EX-13 6 0006.txt ZIONS BANCORPORATION 2000 ANNUAL REPORT
FINANCIAL HIGHLIGHTS 00/99 FOR THE YEAR (in millions) Change 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ ------ Net income ........................................ -17% 161.7 194.1 143.4 131.4 112.8 Operating cash earnings(1) ........................ +16% 281.4 242.8 194.4 138.3 115.0 PER SHARE Net income (diluted) .............................. -18% 1.86 2.26 1.75 1.92 1.69 Net income (basic) ................................ -18% 1.87 2.29 1.77 1.95 1.71 Operating cash earnings (diluted)(1) .............. +14% 3.23 2.83 2.37 2.03 1.73 Dividends declared ................................ +24% .89 .72 .54 .47 .43 Book value(2) ..................................... +5% 20.42 19.39 17.39 12.50 9.00 Market price - end ................................ 62.44 59.19 62.38 45.38 26.00 Market price - high ............................... 62.75 75.88 62.38 46.00 26.00 Market price - low ................................ 36.44 49.00 38.38 25.69 16.69 AT YEAR END Assets ............................................ +8% 21,939 20,281 18,050 10,794 7,353 Loans and leases .................................. +12% 14,378 12,791 11,219 5,463 3,942 Loans sold being serviced(3) ...................... +40% 1,750 1,252 1,040 1,050 868 Deposits .......................................... +7% 15,070 14,062 14,221 7,830 5,301 Shareholders' equity .............................. +7% 1,779 1,660 1,453 857 569 PERFORMANCE RATIOS Return on average assets .......................... .74% .97% 1.00% 1.35% 1.58% Return on average common equity ................... 9.65% 12.42% 10.98% 19.40% 21.54% Efficiency ratio .................................. 64.91% 66.55% 70.10% 59.33% 56.50% Net interest margin ............................... 4.27% 4.31% 4.56% 4.29% 4.69% OPERATING CASH PERFORMANCE RATIOS(1) Return on average assets .......................... 1.34% 1.26% 1.41% 1.45% 1.62% Return on average equity .......................... 27.40% 26.77% 26.56% 25.40% 23.36% Efficiency ratio .................................. 57.46% 60.33% 61.32% 57.99% 55.96% CAPITAL RATIOS(2) Equity to assets .................................. 8.11% 8.18% 8.05% 7.94% 7.73% Tier 1 leverage ................................... 6.38% 6.16% 5.91% 6.92% 8.91% Tier 1 risk-based capital ......................... 8.53% 8.64% 8.40% 11.96% 14.36% Total risk-based capital .......................... 10.83% 11.29% 11.34% 13.85% 16.71% SELECTED INFORMATION Average common-equivalent shares (in thousands) 87,120 85,695 81,918 68,258 66,547 Common dividend payout ratio ...................... 34.65%(4) 29.33% 28.40% 22.10% 22.20% Full-time equivalent employees .................... 6,915 6,833 7,099 4,652 3,327 Commercial banking offices ........................ 373 362 345 241 153 ATMs .............................................. 509 484 476 495 337
(1) Before amortization of goodwill and core deposit intangible assets and merger charges. (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. (4) Before impairment loss on First Security Corporation common stock. [GRAPHIC OF "UNCLE SAM" ANTIQUE BANK APPEARS HERE] UNCLE SAM Designer: C G. SHEPARD AND PETER ADAMS Manufacturer: SHEPARD HARDWARE CO., BUFFALO, NY Patented: 1886 Original price: $0.50 Current Value: $4,000 Instructions: Place a coin in Uncle Sam's extended hand and press the lever. Watch as Uncle Sam's jaw swings open as if he were talking. The carpetbag pops open and Uncle Sam simultaneously lowers his hand, depositing the coin. 2 ZIONS BANCORPORATION QUICK FACTS Assets at Year End: $21.9 billion Deposits at Year End: $15.1 billion TOTAL Offices: 374 TOTAL New Branches in 2000: 10 Total ATMs: 509 TOTAL BANKS ACQUIRED in 2000: 1 (+3 ANNOUNCED FOR 2001) Full-Time Employees: 6,915 A COLLECTION OF GREAT BANKS In 1886, "Uncle Sam" mechanical banks were sold for $6 a dozen. Back then, the bank was merely a novelty. Its cleverness was designed to engender thrift in American youth, to reward a child's modest investment with a unique action. Things have changed since then. If you'd like to invest in an Uncle Sam bank today, it will cost you $4,000. In fact, the value of mechanical banks has increased so much, it's rare to find someone who can assemble a quality collection. "I have about ten banks in my collection," says Dan Morphy, mechanical bank collector and owner of Adamstown Antique Gallery in Denver, Pennsylvania. "And since I only collect banks in good condition, that's quite a few." But Morphy understands the value of a collection of great banks. Of course, Zions Bancorporation has understood that for quite some time, which is why Zions has carefully selected banks over the past decade that enhance the overall value of its franchise. Now that collection includes six banks and several subsidiary companies, almost 7,000 employees, and more than 370 banking offices spread across eight western states. Zions philosophy of "collection" is a rare one in today's market. By contrast, most of Zions' competitors acquire banks to, in essence, melt them down and cast them in their own image. By doing so, they also destroy the cultural and community associations which create a good portion of the banks' value. Much of Uncle Sam's value is tied to both its history and uniqueness. The same holds true for Zions' subsidiary banks, which is why Zions maintains their identities and regional flavors. As far as the customer is concerned, these banks stay essentially the same--same employees, same management. But behind the scenes, each bank enjoys the efficiencies of merged back-room operations, as well as a depth of resources and talent typically unavailable to small community banks. Zions employs a management model that lets employees who are familiar with a client's needs make the decisions regarding that client's relationship. This "local decision making" model helps ensure that clients receive the services they truly need. Under this unique philosophy, Zions Bancorporation has become one of the nation's premier financial services companies, with locations in some of the country's best growth markets. In fact, Forbes magazine recently named Zions one of America's best big companies. Zions has also received notice for its technological focus. In 2000, Zions introduced several new Internet-related products. For online banking customers, MyAlerts(TM) provides a customizable service that sends 3 encrypted e-mail notification about account information. Zions also introduced customers to online safe deposit boxes, allowing them to securely store digital documents online. And GovRate.com(TM) now offers customers real-time, electronically executable U.S. Government securities quotes from Zions Bank Capital Markets. But of all the technological innovations Zions introduced in 2000, the most significant may be TrustID(R) digital certificates. Developed by Zions' affiliate, Digital Signature Trust Co., in partnership with the American Bankers Association, TrustID promises to infuse Internet transactions with a higher level of trust than was ever possible before. The results could revolutionize the way people conduct business online. The value of Zions' collection will continue to rise as customers enjoy the benefits of local decision making, quality service, innovative banking products, and greater technological conveniences. It's as certain as the rising value of antique mechanical banks--which, by the way, is accelerating, thanks to online auctions. And who keeps driving up the market value? Dan Morphy is kind enough to reveal the identity of these new collectors. "It's bankers." [RETURN ON EQUITY GRAPH APPEARS HERE] RETURN ON EQUITY (IN PERCENT) Year 91 92 93 94 95 96 97 98 99 00 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Cash Basis 15.3 20.0 21.9 19.4 22.1 23.4 25.4 26.6 26.8 27.4 Reported 14.6 18.8 20.3 17.9 20.5 21.5 19.4 11.0 12.4 9.7 [DILUTED EARNINGS PER SHARE GRAPH APPEARS HERE] DILUTED EARNINGS PER SHARE (IN DOLLARS) Year 91 92 93 94 95 96 97 98 99 00 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Cash Basis .57 .87 1.01 1.12 1.46 1.73 2.03 2.37 2.83 3.23 Reported .56 .86 .99 1.09 1.42 1.69 1.92 1.75 2.26 1.86 4 TO OUR SHAREHOLDERS, Zions Bancorporation's performance during 2000 demonstrated the tremendous strength of our franchise, the resilience and professionalism of our people, and the soundness of our banking philosophy and operating strategy. After spending ten months engaged in detailed preparations for the merger of First Security Corporation with Zions, shareholders voted the deal down on the last day of the first quarter, following an announcement by First Security that their first quarter earnings would fall materially short of expectations. Although the pending transaction had been the focus of much of our senior management team's efforts for the prior three quarters, and the source of uncertainty for many of our employees and customers due to planned branch divestitures, branch and department consolidations, and systems conversions, our employees and officers were simply incredible in their determination to put the distractions of the failed merger behind them and move forward to complete a year of record performance. FINANCIAL RESULTS Zions Bancorporation's operating cash earnings (which excludes merger expenses, amortization of goodwill and core deposit intangible assets, and impairment losses on the company's holdings of First Security Corporation common stock) were $281.4 million or $3.23 per diluted share, an increase of 15.9% and 14.1%, respectively, over the $242.8 million or $2.83 per share earned in 1999. Net income was $161.7 million or $1.86 per diluted share, down 16.7% and 17.7% from $194.1 million or $2.26 per share in 1999. Included in net income are $45.5 million in merger expenses, primarily related to the failed First Security transaction, $37.2 million amortization of goodwill and core deposit intangible assets, and a $96.9 million impairment loss on First Security Corporation stock. The company's cash return on tangible common equity remained strong at 27.4%, as compared to 26.8% in 1999. The cash "efficiency ratio," or operating costs as a percentage of revenues, was 57.5% in 2000, an improvement from 60.3% in 1999. Total dividends per share rose 23.6% to $.89 in 2000 from $.72 in 1999. The company adjusted its quarterly dividend to $.29 subsequent to the announcement of the First Security transaction in 1999 in order to bring the two companies' dividends into conformance. Upon the dissolution of the transaction, the quarterly dividend was adjusted to $.20, a 42.9% increase over the dividend level prevailing in the first half of 1999. Zions Bancorporation has traditionally maintained a conservative dividend payout in order to provide capital funds for the strong earning asset growth experienced in recent years. Zions experienced strong loan growth in 2000, as average loans and leases outstanding rose 15.5% to $13.6 billion from $11.8 billion the previous year. Average deposits rose a modest 3.5% to $14.6 billion from $14.1 billion in 1999. The company's net interest margin was 4.27%, down slightly from 4.31% in 1999. Credit quality remained strong, as nonperforming assets decreased 5.4% to $70.5 million from $74.6 million in 1999. Nonperforming assets as a percentage of net loans, leases and other real estate owned decreased to .49% from .58% a year ago. Net charge-offs as a percentage of average outstanding loans and leases were .31%, up from .25% in 1999. BUILDING THE BUSINESS Zions continued its pattern of expansion through the acquisition of quality community banking franchises during 2000. County Bank, headquartered in Prescott, Arizona, was acquired in July, adding approximately $240 million in assets to National Bank of Arizona's resources and providing a strong presence in fast-growing north central 5 Arizona. Three other transactions were announced during the year, as follows: o Draper Bancorp, with approximately $250 million in assets and locations in the south Salt Lake Valley and in Park City, Utah. This transaction was completed in the first quarter of 2001, and the bank was merged with Zions First National Bank. o Eldorado Bancshares, Inc., with assets of approximately $1.3 billion and locations throughout southern California and in Sacramento. This transaction, which was announced in the fourth quarter of 2000, is expected to be completed in the first quarter of 2001. The bank will be merged into California Bank & Trust. o Arizona branches of Pacific Century Financial Corporation, with approximately $400 million in deposits and $225 million in loans. This transaction, announced in the fourth quarter, will further strengthen National Bank of Arizona's franchise in Maricopa County and in Yuma. It is expected that the transaction will be completed in the second quarter of 2001. Zions continued its efforts to streamline the management of certain of its business lines during 2000. The company has developed a "Centers of Excellence" approach to the delivery of certain services requiring a heightened degree of sophistication and oversight. Under this program, functional leadership is provided from one of the company's banking subsidiaries or centralized support entities for the delivery of services across the entire corporation. Products and services such as Cash Management, Employee Benefit Trust, Trust Operations, International Banking, SBA Operations, Call Centers, and Internet Banking were the subjects of reorganization under this program during the past year. Management team reorganizations were undertaken at Nevada State Bank and at Vectra Bank Colorado. William Martin, formerly CEO of Pioneer Bancorporation, assumed the CEO position at Nevada State Bank. Bruce Alexander, formerly head of the Denver Urban Renewal Agency, took over the leadership of Vectra Bank Colorado. Both are talented bankers and leaders capable of building strong franchises in these markets. ELECTRONIC COMMERCE Zions remains recognized as a leader in providing trust solutions to the world of online commerce. Our Digital Signature Trust Co. ("DST") subsidiary won important contracts during the year, particularly in the federal government arena. In June, President Clinton signed into law--using a digital certificate provided by DST--the Electronic Signatures in Global and National Commerce Act, paving the way for the use of digital signatures and other electronic technologies to provide a legal substitute for written signatures in online commerce. DST became the first vendor certified as operationally prepared to offer digital certificate services to the federal government under the General Services Administration's Access Certificates for Electronic Services ("ACES") program. DST has, to date, won the largest share of the contracts awarded under the ACES program, including contracts with the Environmental Protection Agency, the Federal Emergency Management Agency, the Department of Veterans Affairs, and a major contract with the Social Security Administration to implement online wage and tax reporting for the nation's employers. DST also won contracts from the states of Washington and Utah for state government initiatives and, in the private sector, DST was selected by VISA(R) as a provider of certificate services for the VISA Access smart card program. 6 Together with the American Bankers Association, DST has introduced the TrustID(R) certificate, an inter-operable online identification and encryption product which is available to banks throughout the nation. Zions partnered with NetVoyage Corporation to develop and introduce online safe deposit boxes to our customers. We expect to participate in filling a growing need for online data storage, and believe that banks, with their heritage of trust and regulatory oversight, are well suited as long-term repositories for our customers' electronic files. OUR FUTURE GROWTH We continue to see numerous opportunities for growth in the West. Each of the eight states in which Zions Bancorporation has its primary operations is among the top third of the states in expected population growth over the next two decades as projected by the U.S. Census Bureau. We have strong management teams in place in each of the markets we serve, and we believe the company is capable of not only keeping pace with the growth in these extraordinary markets, but also of gaining market share as a result of our relatively unique organizational structure, which has been proven to be appealing to our customers and our employees, as well as to many of the community banks which we have acquired in recent years. Zions Bancorporation's "Collection of Great Banks" represents an approach to the financial services business that emphasizes local responsiveness and responsibility. Our decision makers are close to the customers and the communities we serve. Our employees are associated with locally chartered and managed banking institutions, creating a greater sense of "ownership" in their franchises. We believe this sets us apart in an industry increasingly characterized by large, monolithic institutions with little local identity or authority. The economy in the West has continued to remain relatively strong, despite the slowdown in the "dot-com" sector and disruptions in California's power supply. Recent concerns about energy availability in the West and throughout the nation also contain the promise of opportunity: this region of the country contains an abundance of energy resources waiting to be tapped. The capital investment necessary to provide the nation's energy infrastructure with additional capacity can be expected to include substantial expenditures on resource development in the West. We nevertheless remain alert to the possibility of a slowing economy in the West, are cautious in our approach to underwriting, and hopeful that recent interest rate cuts and the prospect of significant tax relief will provide the foundation for continued strong growth over the next several quarters. We look forward to the challenges of continuing to build the premier locally oriented banking organization in the western United States. We appreciate your loyal support. Respectfully, /s/ Harris H. Simmons Harris H. Simmons President and Chief Executive Officer /s/Roy W. Simmons Roy W. Simmons Chairman February 9, 2001 7 [GRAPHIC OF "MILKING COW" ANTIQUE BANK APPEARS HERE] MILKING COW Designer: Charles Bailey Manufacturer: J. and E. Stevens Company, Cromwell, CT Patented: Circa 1888 Original Value: $0.71 Current Value: $9,500 Instructions: Place a coin in the slot on the cow's back, then press the flower-shaped lever. The cow flips her tail while kicking over the milking boy, knocking his hands into the air and spilling the bucket on his face. 8 ZIONS BANK As far as collectors are concerned, the "Milking Cow" bank is a classic--practically a standard--among mechanical banks. Its sophisticated action, remarkable workmanship, and nostalgic quality make it highly collectible. Although it has been reproduced several times, any true collector recognizes that the value of the original can never be duplicated. Nor can the value of Zions Bank. Founded by Mormon pioneers in 1873, there is an element of nostalgia about the bank. But in terms of modern banking, Zions is hardly nostalgic. Through its subsidiary, Digital Signature Trust Co., Zions continues to pioneer digital identity authentication. In addition, Zions continues to offer customers ever more sophisticated banking services and technology, including MyAlerts.(TM) Products like this have made Zions Bank both highly collectible and frequently imitated. But in the end, nothing matches the value of the original. Just ask any bank collector. SELECTED HIGHLIGHTS LOCAL AUTHORITY In Utah, Zions Bank stands alone as the only locally headquartered financial institution with a statewide network of branches. DIGITAL SIGNATURE TRUST DST was the first bank subsidiary to receive approval from the Office of the Comptroller of the Currency to verify digital signatures, and Zions was the first bank in the country to offer TrustID(R) digital certificates to customers. MYALERTS Customers are able to have personal account information, such as account balances, e-mailed to them. "SELF-ENTRY" SAFE DEPOSIT BOX Zions installed the first-ever "self-entry" safe deposit box system in its marketplace. A fingerprint reader, coupled with a personal identification number, allows bank customers to access their safe deposit boxes at their convenience. ONLINE SAFE DEPOSIT BOX Customers can encrypt important documents, such as wills or financial records, and securely upload them into an online safe deposit box. 7 AM to 7 PM DRIVE-UP BANKING In an effort to offer more convenience, Zions extended drive-up banking hours at thirteen branch locations to twelve hours per day--7 AM to 7 PM. SBA LENDING Zions Bank was ranked as the number one provider of U.S. Small Business Administration (SBA) government guaranteed loans in Utah and number two in Idaho for the SBA's fiscal year 2000. ACQUISITIONS Zions announced the acquisition of Draper Bank, a $250 million community bank headquartered in the southern part of the Salt Lake Valley. The acquisition was completed on January 26, 2001. QUICK FACTS Market Share of bank Deposits (UTAH/IDAHO): 18%/2% State Rank by bank Deposits (UTAH/IDAHO): 2nd/9th Assets at Year End: $8.1 billion Deposits at Year End: $4.2 billion Domestic Offices: 142 In-Store Offices: 49 New Branches in 2000: 3 ATMs: 211 Acquisitions: Draper Bank (completed 1/26/01) Full-Time Employees: 1,909 9 DEAR SHAREHOLDER, In 1873, Zions First National Bank was founded by the pioneer settlers of the Utah territory on the principle of service to its customers and its communities. Today, this same pioneering spirit continues to guide us as we explore and implement new technologies that will make banking easier, more convenient, and safer for our clients. MAINTAINING OUR CORE MISSION As the bank prepares to move into its 129th year, we continue to hold true to our core mission of assisting in the economic growth of our clients by ensuring safety for their funds, offering quality products that meet their needs, providing personalized service and competitive pricing, providing convenient access to funds and account information, and demonstrating an uncompromising commitment to the communities we serve. We take our role in the economy, and in each community we serve, very seriously. Our business is built on the trust established with our clients over decades. Maintaining that trust is no small matter to us. Today, Zions Bank is a strong, diversified franchise and is well situated to benefit from market disruptions created by mergers and acquisitions affecting some of the largest banking enterprises in our marketplace. Through a strategy of decentralized decision making, community bank responsiveness, and consolidated operational and administration functions, coupled with an ability to offer the resources and product array available only through a major regional banking enterprise, Zions Bank expects to see continued growth in 2001. GREATER RESOURCES AND CONVENIENCES Loan growth in all sectors--consumer, construction, real estate, and small business--was exceptional in 2000, growing at a rate of 19.6 percent. Credit quality remained strong. But deposit growth was slower, as there was intense competition for core deposits during the year. With a focus on offering greater convenience for our customers, Zions Bank continued to grow its branch network in 2000, adding a new branch in West Valley City, Utah, and two offices in Ammon and Pocatello, Idaho. Additionally, in November, Zions Bank announced an agreement to acquire Draper Bank, a $250 million community bank headquartered in the southern part of the Salt Lake Valley. (The Draper Bank acquisition was completed on January 26, 2001.) The addition of four former Draper Bank offices, combined with the new branches, brings Zions Bank's domestic branch total to 146, with 125 branches in Utah and 21 in Idaho. And, in Utah, Zions Bank stands alone as the only locally headquartered financial institution with a statewide network of branches. Of the 146 branches in the Zions Bank branch network, 49 are located inside grocery stores. These offices not only provide customers with the convenience of banking where they shop, they also provide extended evening and weekend hours. In response to requests from customers for the convenience of drive-up banking during the hours before and after work, Zions Bank recently extended the drive-up banking hours from 7 AM to 7 PM at thirteen of its branch locations located along significant traffic routes. LEADER IN SBA LENDING, GOVERNMENT SECURITIES, AND TECHNOLOGY 2000 was also a year of firsts for Zions Bank. Zions ranked as the number one provider of U.S. Small Business Administration (SBA) government guaranteed loans in Utah, and number two in Idaho for the SBA's fiscal year 2000. Zions also topped the list in providing SBA loans to minority- and women-owned businesses in Utah. Zions is the only primary government securities dealer headquartered west of the Mississippi. And Zions Bank Capital Markets group established itself this year as a leading dealer on the Bloomberg Bondtrader(R) electronic bond trading system. Zions Bank continued to excel in 2000 as a leader in the use of technology to offer greater convenience to customers. On the heels of President Clinton's signing of the "E-SIGN Bill" into law in June, Zions Bank was the first bank in the country to offer TrustID(R) digital certificates to its customers through a program sponsored by the American Bankers Association. Utilizing the digital certificate technology, Zions Bank introduced two innovative services for customers. With MyAlerts,(TM) customers can receive personal data regarding their account in an encrypted form via e-mail, and the customers determine what information they receive and how often they receive it. Zions Bank also introduced its customers to the secure, online storage of important documents. Using a personal digital certificate, customers are able to encrypt important documents (e.g. wills, financial records, images, etc.) and securely place them into an online safe deposit box. Documents can be uploaded and retrieved at any time, providing a convenient way to store and back up sensitive information. 10 In keeping with our goal of giving clients increased access to information on their accounts and greater convenience in dealing with the bank, Zions Bank added a variety of enhancements to its Internet Banking site at www.zionsbank.com. Zions Bank's Internet Banking customers are able to access account information, transfer funds, pay bills, get insurance quotes, apply for an insurance policy, order foreign currency, and apply for consumer loans and credit cards from the convenience of their own homes or offices. Mortgage rate monitoring, mortgage loan tracking, online stock trading, and much more are also available to Zions Internet Banking customers. Another example of Zions Bank's use of technology to better serve the customer is found in the bank's installment of the first-ever "self-entry" safe deposit box system in its marketplace. Using a personal identification number (PIN), along with biometrics in the form of a fingerprint reader for identification, bank customers can access their safe deposit boxes without having to wait for the availability of a bank employee, and with the use of only one key. LOOKING AHEAD Looking forward to 2001, loan growth is expected to remain strong. Deposit growth should continue to rebound. In Utah, where Zions Bank enjoys a 14 percent market share among all financial institutions, loan and deposit growth should be in the double digits, as clients who want to deal with a locally headquartered bank with local decision-making ability switch their banking relationship to Zions. Idaho presents a tremendous growth opportunity for Zions Bank. Our market share of deposits in Idaho is currently about 2 percent. However, the Zions Bank name has good recognition in the state, and our 21 branches provide a solid base from which to grow, particularly in the important markets of Boise and Idaho Falls. STRONG COMMITMENT TO COMMUNITY Zions Bank operates under the philosophy that banking is primarily a local business. Zions' bankers live and work in each of the communities in which we have a branch. Accordingly, we have a stake in how our communities prosper. This same philosophy guides our view on community involvement. We are committed to doing our part for our communities' future. It is a commitment we honor every time a local loan officer approves a loan, every time a local manager makes a decision, and every time an employee participates or officiates in a community meeting or event. It is why we donate thousands of dollars to community activities, charities, and nonprofit organizations. It is why our employees donate thousands of volunteer hours each year, serving in local civic organizations, school boards, charitable groups, and even political office. This past year, Zions Bank received the American Bankers Association Center for Community Development's Action Award in the Community Projects category. The award recognized Zions Bank for its annual Paint-a-Thon project, which has resulted in Zions Bank employees painting the homes of more than 330 low-income, elderly, and disabled homeowners in the past 10 years. We are committed to the communities we serve, and we are committed to meeting the individual needs of our customers. And we know that those who are best able to identify and meet those needs are our local managers and employees. Because of this, Zions Bank branch managers and loan officers are empowered to make decisions regarding how to best meet the needs of their customers. All of these things together demonstrate one thing--that we haven't forgotten who keeps us in business. We value the trust our customers place in us when they deposit their hard-earned money with us, but we also recognize whose money it is. If our customers want to access their accounts over the Internet, they can. If they want to do their banking at 7 AM on their way to work, they can. If they want to check their account balances, withdraw some cash, buy some stamps, or make a deposit at an ATM, they can. If they want to get account information over the telephone at midnight, they can. And, if they want to walk into or call a Zions Bank branch and talk to someone who has the authority to help them with their banking needs, they can. After all, it's their money. 2000 once again brought results that proved the Zions Bank strategy successful, and set the foundation for even greater success well into the future. /s/A. Scott Anderson A. Scott Anderson President and CEO 11 [GRAPHIC OF "ORGAN GRINDER AND PERFORMING BEAR" ANTIQUE BANK APPEARS HERE] ORGAN GRINDER AND PERFORMING BEAR Designers: L. Kyser and A.C. Rex Manufacturer: Kyser & Rex Company, Philadelphia, PA Patented: 1882 Original price: $35 in 1939 Current Value: $7,500 Instructions: Wind the key on the outside of the building. Place a coin in the slot on the organ, then press the lever on the base. The bear revolves as the organ grinder turns the crank, sounding the bells inside. 12 CALIFORNIA BANK & TRUST For antique collectors, the "Organ Grinder and Performing Bear" bank is a must. Its spring-wound motor--rare among mechanical banks--is unique in its sustained motion. Equally unique is the sustained motion of the bank from the state symbolized by the grizzly bear. From a collector's standpoint, the value is obvious: California Bank & Trust is the sixth largest bank in California, which has the ninth largest economy in the world. Just as compelling is CB&T's commitment to shareholder value. And once you consider CB&T's scheduled acquisition of Eldorado Bancshares, as well as its continued growth prospects, it becomes obvious why this bank is such a valuable part of the Zions Bancorporation collection. SELECTED HIGHLIGHTS RELATIONSHIP-STYLE BANKING CB&T is dedicated to providing personal, relationship-style banking to businesses, real estate companies, professional communities, and individuals. EXEMPLARY PORTFOLIO MANAGEMENT AWARD Presented to CB&T, chosen from the field of local banks with SBA loan portfolios. SUPPORTING COMMUNITIES The U.S. Department of Treasury presented CB&T with its Bank Enterprise Award in recognition of the bank's ongoing commitment to offer full-service banking in distressed communities. The fact that CB&T increased SBA lending by over 150% in 2000 has also gained some notice. The U.S. Small Business Administration's San Diego office presented CB&T its Largest Hispanic-American 7(a) Lender Award as the region's top SBA lender to Latino small businesses. The bank was also presented with the SBA Lender Achievement Award for exemplary community service and special achievements in assisting the SBA in reaching lending goals. ACQUISITIONS CB&T continues to grow. Regency Bancorporation merged with CB&T in November of 1999, and the acquisition of Eldorado Bancshares is expected to be completed during the first quarter of 2001. QUICK FACTS Acquired by Zions: 1997 Market Share of Bank Deposits: 2% State Rank by bank Deposits: 6th Assets at Year End: $7.0 billion Deposits at Year End: $5.6 billion Offices: 75 New Branches in 2000: 4 ATMs: 88 Acquisitions: Eldorado Bancshares (announced) Full-Time Employees: 1,703 13 DEAR SHAREHOLDER, The expansion of CB&T over the last two and a half years has provided Zions Bancorporation with a meaningful banking presence in the world's ninth largest economy, the state of California. With total assets just shy of $7 billion, CB&T now comprises approximately one-third of the Zions total asset base. IMPROVED PERFORMANCE Cash operating earnings for year 2000 increased 35% from 1999. Just as Zions has done for the last ten plus years, CB&T achieved above-market revenue growth of 15%, which fueled this strong earnings increase. CB&T was also successful in controlling costs, limiting the increase in non interest expenses to under 1%. The combination of revenue growth and expense control generated tremendous operating leverage for the year. The bank cash operating efficiency ratio declined from 61% in 1999 to under 54% in 2000. Shareholder value added (SVA) for CB&T increased 76%. CB&T is the first Zions affiliate to adopt SVA as a performance measurement tool. Incentive compensation for all CB&T associates is based upon it. In nine short quarters since the merger of Sumitomo Bank of California into Grossmont Bank, CB&T has: o Doubled the quarterly earnings run rate. o Increased revenues by 29%. o Reduced the number of full-time equivalent employees, resulting in a doubling of net income per FTE. o Restructured both sides of the balance sheet, resulting in an expansion of the net interest margin by over 40 basis points. o Decreased nonperforming assets from 1.23% of total loans to 0.40%. o Reduced Other Real Estate Owned to under $100,000. The good news for Zions shareholders is that CB&T is now performing at the median of its peer group and has turned the Sumitomo Bank of California acquisition into an outstanding investment. The better news is that "median" is not a commonly used term at Zions. Improving CB&T's operating performance to the top 10% of its peer group is both a priority and attainable. There are three areas that CB&T will address: o Retail Banking Revenue: CB&T has yet to develop any meaningful retail banking revenue. However, with the closing of the Eldorado Bancshares acquisition scheduled for the second quarter of this year, the bank will have approximately 100 banking offices concentrated in the San Francisco Bay area, metro Los Angeles, Orange County, and San Diego. This provides an opportunity to market to perhaps the most attractive retail customer base in the country. o Fee Income: Fee income at CB&T for 2000 represented just 11% of revenue and 0.58% of average assets. These numbers are less than half of both the bank's peer group average and that of Zions'. o Consolidation and Efficiency: Finally, there are still many back-office functions at CB&T that have yet to be attacked for consolidation and efficiency. 14 While on the surface, cash operating efficiency of 54% for 2000 looks good, given the bank's focus on business, real estate, and private banking, combined with a large average branch deposit size, this number can be reduced to the mid-40s over the next eight quarters. In 2000, CB&T also took responsibility for stewarding Zions Bancorporation's SBA lending, cash management, and international banking activities through the creation of "Centers of Excellence." Significant opportunity for increased income to the corporation for 2001 and beyond exists through the sales of newly developed, state-of-the-art, Internet-based products in these areas. VALUED BANKING RELATIONSHIPS We take pride in the look and feel of our banking offices. During the year, we remodeled twenty of our banking offices, relocated four banking offices to significantly better locations, and expanded our footprint by opening new offices in Walnut Creek, North Oakland, Irvine, and in Kearny Mesa, San Diego. The vision at CB&T is to create California's best banking relationships. That includes developing relationships that create outstanding value not only for our shareholders, clients, and our associates, but also for the communities we serve. In that regard, in 2000, CB&T increased its SBA lending by over 150%, instituted a statewide initiative for acquisition/rehab of residential housing for nonprofits, received the Department of Treasury's "Bank Enterprise Award" for servicing distressed areas in California, and opened up a full-service banking facility in the under-served Temescal district of North Oakland. In addition, the bank received regulatory approval for the opening of a new full-service banking office in East Palo Alto, another under-served community that has been without a full-service banking office for 20 years. This office is scheduled to open in the 3rd quarter of 2001. CB&T thanks Zions for both the opportunity and the pleasure of being a part of its "Collection of Great Banks." /s/Robert G. Sarver Robert G. Sarver Chairman and CEO TRUST ID Need some ID for an online transaction? Want to sign the mortgage papers via e-mail? With just one TrustID(R) digital certificate, you'll be able to do that--and more. Digital Signature Trust Co., an affiliate of Zions Bancorporation, developed TrustID in partnership with the American Bankers Association. It is the first digital certificate designed to be universally accepted for online transactions. It's only appropriate that Zions became the first bank in the country to issue TrustID digital certificates to banking customers. Visit www.abatrustid.com for more information. 15 [GRAPHIC OF HALL'S EXCELSIOR BANK ANTIQUE BANK APPEARS HERE] HALL'S EXCELSIOR BANK Designer: John Hall Manufacturer: J. & E. Stevens Company, Cromwell, CT Patented: 1869 Original price: $0.60 Current Value: $1,000 Instructions: Pull the doorbell. The cupola's top lifts and a small wooden monkey emerges, wagging his head. Place a coin on the desk. The monkey and desk disappear, depositing the money. 16 NEVADA STATE BANK "Hall's Excelsior Bank" is considered the first cast iron mechanical bank and an essential piece to complete any serious bank collection. As one of the earliest mechanical banks, "Hall's Excelsior" proved to be immediately popular. The same could be said for Nevada's oldest state-chartered bank, Nevada State Bank. Nevada State Bank's clients have long appreciated the statewide branches that offer consumer, small business, real estate, and corporate banking services in over 60 locations. They've also enjoyed the convenience of NSB's 31 supermarket branches with extended and weekend hours. It just goes to show you that, in the end, it doesn't take a collector to appreciate a classic that's built to last. SELECTED HIGHLIGHTS INCREASED STATEWIDE BANKING Nevada State Bank's merger with Pioneer Citizens Bank was completed in 1999, increasing the bank's presence in the growing northern Nevada market. The merger gave NSB nearly $2 billion in deposits and--with a statewide 12% market share--made Nevada State Bank the third largest bank in Nevada. COMMUNITY BANKING AND MORE Nevada State Bank, founded in 1959 in Las Vegas, and Pioneer Citizens Bank, founded in 1965 in Reno, attribute their success to their community bank roots. Thanks to their staffs' continued focus on personal service, as well as their commitment to local communities, Nevada State Bank is Nevada's largest community bank. And thanks to the resources and backing of Zions Bancorporation, NSB has become much more. INCREASED WEB PRESENCE NSB already offers a full array of online banking services. In addition, the bank recently established a premier partnership with America Online. NSB will be the exclusive financial service sponsor of Digital City Las Vegas, an interactive search engine offering in-depth overviews of cities throughout the U.S. The strategic partnership provides direct links to Nevada State Bank's web site. QUICK FACTS Market Share of bank Deposits: 12% State Rank by Bank Deposits: 3rd Assets at Year End: $2.4 billion Deposits at Year End: $2.0 billion Offices: 60 In-Store Offices: 31 New Branches in 2000: 3 ATMs: 84 Full-Time Employees: 701 17 DEAR SHAREHOLDER, Nevada State Bank falls under Zions Bancorporation's guiding principle of a "Collection of Great Banks." That perhaps serves as an efficient way to condense our feelings about the bank today, and what we strive to be tomorrow--a great bank, and a great contributor. INCREASED GROWTH, INCREASED CONVENIENCE For several years, Nevada has been the fastest-growing state in the nation. We have seen population gains, increasing employment, and a booming business expansion that has led or competed for the top spot in these, and a host of other, economic and business-health indices. Clearly, our objective is to continue to capitalize on this vibrant situation. Nevada State Bank, with $2.4 billion in assets, now ranks as the third-largest bank in the state, a direct result of the merger at the end of 1999 of the 42-year-old Nevada State Bank and the 37-year-old Pioneer Citizens Bank. The banks were nearly equal in size, but had somewhat differing business plans when it came to target markets. With 46 banking offices spanning from Elko in eastern Nevada, Reno in the northern part of the state, and Las Vegas/Henderson/North Las Vegas in the south, NSB is truly statewide. A recent survey we conducted among bank customers in Nevada determined that 51% of the respondents bank where they do for convenience. NSB's wide branch network offered this convenience and caused the bank to cast itself as a "retail-oriented" bank, with some 138,000 accounts. It should be noted that "convenience" today, in this technology-driven world, isn't only equated to geographic location of branch offices, but also to the availability of step-saving, time-saving electronic conveniences--and that is supported by 85 NSB ATMs and state-of-the-art electronic products offered by the Zions Bancorporation parent. Pioneer Citizens Bank, with 14 offices in northern and southern Nevada and 38,000 accounts, can best be characterized as a "commercial or business" bank. It was clear to those seeking the merger that the two banks complemented each other. COMMUNITY BANKING Both NSB and Pioneer Citizens Bank, each with their long histories as local state-chartered banks, built their assets and reputations on being "community" banks. Community banks can be defined as local banks with limited geographic service areas, under independent ownership, whose personal service focus is the driving force in obtaining and retaining customers. In that sense, not much has changed for the two banks. Although a member of the Zions' "Collection of Great Banks," the new NSB enjoys and markets itself on the autonomy derived from having its name and operations being largely distinct from a large holding company structure. This more decentralized management and organizational style is atypical of large banking companies, and should be viewed as a genuine strength and competitive advantage. In short, NSB is to a great extent operated as a local business. Once you examine what has made NSB and Pioneer Citizens Bank successful, it's easy to remember that banking is still a people business. We want all employees to take ownership of a client's needs or problems; selling a 18 product is less important than developing a relationship. We recognize that when you treat a person with respect, you receive respect in return. In the end, only the customer can define a job well done. Although by strict definition, the size and ownership of NSB may disqualify it as a "community bank," everything else suggests otherwise. Our philosophy, our mode of doing business, attitude, and approach to customer service--all these things define us as "a bank for the community." MOVING FORWARD Nevada State Bank has history. Lots of it. It also has a lot of pride. These are intangibles that don't appear in our product list or financial statements, but they remain a part of the foundation on which we continue to build the bank. These intangibles, combined with the competitive advantage of 60 banking offices, will continue to make Nevada State Bank a better way to bank. 2000 was a challenging year. Our efforts were heavily devoted to untangling the fallout from the protracted and unsuccessful local First Security Bank merger, and that meant returning to the basics, the fundamentals of banking. It was a challenge. Our staff performed well and met the challenge, and we are proud of our standing today. In 2001, we will continue to make improvements to better serve our clients. We have introduced streamlined processes and procedures that make our work easier and that raise the convenience factor for our clients, including the opening of three branches last year. Five more are scheduled for 2001. We have a keen eye on the expense side of our operations and are making a concerted effort to improve our earnings performance. We have the people to get the job done, and done right. Our outlook on 2001? In a word, optimistic. Nevada State Bank of today is really a collection of two great banks. We are proud to be part of the Zions Bancorporation organization. Sincerely, /s/William E. Martin William E. Martin Chairman, President and CEO ENTERVAULT Soon there will be plenty of places to store digital documents online, but very few will be subject to federal oversight. In 2000, Zions announced the founding of EnterVault,(TM) a secure, long-term storage provider for electronic data and documents. Customers can store important items such as financial records, wills, or personal documents. The service has multiple levels of access security, including digital signatures issued by Digital Signature Trust. If approved by the Office of the Comptroller of the Currency (OCC), EnterVault will become the first national bank subsidiary to receive regulatory sanction for Internet storage. For more information, visit us at www.entervault.com. 19 [GRAPHIC OF "INDIAN SHOOTING BEAR" ANTIQUE BANK APPEARS HERE] INDIAN SHOOTING BEAR DESIGNER: Charles Bailey Manufacturer: J. & E. Stevens Company, Cromwell, CT PATENTED: Circa 1883 ORIGINAL PRICE: $0.70 CURRENT VALUE: $2,700 Instructions: Draw back the gun sight, insert a paper cap and press the button. The gun fires and the coin is shot into the bear's chest. Originally advertised as the "Bear Hunt Bank," it was a popular seller for many years. However, the Indian's back feathers are fragile, making a complete model a rare find. 20 NATIONAL BANK OF ARIZONA National Bank of Arizona was added to the Zions collection in 1994. Since then, NBA has seen a 443% increase in assets, a 412% increase in deposits, and a 566% increase in net income. As part of Zions' "Collection of Great Banks," NBA maintains its flexibility to operate as a community bank while offering its customers greater depth of resources. Much like the "Indian Shooting Bear" bank, its value in the collection is assured due to a rare quality in banking--completeness. SELECTED HIGHLIGHTS BUSINESS FOCUS Although NBA continues to expand retail branch operations, its primary focus remains on business and professional banking segments. ACQUISITION In the fall of 2000, NBA strengthened its presence in northern Arizona with the acquisition of five new branches from the Prescott-based County Bank. Later in December, NBA reached a definitive agreement to purchase the nine Arizona branches of Pacific Century Bank (approximately $400 million in deposits, $225 million in loans). STRONG LOAN PORTFOLIO NBA's net loan losses totaled less than .02% of loans. The national average is near .20%. EXPANSION NBA projects six new branches for 2001. CUSTOMER SERVICE NBA's commitment to its founding principle--that banking is a local business--enables it to meet the needs of all its customers in all of the communities it serves. BUSINESS SUPPORT Focus groups in 2000 reaffirmed that NBA bankers know their customers and their customers' businesses. NBA works closely to help them manage their businesses by providing financial counseling and structuring sound financing programs. EXPERIENCE & LOYALTY Low employee turnover allows customers to build long-term relationships with experienced bankers. Consequently, NBA maintains a strong base of loyal customers. QUICK FACTS Market Share of bank Deposits: 4% State Rank by bank Deposits: 4th Assets at Year End: $2.0 billion Deposits at Year End: $1.6 billion Offices: 41 ATMs: 38 Acquisitions in 2000: County Bank; Pacific century branches (announced) Full-Time Employees: 619 21 DEAR SHAREHOLDER, Consistency has been the hallmark of National Bank of Arizona. Since joining the "Collection of Great Banks" in 1994, National Bank of Arizona ("NBA") has remained committed to increased value for our shareholders. In fact, in our 16-year history, National Bank of Arizona has built a reputation of consistent, profitable growth. CONSISTENT VALUE Year after year, NBA has consistently and dramatically increased in profitability and size. The value we have brought to you, the shareholder, has been increased profitability in a growth market every year for the past seven years of our relationship with Zions Bancorporation. CONSISTENT FOCUS We were founded as a small, community bank, with a focus on a distinct market niche. Specifically, NBA serves small to mid-sized businesses, real estate development, construction firms, and professional service firms. Today, we continue our unwavering focus on that niche, recognizing that we can't be all things to all people. But by serving this defined market, we have created a recipe for success that has proven effective year in and year out. We continue to remain loyal to our founding principle of serving our customers with the quality and service of a community bank, but also recognizing that we have the resources and support of a much larger bank in Zions. Services such as cash management technology and an experienced trust and investment team allow us to further enhance our business banking services at a local level. CONSISTENT CREDIT STANDARDS NBA has nurtured a strong credit culture with year 2000 loan losses totaling less than two basis points--some 18 basis points under the national average. The quality of our loans can be attributed to three areas of emphasis: 1) strict adherence to documentation control, 2) sound underwriting standards that are well understood and observed, and 3) the expertise and experience of our officers, who are close to the customers, enabling them to anticipate financial weaknesses and to address the potential frailty before it becomes unmanageable. CONSISTENT GROWTH Positioned as one of the top states for growth during the next 25 years, Arizona has been a particularly fertile environment for growth. The year 2000 saw a continued pace of balanced growth for the bank. The acquisition of Prescott-based County Bank fortified NBA's presence in northern Arizona. NBA now has 41 offices in 26 Arizona communities and 619 full-time employees. NBA is Arizona's fourth-largest bank, with nearly $2 billion in assets. CONSISTENT COMMUNITY CARE NBA remains true to its founding principle of local banking with local people. Recognizing that we serve many local communities, we have continued a tradition of commitment to caring for the communities where we are located. That's why NBA continues to donate significantly to nonprofit organizations, charities and community events. Our employees have volunteered admirably in charitable groups, local civic organizations, and school boards. Their dedication to community and company stands as a testament to our success. 22 CONSISTENT PATH TO 2001 Our success and profitability in 2000 warrant reflection and a certain amount of pride, but NBA has not become so successful by resting on our laurels. It is with even greater dedication and enthusiasm that I look forward to 2001. For the upcoming year, NBA has positioned itself to continue our profitability without compromising the strategic focus we have preserved--especially in establishing and maintaining quality, one-on-one relationships with our customers. In December 2000, we announced that we reached a definitive agreement to acquire the assets of nine Arizona offices of Pacific Century Bank. The Pacific Century acquisition will provide NBA with approximately $400 million in deposits and $225 in loans. The acquisition should be completed at the beginning of the second quarter of 2001 and will mark a milestone of 50 statewide locations for the bank. In addition to the Pacific Century acquisition, NBA will open six new offices throughout the state during 2001. With the addition of new offices, we continue to celebrate the value of our employees with renewed vigor. NBA will continue to support our employees' fundamental character of high-energy, quality work and independent thinking. We will continue to develop programs to foster and nurture training and development. Our employees have been the determining factor in our consistent profitability and deserve to be recognized as such. Strategic restructuring of senior management in 2001 will enable NBA to better facilitate future growth opportunities, as well as positioning senior management at a local level. Like Zions Bank, NBA will continue to stress local management and decision making. Despite the size of the bank, we are regarded throughout the state as a local bank with locally known management. It has been a major strength of the bank for years and will clearly continue to be imperative to our future success. Much like Zions, NBA is a progressive company and active acquirer. We remain open to in-state bank acquisitions that are compatible with our strategic market focus and complementary to our growth goals. CONSISTENT Consistency has been the backbone of our bank. NBA has built a reputation as one of Arizona's premier banks because of our ability to consistently perform--a result of our consistent market focus, consistent management team, and the consistent delivery of financial expertise. /s/John J. Gisi John J. Gisi Chairman and CEO GOVRATE.COM Zions' new GovRate.com(TM) is one of the most comprehensive Internet trading systems in the fixed income market. This unique Internet site provides real-time, electronically executable U.S. Government securities quotes from Zions Bank Capital Markets. Online trading is revolutionizing the government securities market. With Zions' GovRate.com, now any institution can trade odd-lots and round-lots with a primary dealer, from one bond to thousands. The site also provides real-time pricing on discount, corporate, and municipal securities. Visit us at www.GovRate.com. 23 [GRAPHIC OF "LEAP FROG" ANTIQUE BANK APPEARS HERE] LEAP FROG Designers: Charles G. Shepard & Peter Adams Manufacturer: Shepard Hardware Co., Buffalo, NY Patented: 1891 Original price: $20 in 1939 Current Value: $7,000 Instructions: Position the leaping boy behind the stooping boy. Place a coin in the slot located in the tree trunk, then depress the lever at the rear of the bank. The boy jumps over his companion and triggers a lever on the tree to make the coin drop. 24 VECTRA BANK COLORADO The premise behind a mechanical bank is simple: offer a sophisticated action to encourage continued investment. To a large extent, a "Leap Frog" bank has a high market value because its action is so sophisticated and unique. But if the bank still performs--as this one does--its value skyrockets. Vectra Bank Colorado understands the correlation between action and investment, performance and value. That's why it offers sophisticated banking services, yet still maintains a community banking orientation. By creating new lines of business which emphasize corporate banking and corporate real estate lending, Vectra offers stiff competition for the large national banks. In addition, Vectra offers enhanced cash management services through its partnerships with other Zions affiliates. With each added service, Vectra Bank Colorado continues to become more valuable--and continues to leap ahead of its competition. SELECTED HIGHLIGHTS STRATEGIC INITIATIVES In an effort to drive long-term results, Vectra has improved infrastructure, updated and enhanced the credit culture, and improved earnings by a combination of cost containment and creation of new revenue opportunities. UNIQUE FOCUS Vectra has carved out its unique position in its marketplace by organizing its branches to serve three distinct economic markets in Colorado: the urban Front Range, the agricultural communities, and the mountain resorts. LENDING LIMIT Vectra's $20 million lending limit meets the financing needs of most Colorado companies. In addition, customers who need loans or credit lines work directly with bankers holding approval authority. TECHNOLOGY Check imaging allows customers to receive scanned images of each cleared check, along with a monthly statement; and monthly statements on CD-ROM add convenience for commercial account holders. GROWTH REGION Colorado's workforce is one of the most highly educated in the nation and continues to grow rapidly. Since 1994, Colorado's annual rate of population growth has averaged 2.4%, well above the national average of .9%. QUICK FACTS Market Share of Bank Deposits: 3% State Rank by bank Deposits: 5th Assets at Year End: $2.2 billion Deposits at Year End: $1.4 billion Offices: 54 In-Store Offices: 4 ATMs: 88 Full-Time Employees: 874 25 DEAR SHAREHOLDER, Vectra Bank is the fifth-largest bank in Colorado and is uniquely positioned to be one of Colorado's premier banks. With 54 offices and assets of approximately $2.2 billion, Vectra Bank is strategically poised to take advantage of Colorado's continuing economic growth and prosperity. By organizing our branches to serve three distinct economic markets--the urban Front Range, Colorado's agricultural communities, and its mountain resorts--we have been able to carve out a unique position in the marketplace. Unlike the large national banks that have organized themselves around national lines of business, or small community banks that can only serve a select market, Vectra Bank can provide the most sophisticated banking services while maintaining a community banking orientation. THE GROWING COLORADO ECONOMY Colorado's economic growth and prosperity serve to enhance our potential for future growth and increased shareholder value. The Colorado economy remained strong in 2000, helped by growth in major sectors such as high-tech manufacturing, construction, tourism, agriculture, and the energy industry. Colorado's workforce is one of the most highly educated in the nation and continues to grow at twice the national average. Since 1994, Colorado's annual rate of population growth has averaged 2.4%--well above the national average of .9%. In 2001, Colorado's population is expected to grow to 4.35 million. The cost of living in Colorado continues to increase annually, reflecting this strong statewide growth. ORGANIZED FOR COLORADO'S THREE DISTINCT MARKETS To take full advantage of Colorado's robust, yet diverse economy, we have organized our bank to emphasize the products and services that meet the unique needs of the regional markets we serve. The urban Front Range market encompasses the Denver/Boulder metro area and the Colorado Springs metro area. There are significant business and retail opportunities in this heavily populated market. We have increased our ability to compete with large national banks by creating new lines of business emphasizing Corporate Banking, Corporate Real Estate lending, and by partnering with other Zions affiliates to offer enhanced cash management services. In addition to our business banking initiatives, we continue to emphasize retail banking and strive to give our branch personnel the tools they need to service their customers effectively. Vectra Bank's presence in Colorado's agricultural communities and its mountain resorts continues to be a strong one. Our agricultural market segment includes the farming communities of northeastern Colorado and southwestern Colorado. Vectra Bank's mountain resort market includes the popular tourist areas of Aspen and the Roaring Fork Valley, Steamboat Springs, Durango, and the Grand Junction/ Montrose area. Longstanding community relationships forged by our regional and market presidents in these areas continue to allow us to compete effectively against local community banks and take advantage of the unique opportunities in these specialized markets. 26 STRATEGIC INITIATIVES TO INCREASE SHAREHOLDER VALUE Today's Vectra Bank is the product of multiple acquisitions, with systems conversions completed in the latter half of 1999. During the year 2000, the management team identified a series of strategic initiatives to drive long-term results for the bank. These initiatives included improving infrastructure, updating and enhancing the credit culture, accelerating improvements in earnings by a combination of cost containment, and creating new revenue opportunities. The initiative to transform Vectra Bank's infrastructure included consolidating back-office operations, developing consistent procedures, improving internal controls, and minimizing operating losses. These initiatives resulted in increased efficiencies while preserving and enhancing decision making at the customer contact level. Updating and improving the credit culture was also a critical initiative for Vectra Bank. During the last year, we reorganized the credit approval function, formalized written policies and procedures for problem loan administration, built a formal special assets group, improved loan information reporting, adopted a formal appraisal review process, and created a new construction risk management position. We're already seeing significant improvements in all aspects of loan administration. To accelerate earnings gains, Vectra Bank put several cost management and non interest income initiatives into place. Infrastructure improvements allowed for a staff reduction of 50 FTE. Additionally, projects to resolve operational issues, reduce waivers of fees on deposit accounts and loans, and improve the check collection process were pursued. These initiatives improved the quality of our service and contributed to substantial operating income improvements realized throughout the year. We established several new business units in 2000 to enable the bank to compete more effectively in markets with significant revenue opportunities. These new units were designed to capitalize on larger real estate loan opportunities and middle market customer relationships. Both these lines of business allow Vectra Bank to leverage the sophistication of our Zions banking partners in Utah and California. Similarly, our international banking, Small Business Administration lending, and cash management services all benefit from synergies derived from Zions' partnerships. 2001 OUTLOOK Vectra Bank is proud to be a part of the Zions' "Collection of Great Banks" and is committed to making significant contributions to Zions Bancorporation shareholders in the years ahead. The Colorado economy is strong, and we believe the bank is strongly positioned to capitalize on today's opportunities. /s/Bruce K. Alexander Bruce K. Alexander President and CEO INTERNET BANKING As a leader in Internet technology, Zions has one of the most functional banking sites on the web. Customers can access account information, transfer funds, pay bills, get insurance quotes, or order foreign currency. Zions Internet Banking also allows customers to apply for insurance policies, consumer loans, and credit cards online. Mortgage rate monitoring, mortgage loan tracking, and online stock trading are also available. And for added convenience, account information can be downloaded and imported into applications like Quicken,(TM) Microsoft(R) Money, Microsoft(R) Excel or Lotus 1-2-3.(TM) 27 [GRAPHIC OF "TWO FROGS" ANTIQUE BANK APPEARS HERE] TWO FROGS Designer: James H. Bowen Manufacturer: J. & E. Stevens Company, Cromwell, CT Patented: 1882 Original price: $0.95 Current Value: $4,000 Instructions: Place a coin on the extended front feet of the small frog and press the lever. The larger frog opens his mouth while the smaller frog kicks the coin inside. The bank's patent originally called for a "sound producing mechanism" to make the frog croak, but the mechanism was never implemented. 28 THE COMMERCE BANK OF WASHINGTON As mechanical banks go, the "Two Frogs" bank is rather small. Its value, however, is anything but. A combination of design, style, and clever action have made it a desirable piece for any antique bank collector. The Commerce Bank of Washington is equally collectible. If considered only in terms of offices and employees, the bank is deceptively small. Its value, however, is not. TCB's assets per employee ratio and efficiency ratio are remarkable. In addition, the bank offers a degree of customer service that larger retail banks can never match. That's the advantage of a smaller bank with a niche focus. Add to that the depth of resources Zions provides, and you've got an amazing bank worthy of any quality collection. SELECTED HIGHLIGHTS NARROW MARKET FOCUS The Commerce Bank of Washington focuses only on businesses and high net worth individuals. Clients are carefully targeted before being approached. Consequently, relationship managers become familiar with their clients before a formal banking relationship is even established. TAILORED SERVICE TCB ensures quality service by servicing fewer (approximately 2,500) but larger clients and maintaining a high employee-to-client ratio. This allows TCB to tailor products and services for each client, resulting in satisfied clients who feel their banking needs have been personally and professionally addressed. EXPERIENCED PROFESSIONALS TCB's relationship managers are senior professionals with an average of 28 years of banking experience and a deep commitment to their clients. LOCALLY MANAGED All decisions are made in Seattle by people familiar with their clients and their clients' needs. Because bankers at TCB are granted significant authority, they can become more intimately knowledgeable about their clients' financial activities. This allows them to make more accurate assessments of banking requirements. QUICK FACTS Market Share of Bank Deposits: 1% State Rank by bank Deposits: 12th Assets at Year End: $0.5 billion Deposits at Year End: $0.4 billion Offices: 1 Full-Time Employees: 52 29 DEAR SHAREHOLDER, The Commerce Bank of Washington (TCB) services the Puget Sound region of Washington State for Zions Bancorporation. The bank was founded by a group of seasoned local bankers in 1988 and became part of the Zions family in September 1998. CREATED TO SERVE A UNIQUE MARKET SEGMENT TCB was established to address the banking needs of two under-served local market segments--small- to medium-sized local businesses and the private banking market. It was the feeling of the bank's founders that these two segments were losing their traditional local bank support due to the substantial bank consolidation taking place in the greater Seattle marketplace. In designing a business plan committed to reintroducing "an extraordinary level of service" to these two segments, it was the belief of the bank founders that they should design a bank solely around the needs of these two markets and not try to "be all things to all people." Specifically, rather than deliver the bank's products from the traditional branch network found in banks also serving the broad consumer market, TCB operates from only one office location--off the street in a downtown Seattle high-rise--and offers its clients a courier system in lieu of branches to handle bank transactions. Knowing that these two market segments expect experienced bankers in whom they can entrust their most important financial decisions, the bank has hired commercial bankers averaging 28 years of banking experience in the Puget Sound region. These bankers are supported by an equally experienced group of customer service personnel and support staff. These experienced relationship managers and support staff have successfully built a reputation for the bank in Seattle for providing a truly extraordinary level of service. RAPID ASSET GROWTH Interestingly, even though TCB ranks ninth in Puget Sound in total assets with over $520 million, its staff numbers only 52 people, about one-quarter the staff size of a traditional community bank of comparable asset size. By choosing not to utilize a branch system and outsourcing some of its other activities, the bank has succeeded in growing rapidly in asset size and capability while remaining small enough internally to assure consistent delivery of products and services. What does all of this mean to the Zions shareholder? The concept of TCB has been received very well in its marketplace. Since its inception, the bank has experienced an asset growth rate in excess of 30% annually. Loans grew by over 27% in 2000, while deposits were up 43% over the average in 1999. With its nontraditional delivery system and outsourcing of selected back-office activities, the bank's business model has proven to be very profitable. In the year 2000, the bank recorded a 40% gain in pre-tax earnings over the prior year. Return on assets was 1.78% and return on equity 27.8%. The bank's efficiency ratio of under 41% in 2000 demonstrates the power of its business model. INCREASED RESOURCES The Commerce Bank has benefited significantly from its merger into Zions. TCB now has access to more sophisticated cash management and short-term investment products for its business and high net worth clients. The needs of commercial real estate construction in the market are now met by a team of real estate lenders from Zions, co-located with the TCB office in Seattle. International trade financing products and services are available through affiliate California Bank & Trust. Our lending capacity has been enhanced by the investment of subordinated debt into TCB from our parent. Our clients' out-of-state banking needs throughout the West can be referred to our sister banks in Colorado, Utah, Nevada, Idaho, Arizona, and California. We have benefited from the broader product line and financial strength of Zions, while retaining the local decision-making authority that we had before the merger. To us it is the best of all worlds. COMMUNITY COMMITMENT Commitment to the community is an important part of our philosophy in building a local bank for the Puget Sound marketplace. A corporate willingness to allow our people the time for community organizations, as well as providing the financial support for those organizations, is an essential part of that commitment. 30 The Commerce Bank has strongly held that corporate commitment since its founding, and Zions has reinforced its support of the concept. Each senior manager and relationship manager at TCB is expected to be meaningfully involved in at least two community organizations of their own choosing. That individual's time commitment is matched with financial support from the bank. TCB has a reputation in its market of providing leadership for community organizations far in excess of its staff size. We are very proud of our commitment to the betterment of our community and the willingness of our staff to give of their time to key community organizations. While our bank is represented by the leadership positions in most of our community's civic and cultural organizations, we are particularly proud of an award we received this year for our efforts on behalf of the Compass Center, a social services organization in downtown Seattle targeting the homeless population. This organization provides the homeless with a variety of life services, including banking accounts. Through some other volunteer support provided by TCB staff, we learned of their need to automate the Center's banking office to allow them to serve their homeless clients more efficiently. Three members of TCB's management designed a hardware/software solution and then united several major Washington banks, the City of Seattle, and several private vendors in delivering the solution. The joint effort solved a need (banking services for the homeless) that would have been difficult for any one of the sectors to provide. By completion of the project, the Compass Center went from a paper-based operation running literally out of a shoebox to an automated office, including its own Fed routing number, a newly upgraded computer network, an up-to-date banking software platform, and an automated cash dispensing unit. The Center now receives a large percentage of deposits for homeless clients via electronic entry from the federal government, increasing safety and efficiency. TCB provides the Center with ongoing support in the form of computer and ACH processing, training, and coordination of donated services. A member of the original project team from TCB has become a member of the Compass Center's Board of Directors. For its efforts in taking leadership in this innovative program, TCB received the 2000 CRA Award for Community Development from the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank of San Francisco. The Commerce Bank is very proud to be a member of the "Collection of Great Banks." It is a concept that allows us to continue to manage our bank to the needs of our local clients and changing local market conditions while benefiting from the substantial financial and product resources of Zions Bancorporation. Most importantly, we continue to act and think like a small local bank, meeting the banking and community needs of our local market. /s/James C. Hawkanson James C. Hawkanson Managing Director and CEO MYALERTS For those who want to know when the balance on their checking account is low, or if a CD just hit a good rate, Zions now offers MyAlerts.(TM) Using TrustID(R) technology, MyAlerts automatically sends an encoded e-mail notice regarding the customer's account information. Users have the option of receiving e-mails about account transactions on a monthly, weekly, or daily basis. MyAlerts can even be used to notify customers of personal events such as birthdays and anniversaries. Zions Bank customers can sign up now at www.zionsbank.com. 31 [GRAPHIC OF "PROFESSOR PUG FROG'S GREAT BICYCLE FEAT" ANTIQUE BANK APPEARS HERE] PROFESSOR PUG FROG'S GREAT BICYCLE FEAT Designer: Charles Bailey Manufacturer: J. and E. Stevens Co., Cromwell, CT Manufactured: Circa 1890 (No patent) Original Price: $0.71 Current Value: $9,500 Instructions: First, wind the spring, then place a coin on the rear wheel of the bicycle and press the lever. The frog on the bicycle makes one full revolution, catapulting the coin into the clown's basket. While returning to its original position, the frog kicks Mother Goose's book up, sending her tongue wagging. 32 OTHER AFFILIATES Even the most sophisticated people react to "Professor Pug Frog's Great Bicycle Feat" essentially the same way. You explain to them how it is going to work and what is going to happen. You point to the pieces that will move, the parts that will wind. You point and talk and explain, and they nod. Then you put a penny on the rear wheel of the bicycle, press the lever, and SNAP! They jump. Finally, they understand why this mechanical bank is so valuable. It's also true for many of Zions' affiliates. You can explain TrustID(R), talk about GovRate.com,(TM) or explain the processes handled by Zions Management Services, but in the end, they must be seen and experienced. Only then do people step back and say, "Wow!" ZIONS MANAGEMENT SERVICES COMPANY Zions Management Services Company was formed in 1998 to provide cost-effective back-office support to the Zions banks. The primary services provided by ZMS are Customer Service, Bank Operations, Investment Management, Finance and Human Resources, and Credit and Compliance. CUSTOMER SERVICE The Customer Service division allows clients quick, convenient access to account information 24 hours a day, seven days a week, from any phone or PC. Zions' Call Center, which works in conjunction with Zions' Reddi-Response automated telephone service, allows customers to obtain account information and process requests anywhere at any time. During 2000, Reddi-Response delivered 21,769,148 minutes of service, and Call Center operators provided an additional 12,836,152 minutes--equivalent to nearly 66 years of telephone customer service. By consolidating affiliate call centers to an efficient central location, cost-per-minute expenses declined by 17% from 1999. BANK OPERATIONS Bank Operations includes Items Processing, Corporate Services, System Support, ATM Operations, and Bankcard Operations. As Zions continues to consolidate its operations, these departments have become responsible for servicing various combinations of Zions First National Bank, Nevada State Bank, National Bank of Arizona, and Vectra Bank Colorado. During the year 2000, Bank Operations processed a total of 215,889,267 items, 11,716,631 pieces of mail, and 10,068,622 ATM transactions. INVESTMENT PORTFOLIO Managing a bank investment portfolio requires increasingly sophisticated techniques. Consequently, Zions Management Services manages the portfolio of each individual bank. Not only is it more efficient, but it also provides each bank with greater investment expertise than a community bank would typically have. FINANCE AND HUMAN RESOURCES Zions has reduced the expenses of its affiliate banks and enhanced services and benefits by centralizing many corporate finance and human resources functions. CREDIT ADMINISTRATION AND COMPLIANCE Zions' model of individual community banks allows each bank to make credit decisions based on their knowledge of the customer. To assist in that process, Zions' Credit Administration supports hundreds of Zions' bankers across eight states to help ensure consistently high credit quality while facilitating fast response times. Credit Administration includes a retail loan center for efficient processing and underwriting of retail loans for affiliate banks. The center also provides automated services, such as Loan-by-Phone. In addition, Credit Administration provides a corporate compliance function to assist each bank in meeting the numerous demands of regulatory compliance. 33 DIGITAL SIGNATURE TRUST CO. Digital Signature Trust Co. (DST), an affiliate of Zions Bancorporation, was established in 1996 as the first licensed certificate authority in the United States. Since then, DST has been both a pioneer in digital identity authentication and a leading-edge provider of digital certificate services. With the support of the American Bankers Association, combined with comprehensive risk management warranties, DST has transformed technology-based digital security solutions. DST specializes in Universal Digital IDs, a platform that employs technology-based solutions utilizing Public Key Infra-structure (PKI). In essence, the technology allows an organization to positively identify its patrons. This in turn enables reliable e-commerce and cross-enterprise interoperability. Consequently, Universal Digital IDs are ideal for streamlining financial, healthcare, e-business, or government transactions. After President Clinton signed the federal "E-SIGN Bill" in June of 2000, Zions Bank was the first bank in the country to offer TrustID(R) digital certificates to its customers. As the only PKI service provider subject to federal regulatory oversight, DST has secured several federal, state, and local contracts. Currently, DST supports a number of government organizations, including the States of California, Utah, and Washington; the Social Security Administration; the Department of Veterans Affairs (VA); and the Federal Emergency Management Agency (FEMA). In July of 2000, DST entered into a sole agency agreement with Nippon System Development Co. Ltd., entitling NSD to be the exclusive reseller of DST's certificate-based solutions in Japan. In December, VISA(TM) U.S.A. also selected DST to provide certificate services for its smart VISA Access application, a component of VISA's smart VISA technology platform. ZIONS SMALL BUSINESS FINANCE During fiscal 2000, Zions Bancorporation was the seventh largest SBA 7(a) lender in the nation, generating 705 loans totaling $108 million. Zions Bank was recognized as the leading SBA lender in Utah for both total loans and minority lending. In fact, the number of SBA loans Zions granted to women alone was greater than the total number of SBA loans granted by any other Utah bank. Zions Bank is also the largest provider of SBA 504 financing in the nation. Zions created the secondary market for SBA 504 loans and completed the first-ever sale of these loans in 1994. CAPITAL MARKETS Zions Bank Capital Markets is one of only 26 primary U.S. Government securities dealers and the only primary dealer headquartered west of the Mississippi River. Its customer base is comprised of global institutions such as major corporations, banks, insurance companies, municipalities, and foreign central banks. As a primary dealer, Zions makes markets in U.S. Treasuries, Agencies, Municipals, Small Business Administration (SBA) Pools, Mortgage-Backed/Asset-Backed Securities, and Repurchase Agreements. Zions also offers Liquid Asset Management, an investment service that enhances earnings on cash while maintaining liquidity. Zions provides online trading through Zions Direct Online Brokerage (www.zionsdirect.com), the online brokerage arm of Zions Investment Securities, Inc. (ZISI), a member of the NASD and SIPC. Zions Direct offers free real-time quotes, free news, free access for reviewing personal portfolios, and inexpensive online trading of stocks, options, and over 6,000 mutual funds. Other services include estate planning, investment management, financial planning, registered investment advisors services, and retirement planning. 34 Electronic trading of U.S. Treasury and Agency issues is available through Zions on five electronic delivery platforms. Institutional investors with the Bloomberg system can access Zions at BBT (GO) and Zions (GO), or via the Internet at GovRate.com,(TM) OddLot.com, or MoneyLine.com. Zions' proprietary site, GovRate.com, also provides a search engine for municipal, corporate, and agency securities. On average, Zions expedites over $2 billion in trades a day. PUBLIC FINANCE Not only does Zions Bank underwrite and purchase municipal bonds, it also provides financial advisory service. For four consecutive years, the combined financial advisory business of Zions has been ranked in the nation's top ten municipal financial advisors. Zions' top ten ranking includes the combined financial advisory business of Zions Bank Public Finance (Utah and Idaho), Howarth & Associates (Nevada), National Bank of Arizona, and Kelling, Northcross & Nobriga (California). ZIONS INSURANCE AGENCY Established in 1984, Zions Insurance Agency is an independent agency representing numerous insurance carriers. Insurance offerings capitalize on a tremendous opportunity to develop and sell fee income products to existing clients. In addition, insurance products complement existing bank products while using very little capital or overhead. Consider the results: For the year 2000, Zions increased the number of clients served to over 35,000, while salary costs were down 12.5%. ZIONS AGRICULTURAL FINANCE Zions Agricultural Finance is the nation's top originator of secondary market agricultural real estate mortgage loans through the Federal Agricultural Mortgage Corporation (Farmer Mac). Zions provides financing for capital expansion, farm and ranch land acquisitions, and refinances existing debt. Since 1996, Zions Agricultural Finance has held a primary contract with Farmer Mac to underwrite and service loans sold by financial institutions to the secondary market. In addition, Zions offers proprietary agricultural finance products to over 150 brokerages and banks in 48 states. Consequently, over the year 2000, Zions serviced 1,114 loans totaling over $463 million and closed 128 loans totaling over $58 million. INTERNATIONAL BANKING GROUP The International Banking Group offers a full range of international banking services, including trade financing, letters of credit, documentary collections, and foreign exchange. During 2000, the group handled over $2 billion in international transactions. In 2000, a new, state-of-the-art Internet based system, CBTrade(R), was developed and installed. With CBTrade, customers can now initiate international trade transactions from their own offices, avoiding the traditional paper application. The new system also allows the customer to determine the status of documentary collections and letters of credit from their own PC at any time. Our Trade Payment Wizard$(TM) are used over the Internet by a host of companies worldwide to initiate and complete international payments. Customers have found this state-of-the-art tool easy to use, reliable, and fast. 35 [GRAPHIC OF COINS APPEARS HERE] 36 MANAGEMENT'S COMMENTS PERFORMANCE SUMMARY Zions Bancorporation and subsidiaries (the Company) reported net income of $161.7 million or $1.86 per diluted share in 2000. Net income decreased 16.7% from the $194.1 million earned in 1999, which was up 35.4% over the $143.4 million earned in 1998. On a diluted net income per share basis, earnings decreased 17.7% to $1.86 in 2000, compared to $2.26 in 1999. Per share earnings increased from $1.75 to $2.26, a 29.1% increase, from 1998 to 1999. Earnings for 2000 included pre-tax merger-related charges of $45.5 million related primarily to a terminated merger with First Security Corporation and an impairment loss on First Security Corporation common stock of $96.9 million. Excluding the merger-related expense and impairment loss, net income for 2000 was $249.7 million, an increase of 17.5% over the $212.5 million of net income before merger-related charges earned in 1999. Net income before merger-related charges for 1999 increased 26.9% over the $167.5 million earned in 1998. On a diluted net income per share basis, net income before merger-related charges was $2.87 per diluted share for 2000, an increase of 15.7% over $2.48 earned in 1999, which was up 21.6% over the $2.04 earned in 1998. Operating cash earnings were $281.4 million or $3.23 per share for 2000, an increase of 15.9% and 14.1%, respectively, over the $242.8 or $2.83 per share for 1999, which was up 24.9% and 19.4% over the $194.4 million or $2.37 per share for 1998. The return on average shareholders' equity and the return on average assets on an operating cash basis were 27.40% and 1.34%, respectively, for 2000, compared to 26.77% and 1.26% for 1999 and 26.56% and 1.41% for 1998. The Company is 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-related charges. Return on average shareholders' equity was 9.65% and the return on average assets was 0.74% for 2000, compared with 12.42% and 0.97%, respectively, in 1999, and 10.98% and 1.00%, respectively, in 1998. Dividends per share were $0.89 in 2000, an increase of 23.6% over $0.72 in 1999, which were up 33.3% from $0.54 in 1998. During 1999 the Company acquired Regency Bancorp in a transaction accounted for as a purchase. Results of operations for Regency are included from October 1, 1999. The acquisitions of Vectra Banking Corporation, FP Bancorp, Inc., and The Sumitomo Bank of California during 1998 were accounted for as purchases. The results of operations for Vectra Banking Corporation and FP Bancorp, Inc. were included from the effective dates of acquisition, January 1, 1998 and April 1, 1998, respectively, which resulted in immaterial differences to results of operations. Results of operations for The Sumitomo Bank of California are included from October 1, 1998, the actual date of acquisition. Results of operations cannot be compared directly between periods because of these transactions. The Company's acquisitions and related merger charges are further described in Note 3 of the Notes to Consolidated Financial Statements. The performance of the Company was driven by a 15.5% growth in average loans and leases and a 9.5% growth in average total earning assets resulting in an 8.4% increase in taxable-equivalent net interest income to $821.5 million in 2000. Noninterest income, excluding the impairment loss on the First Security Corporation common stock, increased 8.5% to $289.1 million in 2000, with strong growth in trust income and loans sales and servicing income. Noninterest expense, including merger expenses, increased 5.8% to $720.8 million in 2000. Excluding merger expenses, noninterest expense increased 3.3% over 1999 to $675.3 million. The Company's operating cash "efficiency ratio", or noninterest expenses, excluding amortization of goodwill and core deposit intangibles and merger-related expenses, as a percentage of total taxable-equivalent net revenues, improved to 57.5% in 2000, compared to 60.3% in 1999 and 61.3% in 1998. The Company's provision for loan losses totaled $31.8 million for 2000, compared to $18.0 million for 1999 and $14.0 million for 1998. The increased provision for loan losses for 2000 is mainly the result of the robust loan growth experienced by the Company. Net charge-offs were $42.4 million, or 0.31% of average loans and leases in 2000, compared to $29.0 million or 0.25% in 1999 and $15.8 million or 0.21% in 1998. Nonper-forming assets decreased to $71 million or .49% of loans and other real estate owned as of December 31, 2000 from $75 million or .58% as of December 31, 1999. 37 BUSINESS SEGMENT RESULTS The Company manages its operations and prepares management reports with a primary focus on geographical area. Operating segment information is presented in Schedule 1 and Note 20 of the Notes to Consolidated Financial Statements. The Company allocates centrally provided services to the business segments based upon estimated usage of those services. The operating segment identified as "Other" includes Zions Bancorporation (the Parent), several smaller business units and inter-segment eliminations. ZIONS FIRST NATIONAL BANK AND SUBSIDIARIES Zions First National Bank and Subsidiaries (ZFNB) includes the Company's operations in Utah and Idaho. ZFNB experienced strong loan growth in 2000, with loans increasing 19.6% over 1999 to $4.9 billion. Deposits increased 9.5% during the year to $4.2 billion. Operating cash earnings were $107.4 million in 2000, a decrease of 7.2% from $115.7 million earned in 1999, which were up 30.1% over $89.0 million earned in 1998. Net income decreased 8.6% to $104.4 million compared to $114.2 million for 1999, which was up 31.2% from the $87.1 million earned in 1998. The decrease in net income for 2000 compared to 1999 results mainly from decreased pre-tax income of $50.9 million from investments in venture capital entities and increased pre-tax losses of $7.6 million from a subsidiary, Digital Signature Trust Company. The increase in net income for 1999 compared to 1998 results mainly from a $27.2 million increase in noninterest income and a $8.0 million decrease in other noninterest expense. The increase in noninterest income for 1999 compared to 1998 is mainly attributable to gains experienced by a venture capital subsidiary, Wasatch Venture Corporation, and increased income from investments in bank-owned life insurance. The decrease in noninterest expense for 1999 included a $4.6 million decrease in amortization of mortgage servicing rights resulting from the sale of mortgage servicing rights during the first quarter of 1999. CALIFORNIA BANK & Trust Results of operations for California Bank & Trust for the years presented are not directly comparable because of acquisitions accounted for as purchases during 1999 and 1998. See Note 3 of the Notes to Consolidated Financial Statements for further information about the acquisitions. Operating cash earnings were $92.9 million for 2000, up 34.6% from the $69.0 million earned in 1999, which were up 79.7% from the $38.4 million earned in 1998. California Bank & Trust reported net income of $74.1 million for 2000 compared to $49.4 million for 1999 and $16.4 million for 1998. In 2000 net loans and leases increased 6.5% to $4.9 billion and deposits increased 3.0% to $5.6 billion from year end 1999. Net interest income for 2000 increased $33.5 million or 12.9% from 1999, while other noninterest income increased $7.8 million or 21.7%. Noninterest expense excluding merger-related expense and amortization of intangibles increased a modest 0.8%. The increase in earnings for 1999 compared to 1998 resulted mainly from the acquisitions consummated during those years and increased efficiencies attained during 1999. Net income for 1998 included income only for the last three months of 1998 from the acquisition of The Sumitomo Bank of California. The Bank incurred pre-tax merger charges of $5.6 million during 2000, $9.4 million during 1999 and $27.5 million during 1998. NEVADA STATE BANK Operating cash earnings for Nevada State Bank were $27.5 million for 2000, down 5.2% from the $29.0 million earned in 1999, which were up 2.5% from $28.3 million earned in 1998. Net income increased 23.2% to $22.8 million as compared to $18.5 million in 1999 and $27.0 million for 1998. Earnings for 2000 included a provision for loan losses of $10.1 million compared to provisions of $3.7 million in both 1999 and 1998, which covered increased credit losses in 2000. During 2000 Nevada State Bank incurred $5.3 million of pre-tax merger expense related to the terminated First Security Corporation merger and the conversion of Pioneer Bancorporation compared to $12.6 million of merger-related expense incurred during 1999. Net loans at year end 2000 increased 3.2% from 1999, while total deposits increased 5.9%. NATIONAL BANK OF ARIZONA Operating cash earnings at National Bank of Arizona were $32.0 million for 2000, up 15.9% from the $27.6 million earned in 1999, which were up 16.5% from the $23.7 million of cash earnings in 1998. Net income was up 15.4% to $30.2 million in 2000, compared to $26.2 million in 1999 and $22.2 million for 1998. The increases for both 2000 and 1999 were driven by strong loan growth. Net loans increased 22.8% to $1.5 billion at year end 2000, and net loans increased 19.8% during 1999. Net interest income for 2000 was up 20.0% from 1999. The provision for loan losses was increased to $3.6 million for 2000, a 48.8% increase from the $2.4 million provided for in 1999. VECTRA BANK COLORADO In January 1998 the Company acquired Vectra Banking Corporation in a transaction accounted for as a purchase. 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 3 of the Notes to Consolidated Financial Statements for further information about the acquisitions. 38 Operating cash earnings for Vectra Bank Colorado were $18.3 million for 2000, up 18.8% from the $15.4 million earned in 1999, which were down 13.0% from the $17.7 million earned in 1998. Net income increased 190.0% to $5.8 million from $2.0 million in 1999, which was down 44.4% from the $3.6 million earned in 1998. Improved earnings for 2000 resulted primarily from improved operating efficiencies. Noninterest expense excluding merger-related expense and amortization of intangibles decreased 4.9%, while net interest income increased 7.2% and noninterest income increased 17.5% from 1999 levels. The provision for loan losses was increased to $9.1 million for 2000, compared to $2.6 million for 1999. The increased provision for 2000 was made to cover increased credit losses. The decreased earnings for 1999 compared to 1998 were, in part, attributable to the expenses related to the conversion of acquired banks to Zions' systems. THE COMMERCE BANK OF WASHINGTON The Commerce Bank of Washington was acquired in September, 1998 and accounted for as a pooling of interests. Net income for 2000 was $7.9 million compared to net income of $5.7 million for 1999. The Bank experienced loan growth of 20.8% for 2000, which contributed to a 26.6% increase in net interest income. OTHER Other includes the Parent only and other various nonbanking subsidiaries. The $61.6 million increase in net loss for 2000, compared to 1999, is mainly due to the recognition of a $96.9 million pre-tax impairment loss during the first quarter on First Security Corporation common stock and $28.2 million of pre-tax merger expense mainly related to the terminated First Security Corporation merger, offset in part by gains of $23.6 million from the subsequent sale of the First Security Corporation common stock. The increased net loss of $9.1 million for 1999 compared to 1998 is mainly attributable to increased net interest loss incurred by the Company of $10.4 million related to increased borrowings for the purchase of First Security Corporation common stock and other matters. INCOME STATEMENT ANALYSIS NET INTEREST INCOME, MARGIN, AND INTEREST RATE SPREADS Net interest income on a taxable-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 both 2000 and 1999, taxable-equivalent net interest income provided 74.0% of the Company's net revenues, excluding the impairment loss on the First Security Corporation common stock, compared with 73.5% in 1998. The Company's taxable-equivalent net interest income increased by 8.4% to $821.5 million in 2000, as compared to $757.7 million in 1999 and $583.9 million in 1998. The increased level of taxable-equivalent net interest income was driven by a 9.5% and 37.1% growth in average earning assets for 2000 and 1999, 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 2000 was $2.6 million, compared to $8.3 million in 1999 and $6.9 million in 1998. 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 4.27% in 2000, 4.31% in 1999 and 4.56% in 1998. The decrease in the margins for 2000 and 1999 was primarily due to continued robust loan growth financed by short-term funding sources instead of traditional core deposit growth previously experienced by the Company. 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 that 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 principal 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 35% for all years presented. 39 SCHEDULE 1 OPERATING SEGMENTS INFORMATION
Zions First National Bank California Nevada State Bank and Subsidiaries Bank & Trust and Subsidiaries ------------------------------ -------------------------------- ------------------------------ (Amounts in millions) 2000 1999 % Change 2000 1999 % Change 2000 1999 % Change ------- ------- -------- ------- ------- -------- ------- ------- -------- CONDENSED INCOME STATEMENT Net interest income ........... $ 227.1 $ 220.0 3 % $ 297.2 $ 263.7 13 % $ 101.7 $ 99.9 2 % Noninterest income ............ 152.0 169.9 (11) 43.6 35.8 22 23.5 23.9 (2) ------- ------- ------- ------- ------- ------- Total revenue ................. 379.1 389.9 (3) 340.8 299.5 14 125.2 123.8 1 Provision for loan losses ..... 8.2 9.0 (9) -- -- -- 10.1 3.7 173 Noninterest expense(1)......... 219.2 208.1 5 183.6 182.1 1 74.2 78.5 (5) ------- ------- ------- ------- ------- ------- Pretax cash earnings .......... 151.7 172.8 (12) 157.2 117.4 34 40.9 41.6 (2) Income tax expense (benefit) .. 46.4 54.0 (14) 64.3 48.4 33 13.4 12.6 6 Minority interest ............. (2.1) 3.1 (168) -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- Cash earnings(1)............... 107.4 115.7 (7) 92.9 69.0 35 27.5 29.0 (5) Merger expense ................ 2.6 0.2 1,200 5.6 9.4 (40) 5.3 12.6 (58) Impairment loss on First Security Corporation common stock ... -- -- -- -- -- -- -- -- -- Amortization of goodwill and core deposit intangibles ... 1.9 1.9 -- 18.1 16.5 10 1.5 1.5 -- Minority interest adjustment .. -- -- -- -- -- -- -- -- -- Income tax expense (benefit) .. (1.5) (0.6) (150) (4.9) (6.3) 22 (2.1) (3.6) 42 ------- ------- ------- ------- ------- ------- Net income (loss) ........ $ 104.4 $ 114.2 (9)% $ 74.1 $ 49.4 50 % $ 22.8 $ 18.5 23 % ======= ======= ======= ======= ======= ======= YEAR END BALANCE SHEET DATA Total assets .................. $ 8,095 $ 7,157 13 % $ 6,953 $ 6,567 6 % $ 2,374 $ 2,277 4 % Net loans and leases .......... 4,885 4,085 20 4,856 4,559 7 1,383 1,341 3 Allowance for loan losses ..... 61 65 (6) 71 86 (17) 17 14 21 Goodwill and core deposit intangibles ................ 19 21 (10) 307 325 (6) 25 27 (7) Total deposits ................ 4,173 3,809 10 5,589 5,426 3 1,993 1,882 6 Common equity ................. 460 444 4 714 679 5 176 163 8 OPERATING CASH PERFORMANCE RATIOS(1) Return on average assets ...... 1.30% 1.60% 1.45% 1.15% 1.19% 1.30% Return on average common equity 25.31% 29.26% 23.88% 20.30% 19.35% 22.10% Efficiency ratio .............. 56.24% 52.25% 53.65% 60.52% 58.48% 61.71% OTHER INFORMATION Full-time equivalent employees 1,909 1,822 1,703 1,659 701 803 Domestic offices Traditional branches ..... 93 91 75 74 29 31 Banking centers in grocery stores ........ 49 46 -- -- 31 27 Foreign office ................ 1 1 -- -- -- -- ------- ------- ------- ------- ------- ------- Total offices ............ 143 138 75 74 60 58 ATMs .......................... 211 207 88 84 84 73
(1) Before amortization of goodwill and core deposit intangible assets and merger expense. 40
National Bank Vectra Bank The Commerce Bank of Arizona Colorado of Washington --------------------------------- -------------------------------- --------------------------- (Amounts in millions) 2000 1999 % Change 2000 1999 % Change 2000 1999 % Change --------- --------- -------- --------- --------- -------- ------- ------- -------- CONDENSED INCOME STATEMENT Net interest income .......... $ 92.3 $ 76.9 20% $ 89.1 $ 83.1 7 % $ 20.0 $ 15.8 27% Noninterest income ........... 14.1 13.0 8 20.2 17.2 17 1.5 0.7 114 --------- --------- --------- --------- ------- ------- Total revenue ................ 106.4 89.9 18 109.3 100.3 9 21.5 16.5 30 Provision for loan losses .... 3.6 2.4 50 9.1 2.6 250 0.8 0.6 33 Noninterest expense(1)........ 50.4 42.9 17 72.5 74.8 (3) 8.8 7.4 19 --------- --------- --------- --------- ------- ------- Pretax cash earnings ......... 52.4 44.6 17 27.7 22.9 21 11.9 8.5 40 Income tax expense (benefit) . 20.4 17.0 20 9.4 7.5 25 4.0 2.8 43 Minority interest ............ -- -- -- -- -- -- -- -- -- --------- --------- --------- --------- ------- ------- Cash earnings(1).............. 32.0 27.6 16 18.3 15.4 19 7.9 5.7 39 Merger expense ............... 0.5 -- -- 0.5 1.6 (69) -- -- -- Impairment loss on First Security Corporation common stock .. -- -- -- -- -- -- -- -- -- Amortization of goodwill and core deposit intangibles .. 1.8 1.8 -- 13.2 13.7 (4) -- -- -- Minority interest adjustment . -- -- -- -- -- -- -- -- -- Income tax expense (benefit) . (0.5) (0.4) (25) (1.2) (1.9) 37 -- -- -- --------- --------- --------- --------- ------- ------- Net income (loss) ....... $ 30.2 $ 26.2 15% $ 5.8 $ 2.0 190 % $ 7.9 $ 5.7 39% ========= ========= ========= ========= ======= ======= == YEAR END BALANCE SHEET DATA Total assets ................. $ 1,944 $ 1,600 22% $ 2,156 $ 2,161 -- $ 553 $ 408 36% Net loans and leases ......... 1,489 1,213 23 1,475 1,373 7 % 242 200 21 Allowance for loan losses .... 23 18 28 18 18 -- 4 3 33 Goodwill and core deposit intangibles ............... 23 25 (8) 244 257 (5) -- -- -- Total deposits ............... 1,551 1,206 29 1,385 1,490 (7) 405 289 40 Common equity ................ 161 131 23 390 384 2 33 25 32 OPERATING CASH PERFORMANCE RATIOS(1) Return on average assets ..... 1.87% 1.86% 0.96% 0.81% 1.78% 1.54% Return on average common equity .................... 25.69% 27.42% 13.36% 12.64% 27.79% 24.30% Efficiency ratio ............. 46.81% 46.97% 65.64% 73.51% 40.57% 44.30% OTHER INFORMATION Full-time equivalent employees 619 561 874 955 52 50 Domestic offices Traditional branches ...... 41 37 50 51 1 1 Banking centers in grocery stores ......... -- -- 4 4 -- -- Foreign office ............... -- -- -- -- -- -- --------- --------- --------- --------- ------- ------- Total offices ........... 41 37 54 55 1 1 ATMs ......................... 38 30 88 90 -- --
(1) Before amortization of goodwill and core deposit intangible assets and merger expense. 41
Consolidated Other Company ----------------------------- ------------------------------------- (Amounts in millions) 2000 1999 % Change 2000 1999 % Change ------- ------- -------- ---------- ---------- -------- CONDENSED INCOME STATEMENT Net interest income ................ $ (24.0) $ (17.9) (34)% $ 803.4 $ 741.5 8 % Noninterest income ................. 34.2 6.0 470 289.1 266.5 8 ------- ------- ---------- ---------- Total revenue ...................... 10.2 (11.9) 186 1,092.5 1,008.0 8 Provision for loan losses .......... -- (0.3) 100 31.8 18.0 77 Noninterest expense(1).............. 29.5 24.0 23 638.2 617.8 3 ------- ------- ---------- ---------- Pretax cash earnings ............... (19.3) (35.6) 46 422.5 372.2 14 Income tax expense (benefit) ....... (19.2) (18.8) (2) 138.7 123.5 12 Minority interest .................. 4.5 2.8 61 2.4 5.9 (59) ------- ------- ---------- ---------- Cash earnings(1).................... (4.6) (19.6) 77 281.4 242.8 16 Merger expense ..................... 31.0 3.9 695 45.5 27.7 64 Impairment loss on First Security Corporation common stock ........ 96.9 -- -- 96.9 -- -- Amortization of Goodwill and core deposit intangibles ........ 0.7 0.6 17 37.2 36.0 3 Minority interest adjustment ....... (0.9) (1.0) 10 (0.9) (1.0) 10 Income tax expense (benefit) ....... (48.8) (1.2) (3,967) (59.0) (14.0) (321) ------- ------- ---------- ---------- Net income (loss) ............. $ (83.5) $ (21.9) (281)% $ 161.7 $ 194.1 (17)% ======= ======= ========== ========== YEAR END BALANCE SHEET DATA Total assets ....................... $ (136) $ 111 (223)% $ 21,939 $ 20,281 8% Net loans and leases ............... 48 20 140 14,378 12,791 12 Allowance for loan losses .......... 2 -- -- 196 204 (4) Goodwill and core deposit intangibles ............. 23 11 109 641 666 (4) Total deposits ..................... (26) (40) 35 15,070 14,062 7 Common equity ...................... (155) (166) 7 1,779 1,660 7 OPERATING CASH PERFORMANCE RATIOS(1) Return on average assets ........... 1.34% 1.26% Return on average common equity .... 27.40% 26.77% Efficiency ratio ................... 57.46% 60.33% OTHER INFORMATION Full-time equivalent employees 1,057 983 6,915 6,833 Domestic offices Traditional branches ............ -- -- 289 285 Banking centers in grocery stores ................ -- -- 84 77 Foreign office ..................... -- -- 1 1 ------- ------- ---------- ---------- Total offices ................. -- -- 374 363 ATMs ............................... -- -- 509 484
(1) Before amortization of goodwill and core deposit intangible assets and merger expense. 41 [continued] SCHEDULE 2 DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY AVERAGE BALANCE SHEETS, YIELDS AND RATES
2000 1999 ------------------------------------ ------------------------------------ Average Amount of Average Average Amount of Average (Amounts in millions) balance interest(1) rate balance interest(1) rate --------- --------- ---------- --------- --------- ---------- ASSETS: Money market investments ............ $ 1,061 $ 67.4 6.35% $ 1,185 $ 67.2 5.67% Securities: Held to maturity ............... 3,254 222.1 6.83% 3,277 204.6 6.24% Available for sale ............. 685 44.8 6.53% 741 42.4 5.72% Trading account ................ 574 36.3 6.32% 538 30.1 5.59% --------- --------- --------- --------- Total securities .......... 4,513 303.2 6.72% 4,556 277.1 6.08% --------- --------- --------- --------- Loans: Loans held for sale ............ 192 14.5 7.52% 178 12.2 6.85% Net loans and leases(2) ........ 13,457 1,259.2 9.36% 11,641 1,019.0 8.75% --------- --------- --------- --------- Total loans ............... 13,649 1,273.7 9.33% 11,819 1,031.2 8.72% --------- --------- --------- --------- Total interest-earning assets ....... $ 19,223 $ 1,644.3 8.55% $ 17,560 $ 1,375.5 7.83% --------- --------- Cash and due from banks ............. 826 856 Allowance for loan losses ........... (203) (211) Goodwill and core deposit intangibles .............. 648 655 Other assets ........................ 1,228 1,052 --------- --------- Total Assets .............. $ 21,722 $ 19,912 ========= ========= LIABILITIES: Interest-bearing deposits: Savings and NOW deposits ....... $ 1,783 $ 40.0 2.24% $ 1,812 $ 44.1 2.43% Money market and super NOW deposits .................... 6,210 289.4 4.66% 5,521 203.6 3.69% Time deposits under $100,000 .............. 1,719 87.7 5.10% 2,085 98.5 4.72% Time deposits $100,000 or more ..................... 1,408 80.4 5.71% 1,257 61.1 4.86% Foreign deposits ............... 138 6.3 4.56% 165 7.2 4.36% --------- --------- --------- --------- Total interest- bearing deposits ....... 11,258 503.8 4.48% 10,840 414.5 3.82% --------- --------- --------- --------- Borrowed funds: Securities sold, not yet purchased ............... 311 19.7 6.32% 271 15.6 5.76% Federal funds purchased and security repurchase agreements .................. 2,747 159.7 5.81% 2,369 108.5 4.58% Commercial paper .............. 316 20.7 6.55% 194 10.8 5.57% FHLB advances and other borrowings: less than one year ...... 1,161 76.2 6.56% 545 28.5 5.23% over one year ........... 140 8.5 6.06% 76 4.8 6.32% Long-term debt ................ 429 34.2 7.98% 453 35.1 7.75% --------- --------- --------- --------- Total borrowed funds ...... 5,104 319.0 6.25% 3,908 203.3 5.20% --------- --------- --------- --------- Total interest-bearing liabilities ...................... $ 16,362 $ 822.8 5.03% $ 14,748 $ 617.8 4.19% --------- --------- Noninterest-bearing deposits ........ 3,316 3,249 Other liabilities ................... 329 316 --------- --------- Total liabilities ................... 20,007 18,313 Minority interest ................... 40 37 Total shareholders' equity .......... 1,675 1,562 --------- --------- Total liabilities and shareholders equity .............. $ 21,722 $ 19,912 ========= ========= Spread on average interest- bearing funds .................... 3.52% 3.64% ==== ==== Net interest income and net yield on interest-earning assets ....... $ 821.5 4.27% $ 757.7 4.31% ========= ==== ========= ==== (1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 42 1998 1997 ------------------------------------ ------------------------------------ Average Amount of Average Average Amount of Average (Amounts in millions) balance interest(1) rate balance interest(1) rate --------- --------- ---------- --------- --------- ---------- ASSETS: Money market investments ............ $ 1,629 $ 92.3 5.67% $ 1,558 $ 88.3 5.67% Securities: Held to maturity ............... 2,271 154.8 6.82% 1,790 126.5 7.07% Available for sale ............. 849 48.6 5.72% 671 46.0 6.86% Trading account ................ 430 24.0 5.58% 276 16.2 5.87% --------- --------- --------- --------- Total securities .......... 3,550 227.4 6.41% 2,737 188.7 6.89% --------- --------- --------- --------- Loans: Loans held for sale ............ 202 14.3 7.08% 163 11.9 7.30% Net loans and leases(2) ........ 7,430 708.8 9.54% 4,384 437.6 9.98% --------- --------- --------- --------- Total loans ............... 7,632 723.1 9.47% 4,547 449.5 9.89% --------- --------- --------- --------- Total interest-earning assets ....... $ 12,811 $ 1,042.8 8.14% $ 8,842 $ 726.5 8.22% --------- --------- Cash and due from banks ............. 657 471 Allowance for loan losses ........... (132) (81) Goodwill and core deposit intangibles .............. 573 132 Other assets ........................ 488 341 --------- --------- Total Assets .............. $ 14,397 $ 9,705 ========= ========= LIABILITIES: Interest-bearing deposits: Savings and NOW deposits ....... $ 1,338 $ 39.4 2.94% $ 860 $ 24.6 2.86% Money market and super NOW deposits .................... 3,712 134.5 3.62% 2,532 100.5 3.97% Time deposits under $100,000 .............. 1,651 85.7 5.19% 866 44.9 5.18% Time deposits $100,000 or more ..................... 894 49.3 5.51% 310 18.0 5.81% Foreign deposits ............... 182 8.2 4.51% 142 6.4 4.51% --------- --------- --------- --------- Total interest- bearing deposits ....... 7,777 317.1 4.08% 4,710 194.4 4.13% --------- --------- --------- --------- Borrowed funds: Securities sold, not yet purchased ............... 202 10.0 4.95% 92 5.3 5.76% Federal funds purchased and security repurchase agreements .................. 1,908 90.5 4.74% 2,206 114.7 5.20% Commercial paper .............. 28 1.6 5.71% -- -- FHLB advances and other borrowings: less than one year ...... 63 4.0 6.35% 34 2.4 7.06% over one year ........... 114 6.6 5.79% 136 8.2 6.03% Long-term debt ................ 347 29.1 8.39% 253 22.4 8.85% --------- --------- --------- --------- Total borrowed funds ...... 2,662 141.8 5.33% 2,721 153.0 5.62% --------- --------- --------- --------- Total interest-bearing liabilities ...................... $ 10,439 $ 458.9 4.40% $ 7,431 $ 347.4 4.68% --------- --------- Noninterest-bearing deposits ........ 2,448 1,439 Other liabilities ................... 196 158 --------- --------- Total liabilities ................... 13,083 9,028 Minority interest ................... 9 -- Total shareholders' equity .......... 1,305 677 --------- --------- Total liabilities and shareholders equity............... $ 14,397 $ 9,705 ========= ========= Spread on average interest- bearing funds .................... 3.74% 3.54% ==== ==== Net interest income and net yield on interest-earning assets ....... $ 583.9 4.56% $ 379.1 4.29% ========= ==== ========= ====
(1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 43 1996 ------------------------------------ Average Amount of Average (Amounts in millions) balance interest(1) rate --------- --------- ---------- ASSETS: Money market investments ............ $ 946 $ 52.9 5.59% Securities: Held to maturity ............... 1,314 93.9 7.15% Available for sale ............. 566 38.7 6.84% Trading account ................ 156 9.2 5.90% --------- --------- Total securities .......... 2,036 141.8 6.96% --------- --------- Loans: Loans held for sale ............ 151 11.5 7.62% Net loans and leases(2) ........ 3,409 340.5 9.99% --------- --------- Total loans ............... 3,560 352.0 9.89% --------- --------- Total interest-earning assets ....... $ 6,542 $ 546.7 8.36% --------- Cash and due from banks ............. 368 Allowance for loan losses ........... (75) Goodwill and core deposit intangibles .............. 31 Other assets ........................ 257 --------- Total Assets .............. $ 7,123 ========= LIABILITIES: Interest-bearing deposits: Savings and NOW deposits ....... $ 730 $ 21.7 2.97% Money market and super NOW deposits .................... 2,017 78.9 3.91% Time deposits under $100,000 .............. 713 37.2 5.22% Time deposits $100,000 or more ..................... 223 12.8 5.74% Foreign deposits ............... 121 5.4 4.46% --------- --------- Total interest- bearing deposits ....... 3,804 156.0 4.10% --------- --------- Borrowed funds: Securities sold, not yet purchased ............... 77 4.5 5.84% Federal funds purchased and security repurchase agreements .................. 1,358 67.9 5.00% Commercial paper .............. -- FHLB advances and other borrowings: less than one year ...... 18 1.3 7.22% over one year ........... 79 4.8 6.08% Long-term debt ................ 58 5.2 8.97% --------- --------- Total borrowed funds ...... 1,590 83.7 5.26% --------- --------- Total interest-bearing liabilities ...................... $ 5,394 $ 239.7 4.44% --------- Noninterest-bearing deposits ........ 1,098 Other liabilities ................... 107 --------- Total liabilities ................... 6,599 Minority interest ................... -- Total shareholders' equity .......... 524 --------- Total liabilities and shareholders equity............... $ 7,123 ========= Spread on average interest- bearing funds .................... 3.92% ==== Net interest income and net yield on interest-earning assets ....... $ 307.0 4.69% ========= ==== (1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 43 [Continued] SCHEDULE 3 ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATE
2000 over 1999 1999 over 1998 ------------------------------ ------------------------------ 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 ................... $ (6.9) $ 7.1 $ 0.2 $ (25.3) $ 0.2 $ (25.1) Securities: Held to maturity ...................... (1.6) 19.1 17.5 62.9 (13.1) 49.8 Available for sale .................... (3.2) 5.6 2.4 (6.1) (0.1) (6.2) Trading account ....................... 2.1 4.1 6.2 6.1 -- 6.1 -------- -------- -------- -------- -------- -------- Total securities ................. (2.7) 28.8 26.1 62.9 (13.2) 49.7 -------- -------- -------- -------- -------- -------- Loans: Loans held for sale ................... 1.0 1.2 2.2 (1.6) (0.5) (2.1) Net loans and leases(2)................ 166.2 74.0 240.2 368.9 (58.7) 310.2 -------- -------- -------- -------- -------- -------- Total loans ...................... 167.2 75.2 242.4 367.3 (59.2) 308.1 -------- -------- -------- -------- -------- -------- Total interest-earning assets .............. $ 157.6 $ 111.1 $ 268.7 $ 404.9 $ (72.2) $ 332.7 -------- -------- -------- -------- -------- -------- INTEREST-BEARING LIABILITIES: Interest-bearing deposits: Savings and NOW deposits .............. $ (0.6) $ (3.5) $ (4.1) $ 11.5 $ (6.8) $ 4.7 Money market and super NOW deposits ... 27.7 58.1 85.8 66.6 2.5 69.1 Time deposits under $100,000 .......... (17.4) 6.6 (10.8) 20.6 (7.8) 12.8 Time deposits $100,000 or more ........ 7.9 11.4 19.3 17.7 (5.9) 11.8 Foreign deposits ...................... (1.2) 0.3 (0.9) (0.7) (0.3) (1.0) -------- -------- -------- -------- -------- -------- Total interest-bearing deposits .. 16.4 72.9 89.3 115.7 (18.3) 97.4 -------- -------- -------- -------- -------- -------- Borrowed funds: Securities sold, not yet purchased .... 2.4 1.6 4.0 3.8 1.8 5.6 Federal funds purchased and security repurchase agreements ..... 19.1 32.1 51.2 21.1 (3.1) 18.0 Commercial paper ...................... 7.7 2.2 9.9 9.3 (0.1) 9.2 FHLB advances and other borrowings: Less than one year ............... 38.9 8.8 47.7 25.2 (0.7) 24.5 Over one year .................... 3.9 (0.2) 3.7 (2.2) 0.4 (1.8) Long-term debt ........................ (1.8) 0.9 (0.9) 8.1 (2.1) 6.0 -------- -------- -------- -------- -------- -------- Total borrowed funds ............. 70.2 45.4 115.6 65.3 (3.8) 61.5 -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities ......... $ 86.6 $ 118.3 $ 204.9 $ 181.0 $ (22.1) $ 158.9 -------- -------- -------- -------- -------- -------- Change in net interest income .............. $ 71.0 $ (7.2) $ 63.8 $ 223.9 $ (50.1) $ 173.8 ======== ======== ======== ======== ======== ========
(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 $31.8 million in 2000, compared to $18.0 million in 1999 and $14.0 million in 1998. The provision was .23% of average loans for 2000, .15% in 1999 and .18% for 1998. NONINTEREST INCOME Noninterest income, excluding the impairment loss recognized on the First Security Corporation common stock, comprised 26.5% of net revenue in 2000, compared to 26.4% in 1999 and 26.8% in 1998. Noninterest income excluding the impairment loss was $289.1 million in 2000, an increase of 8.5% over $266.5 million in 1999, which was up 26.8% over $210.2 million in 1998. Noninterest income from The Sumitomo Bank of California for 1998 included only income for the last quarter of the year, following the acquisition. Schedule 4 shows the major components of noninterest income. 44 SCHEDULE 4 NONINTEREST INCOME
Percent Percent Percent Percent (Amounts in millions) 2000 change 1999 change 1998 change 1997 change 1996 -------- -------- -------- -------- -------- -------- -------- ------- -------- Service charges on deposit accounts . $ 78.3 2.0% $ 76.8 25.7% $ 61.1 36.7% $ 44.7 25.6% $ 35.6 Other service charges, commissions and fees ............. 65.3 (1.2) 66.1 16.0 57.0 39.4 40.9 32.8 30.8 Trust income ........................ 18.2 15.2 15.8 43.6 11.0 35.8 8.1 37.3 5.9 Investment securities gains (losses), net .............. 14.8 593.3 (3.0) (173.2) 4.1 355.6 0.9 800.0 0.1 Impairment loss on First Security Corporation common stock ......... (96.9) -- -- -- -- -- -- -- -- Underwriting and trading income ........................... 10.1 (12.2) 11.5 25.0 9.2 61.4 5.7 111.1 2.7 Loan sales and servicing income ..... 51.7 27.7 40.5 (19.6) 50.4 30.2 38.7 10.3 35.1 Other income ........................ 50.7 (13.8) 58.8 237.9 17.4 87.1 9.3 27.4 7.3 -------- -------- -------- -------- -------- Total ............................... $ 192.2 (27.9)% $ 266.5 26.8% $ 210.2 41.7% $ 148.3 26.2% $ 117.5 ======== ======== ======== ======== ========
Service charges for 2000, compared with 1999, were relatively flat, reflecting the modest deposit growth experienced by the Company during 2000 and a competitive service charge environment in the Company's markets. The 25.7% increase in deposit service charges for 1999, compared to 1998, resulted from the increase of the Company's deposit base through acquisitions and internal growth and the inclusion of fees from the 1998 acquisition of The Sumitomo Bank of California for only the last quarter of 1998. 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 $65.3 million in 2000, down 1.2% from the $66.1 million of fees earned in 1999, which were up 16.0% from 1998. The decrease in fees for 2000 results from a decrease in brokerage and fiscal agent fees of $1.1 million and a decrease in commissions and fees from insurance products of $1.4 million. Trust income for 2000 was up 15.2% over 1999, which was up 43.6% over 1998. The Company has significantly expanded its trust services in Arizona and Colorado. Investment securities gains for 2000 include gains of $23.6 million on the sale of First Security Corporation common stock and an impairment loss of $13.4 million on a technology company investment by the Company's venture funding group. Underwriting and trading income decreased 12.2% to $10.1 million in 2000 from $11.5 million in 1999, which was up 25.0% over $9.2 million earned in 1998. The decrease for 2000 reflects the slow-down in capital markets transactions. During 1998, the Company commenced the provision of online executable government bond sales using Bloomberg and the Internet, which resulted in increased revenues for 1999 and 1998. Loan sales and servicing income increased 27.7% in 2000 to $51.7 million over $40.5 million in 1999, which was down 19.6% from $50.4 million in 1998. The increase for 2000 over 1999 resulted mainly from gains and servicing fees from SBA 504 loan securitizations completed during 2000 and 1999. The decrease in loan sales and servicing income for 1999 was the result of a Company decision to decrease its mortgage origination and servicing activities, resulting in decreased loan servicing income and gains on sales as well as decreased expense. Other income, which includes income from investments in bank-owned life insurance, income recognized on nonmarketable equity securities from the Company's venture funding operations, income from unconsolidated subsidiaries and associated companies, net gains on sales of fixed assets and other assets, and other items, was $50.7 million in 2000, a decrease of 13.8% from 1999, which was up $41.4 million or 237.9% from 1998. The significant increase for 1999 was mainly due to increased income from venture funding operations. Included in other noninterest income for 1999 was $42.6 million of income from the Company's venture funding operations. During 1999, the Company also recognized impairment and other losses related to SBA interest-only strips of $8.3 million. NONINTEREST EXPENSE The Company's noninterest expense was $720.8 million in 2000, an increase of 5.8% over $681.6 million in 1999, which was up 22.4% over the $556.7 million in 1998. Included in 2000, 1999 and 1998 expense was $45.5 million, $27.7 million and $38.1 million, respectively, in merger-related expenses. Excluding merger-related expense and amortization of goodwill and core deposit intangibles, noninterest expense increased 3.3% for 2000 compared to 1999. Schedule 5 shows the major components of noninterest expense. 45 SCHEDULE 5 NONINTEREST EXPENSE
Percent Percent Percent Percent (Amounts in millions) 2000 change 1999 change 1998 change 1997 change 1996 ------- ------- ------- ------- ------- ------- ------- ------ ------- Salaries and benefits .............. $ 348.3 0.5% $ 346.7 32.6% $ 261.5 58.6% $ 164.9 25.9% $ 131.0 Occupancy, net ..................... 51.7 4.7 49.4 47.9 33.4 85.6 18.0 33.3 13.5 Furniture and equipment ............ 52.7 16.1 45.4 18.5 38.3 56.3 24.5 41.6 17.3 Other real estate expense (income) . 0.3 400.0 (0.1) (114.3) 0.7 133.3 0.3 250.0 (0.2) Legal and professional services .... 19.7 21.6 16.2 (0.6) 16.3 101.2 8.1 50.0 5.4 Supplies ........................... 11.0 (1.8) 11.2 (5.9) 11.9 41.7 8.4 23.5 6.8 Postage ............................ 10.9 (6.8) 11.7 6.4 11.0 50.7 7.3 23.7 5.9 Advertising ........................ 25.4 37.3 18.5 46.8 12.6 70.3 7.4 27.6 5.8 FDIC premiums ...................... 3.4 54.5 2.2 46.7 1.5 114.3 0.7 -- -- Merger-related expense ............. 45.5 64.3 27.7 (27.3) 38.1 4,662.5 0.8 -- -- Amortization of goodwill and core deposit intangibles .. 37.2 3.3 36.0 13.6 31.7 346.5 7.1 208.7 2.3 Other expenses ..................... 114.7 (1.7) 116.7 17.1 99.7 52.4 65.4 25.8 52.0 ------- ------- ------- ------- ------- Total .............................. $ 720.8 5.8% $ 681.6 22.4% $ 556.7 77.9% $ 312.9 30.5% $ 239.8 ======= ======= ======= ======= =======
The increase in furniture and equipment expense for 2000 compared to 1999 includes increased expenses related to upgrading branch and administrative facilities of California Bank & Trust branches and increased expenses related to technology upgrades, including Internet security and authentification systems. The increased advertising expense for 2000 reflects efforts to promote Internet banking products and reestablish the Company's presence in critical markets subsequent to the terminated merger with First Security Corporation. In 1999 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. Also, expenses for 1998 only include operations of The Sumitomo Bank of California for the last quarter of the year, since the bank was acquired in a purchase transaction on October 1, 1998. On December 31, 2000, the Company had 6,915 full-time equivalent employees and 373 domestic offices compared to 6,833 employees and 362 offices at year-end 1999 and 7,099 full-time equivalent employees and 345 offices at year-end 1998. The Company's operating cash "efficiency ratio", or noninterest expenses, excluding amortization of goodwill and core deposit intangibles and merger-related expenses, as a percentage of total taxable-equivalent net revenues, improved to 57.5% in 2000, compared to 60.3% in 1999 and 61.3% in 1998. INCOME TAXES The Company's income tax expense for 2000 was $79.7 million, compared to $109.5 million in 1999 and $69.6 million in 1998. The Company's effective income tax rate was 32.8% in 2000, 35.5% in 1999 and 32.6% in 1998. The lower effective tax rate for 2000 results mainly from a higher percentage of nontaxable income and a reduction in nondeductible merger-related expenses. The higher rate for 1999 is mainly due to a higher percentage of the Company's income being generated in states with higher tax rates and increased nondeductible goodwill amortization. The lower effective tax rate for 1998 resulted primarily from decisions regarding a corporate reorganization. 46 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 9.5% to $19,223 million in 2000, compared to $17,560 million in 1999. Earning assets comprised 88.5% of total average assets in 2000, compared with 88.2% in 1999. Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements, decreased 10.5% to $1,061 million in 2000, compared to $1,185 million in 1999. Average securities decreased .9% to $4,513 million in 2000, compared to $4,556 million in 1999. Average held-to-maturity securities decreased .7% to $3,254 million, available-for-sale securities decreased 7.6% to $685 million, and trading account securities increased 6.7% to $574 million. Average net loans and leases increased 15.5% to $13,649 million in 2000, compared to $11,819 million in 1999, representing 71.0% of earning assets in 2000 compared to 67.3% in 1999. Average net loans and leases were 93.7% of average total deposits in 2000, as compared to 83.9% in 1999. INVESTMENT SECURITIES PORTFOLIO Schedule 6 presents the Company's year-end investment securities on December 31, 2000, 1999, and 1998. Schedule 7 presents the Company's maturities and average yields on securities on December 31, 2000. See Note 4 of the Notes to Consolidated Financial Statements for additional information about securities. SCHEDULE 6 INVESTMENT SECURITIES PORTFOLIO
December 31, --------------------------------------------------------------------- 2000 1999 1998 --------------------- --------------------- --------------------- Amortized Market Amortized Market Amortized Market (Amounts in millions) cost value cost value cost value --------- --------- --------- --------- --------- --------- HELD TO MATURITY: U.S. Treasury securities ................... $ 1 $ 1 $ 1 $ 1 $ 63 $ 63 U.S. government agencies and corporations: Small Business Administration loan- backed securities ................. 560 563 440 445 358 356 Other agency securities .............. 1,269 1,285 1,270 1,233 940 944 States and political subdivisions .......... 292 296 314 309 331 340 Mortgage-backed securities ................. 1,003 1,008 1,305 1,303 1,159 1,166 --------- --------- --------- --------- --------- --------- 3,125 3,153 3,330 3,291 2,851 2,869 --------- --------- --------- --------- --------- --------- AVAILABLE FOR SALE: U.S. Treasury securities ................... 51 52 93 93 98 100 U.S. government agencies and corporations .. 94 94 51 50 362 346 States and political subdivisions .......... 185 190 102 97 67 68 Mortgage- and other asset-backed securities .............................. 274 273 147 143 179 180 --------- --------- --------- --------- --------- --------- 604 609 393 383 706 694 --------- --------- --------- --------- --------- --------- Equity securities: Mutual funds: Accessor Funds, Inc. ................. 159 160 141 139 117 118 Other stock ............................. 18 13 242 257 137 142 --------- --------- --------- --------- --------- --------- 177 173 383 396 254 260 --------- --------- --------- --------- --------- --------- 781 782 776 779 960 954 --------- --------- --------- --------- --------- --------- Total ...................................... $ 3,906 $ 3,935 $ 4,106 $ 4,070 $ 3,811 $ 3,823 ========= ========= ========= ========= ========= =========
47 SCHEDULE 7 MATURITIES AND AVERAGE YIELDS ON SECURITIES ON DECEMBER 31, 2000
After one but After five but Total securities Within one year within five years within 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 ....... $ 1 6.2% $ 1 6.2% $ -- $ -- $ -- U.S. government agencies and corporations: Small Business Administration loan- backed securities ..... 560 8.2% 49 8.1% 354 8.1% 82 8.3% 75 8.3% Other agency securities .. 1,269 6.4% 33 6.2% 1,057 6.2% 41 7.3% 138 7.7% States and political subdivisions ................ 292 8.3% 59 8.3% 108 8.3% 63 8.3% 62 8.3% Mortgage-backed securities ..... 1,003 6.8% 295 6.8% 590 6.8% 65 7.2% 53 7.1% ------ ------ ------ ------ ------ 3,125 7.0% 437 7.1% 2,109 6.8% 251 7.9% 328 7.8% ------ ------ ------ ------ ------ AVAILABLE FOR SALE: U.S. Treasury securities ....... 51 5.9% 21 5.1% 28 6.4% 2 6.5% -- U.S. government agencies and corporations ............ 94 6.1% 8 6.2% 86 6.1% -- -- States and political subdivisions ................ 185 8.6% 30 9.0% 50 8.6% 54 8.1% 51 8.9% Mortgage- and other asset-backed securities ..... 274 7.1% 10 7.0% 46 6.7% 59 6.4% 159 7.5% ------ ------ ------ ------ ------ 604 7.3% 69 7.2% 210 6.9% 115 7.2% 210 7.8% ------ ------ ------ ------ ------ Equity securities: Mutual funds: Accessor Funds, Inc. ..... 159 6.2% -- -- -- 159 6.2% Other stock ................. 18 1.0% -- -- -- 18 1.0% ------ ------ ------ ------ ------ 177 5.7% -- -- -- 177 5.7% ------ ------ ------ ------ ------ 781 6.9% 69 7.2% 210 6.9% 115 7.2% 387 6.9% ------ ------ ------ ------ ------ Total .......................... $3,906 7.0% $ 506 7.1% $2,319 6.8% $ 366 7.6% $ 715 7.3% ====== ====== ====== ====== ======
*Taxable-equivalent rates used where applicable. 48 LOAN PORTFOLIO During 2000, the Company consummated securitized loan sales of automobile loans, credit card receivables, home equity credit lines, Small Business Administration (SBA) and Federal Agricultural Mortgage Corporation ("Farmer Mac") loans totaling $1,141 million. The Company also sold $533 million of long-term residential mortgage loans, SBA loans, Farmer Mac loans, and student loans classified as held for sale. After these sales, gross loans and leases on December 31, 2000 totaled $14,458 million, an increase of 12.5% compared to $12,853 million on December 31, 1999. 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, 2000. SCHEDULE 8 LOAN PORTFOLIO BY TYPE
December 31, 2000 ------------------------------------- One year Over December 31, One year through five ------------------------------------- (Amounts in millions) or less five years years Total 1999 1998 1997 1996 ------- ------- ------- ------- ------- ------- ------- ------- Loans held for sale ..................... $ 145 $ 11 $ 25 $ 181 $ 205 $ 232 $ 179 $ 150 Commercial, financial and agricultural .. 1,369 1,701 545 3,615 3,036 2,844 1,406 949 Real estate: Construction ....................... 1,026 1,221 26 2,273 1,722 960 576 387 Other: Home equity credit line ....... 30 27 206 263 232 232 165 188 1-4 family residential ........ 278 297 2,336 2,911 2,503 2,207 742 560 Other real estate-secured ..... 482 1,058 2,650 4,190 4,168 3,894 1,678 1,213 ------- ------- ------- ------- ------- ------- ------- ------- 1,816 2,603 5,218 9,637 8,625 7,293 3,161 2,348 ------- ------- ------- ------- ------- ------- ------- ------- Consumer: Bankcard ........................... 93 42 -- 135 107 99 73 47 Other .............................. 102 269 101 472 490 472 417 286 ------- ------- ------- ------- ------- ------- ------- ------- 195 311 101 607 597 571 490 333 ------- ------- ------- ------- ------- ------- ------- ------- Lease financing ......................... 16 213 88 317 275 214 176 160 Foreign loans ........................... 3 16 7 26 53 44 -- -- Other receivables ....................... 69 3 3 75 62 72 95 41 ------- ------- ------- ------- ------- ------- ------- ------- Total loans ........................ $ 3,613 $ 4,858 $ 5,987 $14,458 $12,853 $11,270 $ 5,507 $ 3,981 ======= ======= ======= ======= ======= ======= ======= ======= Loans maturing in more than one year: With fixed interest rates .......... $ 1,638 $ 2,989 $ 4,627 With variable interest rates ....... 3,220 2,998 6,218 ------- ------- ------- Total ......................... $ 4,858 $ 5,987 $10,845 ======= ======= =======
49 SOLD LOANS BEING SERVICED On December 31, 2000, long-term first mortgage real estate loans serviced for others amounted to $198 million, compared to $237 million on December 31, 1999, and $1,995 million on December 31, 1998. During 1999, the Company merged Zions Mortgage Company, its wholly owned mortgage company, into Zions First National Bank and sold most of its mortgage servicing and outsourced servicing retained on long-term first mortgage real estate loans. Consumer and other loan securitizations serviced, which relate primarily to loans sold under revolving securitization structures, totaled $1,750 million, $1,252 million, and $1,040 million on December 31, 2000, 1999 and 1998, respectively. Schedule 9 summarizes the Company's activity in its portfolio of sold loans being serviced (excluding long-term first mortgage real estate loans). SCHEDULE 9 SOLD LOANS BEING SERVICED
2000 1999 1998 ------------------------- ------------------------- ------------------------- Outstanding Outstanding Outstanding (Amounts in millions) Sales at year end Sales at year end Sales at year end ----------- ----------- ----------- ----------- ----------- ----------- Auto loans ................ $ 164 $ 310 $ 195 $ 326 $ 198 $ 345 Home equity credit lines .. 248 312 255 274 261 261 Bankcard receivables ...... 169 61 194 67 282 134 Home refinance loans ...... -- 6 -- 10 -- 23 SBA 504 loans ............. 494 722 212 275 -- 100 SBA 7(a) loans ............ 1 52 15 67 33 73 Farmer Mac ................ 65 287 111 233 110 104 ----------- ----------- ----------- ----------- ----------- ----------- Total ................ $ 1,141 $ 1,750 $ 982 $ 1,252 $ 884 $ 1,040 =========== =========== =========== =========== =========== ===========
DEPOSITS AND BORROWED FUNDS Total deposits increased 7.2% to $15,070 million on December 31, 2000, as compared to $14,062 million on December 31, 1999. Comparing December 31, 2000 to December 31, 1999, demand deposits increased 9.4%, savings and money market deposits increased 8.0%, and time deposits under $100,000 decreased 11.3%, while time deposits over $100,000 increased 34.3% and foreign deposits decreased 35.0%. As derived from Schedule 2, total average deposits increased 3.4% to $14,574 million in 2000 from $14,089 million in 1999. Average noninterest-bearing deposits increased 2.1%, average savings and NOW deposits decreased 1.6%, average money market and super NOW deposits increased 12.5%, and average time deposits under $100,000 decreased 17.6%. Average time deposits over $100,000 increased 12.0% over 1999 average balances, and average foreign deposits decreased 16.4% for 2000, as compared with 1999. See Notes 9, 10 and 11 of the 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, 2000 was $1,779 million, an increase of 7.2% over total shareholders' equity of $1,660 million on December 31, 1999. The ratio of average equity to average assets for 2000 was 7.71%, compared to 7.85% for 1999. During 2000, 1999 and 1998, the Company repurchased and retired 80,174, 115,769 and 591,009 shares of its common stock at a cost of $3.9 million, $6.7 million and $25.7 million, respectively. On December 31, 2000, the Company's Tier 1 leverage ratio was 6.38%, as compared to 6.16% on December 31, 1999. On December 31, 2000, the Company's Tier 1 risk-based capital ratio was 8.53%, as compared to 8.64% on December 31, 1999. 50 On December 31, 2000, the Company's total risk-based capital ratio was 10.83%, as compared to 11.29% on December 31, 1999. 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. See Note 17 of the Notes to Consolidated Financial Statements for additional information on risk-based capital. DIVIDENDS Dividends per share were $.89 in 2000, an increase of 23.6% over $.72 in 1999, which were up 33.3% over $.54 in 1998. The Company's quarterly dividend rate was $.12 for the first quarter of 1998, increasing to $.14 per share for the second, third and fourth quarters of 1998 and the first quarter of 1999. For the second and third quarters of 1999 the dividend rate was increased to $.29 per share to bring it into parity with the dividend rate of First Security Corporation. No dividend was declared during the fourth quarter of 1999. Dividends for 2000 were $.29 per share for the first quarter and were reduced to $.20 for the second, third and fourth quarters after the merger agreement with First Security Corporation was terminated. FOREIGN OPERATIONS Zions First National Bank opened a foreign office located in Grand Cayman, Grand Cayman Islands, B.W.I. in 1980. The office accepts Eurodollar deposits from qualified customers and places deposits with foreign banks and foreign branches of other U.S. banks. Foreign deposits at December 31, 2000, 1999 and 1998 totaled $136 million, $210 million and $204 million, respectively; and averaged $138 million for 2000, $165 million for 1999 and $182 million for 1998. See Schedule 8 Loan Portfolio by Type for details of foreign loans outstanding. 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 1% of its portfolio in loans held for sale, 25% in commercial loans, 67% in real estate loans, 4% in consumer loans, and 2% in lease financing. The Company's real estate portfolio is also diversified. Of the total real estate loan portfolio, 24% is in real estate construction loans, 3% is in home equity credit lines, 30% is in 1-4 family residential loans and 43% 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 6 of the 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, Nevada, Arizona, Colorado, and Washington. Also, the Company limits its exposure to any individual customer or counterparty. 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 normally 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 $71 million on December 31, 2000, down from $75 million on December 31, 1999. Such nonperforming assets as a percentage of net loans and leases, other real estate owned and other nonperforming assets were .49% on December 31, 2000, compared to .58% on December 31, 1999. 51 Accruing loans past due 90 days or more totaled $27 million on December 31, 2000, up from $21 million on December 31, 1999. These loans equaled .19% of net loans and leases on December 31, 2000, as compared to .16% on December 31, 1999. No loans were considered potential problem loans on December 31, 2000 or 1999. Potential problem loans are defined as loans currently 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 $45.9 million and $57.1 million on December 31, 2000 and 1999, respectively. The Company considers a loan to be impaired when the accrual of interest has been discontinued and the loan meets certain other criteria. 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, 2000 and 1999, is an allowance of $10.1 million and $16 million, respectively, on $16.2 million and $22.5 million, respectively, of the recorded investment in impaired loans. See Note 5 of the Notes to Consolidated Financial Statements for additional information on impaired loans. SCHEDULE 10 NONPERFORMING ASSETS
December 31, ------------------------------------ <(Amounts in millions) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Nonaccrual loans: Commercial, financial and agricultural .............. $ 20 $ 29 $ 12 $ 4 $ 5 Real estate ......................................... 34 34 39 7 6 Consumer ............................................ 2 1 1 1 1 Lease financing ..................................... 2 1 3 1 1 Other ............................................... -- -- -- -- -- Restructured loans: Commercial, financial and agricultural .............. 2 -- -- -- -- Real estate ......................................... 1 1 5 1 1 Other real estate owned: Commercial, financial and agricultural: Improved ....................................... 6 5 -- 2 -- Unimproved ..................................... 2 3 -- -- -- Residential: 1-4 Family ..................................... 2 1 2 1 -- Multi-family ................................... -- -- -- -- -- Other ............................................... -- -- 3 -- -- ---- ---- ---- ---- ---- Total .......................................... $ 71 $ 75 $ 65 $ 17 $ 14 ==== ==== ==== ==== ==== % of net loans* and leases, other real estate owned and other nonperforming assets .......................... .49% .58% .58% .31% .36% Accruing loans past due 90 days or more: Commercial, financial and agricultural .............. $ 8 $ 4 $ 5 $ 2 $ 1 Real estate ......................................... 18 15 20 7 2 Consumer ............................................ 1 2 1 1 1 ---- ---- ---- ---- ---- Total .......................................... $ 27 $ 21 $ 26 $ 10 $ 4 ==== ==== ==== ==== ==== % of net loans* and leases ............................... .19% .16% .23% .18% .09% *Includes loans held for sale.
52 ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was 1.36% of net loans and leases on December 31, 2000, compared to 1.60% on December 31, 1999. Net charge-offs in 2000 were $42 million, or .31% of average loans and leases, compared to net charge-offs of $30 million, or .25% of average net loans and leases in 1999 and net charge-offs of $16 million, or .21% of average net loans and leases in 1998. The allowance, as a percentage of nonaccrual loans and restructured loans, was 320.7% on December 31, 2000, compared to 310.9% on December 31, 1999 and 354.9% on December 31, 1998. The allowance, as a percentage of nonaccrual loans and accruing loans past due 90 days or more, was 229.4% on December 31, 2000, compared to 238.1% on December 31, 1999 and 264.2% on December 31, 1998. On December 31, 2000, 1999 and 1998, the allowance for loan losses includes an allocation of $22 million, $23 million and $20 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, 2000, 1999, and 1998 totaled $7,254 million, $6,001 million, and $5,090 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 losses, management utilizes a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of independent internal credit reviews. 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. SCHEDULE 11 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2000 1999 1998 1997 1996 ---------------- --------------- --------------- --------------- --------------- % of Allocation % of Allocation % of Allocation % of Allocation % of Allocation total of total of total of total of total of (Amounts in millions) loans allowance loans allowance loans allowance loans allowance loans allowance ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- Type of loan Loans held for sale .................. 1.3% $ -- 1.6% $ -- 2.1% $ -- 3.3% $ -- 3.8% $ -- Commercial, financial and agricultural 25.1% 53 23.8% 46 25.4% 83 25.5% 17 23.8% 16 Real estate .......................... 66.7% 107 67.4% 100 64.9% 52 57.4% 28 59.0% 28 Consumer ............................. 4.2% 8 4.6% 12 5.1% 12 8.9% 10 8.4% 8 Lease financing ...................... 2.2% 4 2.1% 6 1.9% 6 3.2% 2 4.0% 2 Other receivables .................... 0.5% -- 0.5% -- 0.6% -- 1.7% -- 1.0% -- ----- ----- ----- ----- ----- Total loans ..................... 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- Off-balance sheet unused commitments and standby letters of credit ......... 22 23 20 9 6 --------- --------- --------- --------- --------- Total allocated ...................... 194 187 173 66 60 Unallocated .......................... 2 17 40 23 17 --------- --------- --------- --------- --------- Total allowance for loan losses . $ 196 $ 204 $ 213 $ 89 $ 77 ========= ========= ========= ========= =========
53 SCHEDULE 12 SUMMARY OF LOAN LOSS EXPERIENCE
(Amounts in millions) 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Loans* and leases outstanding on December 31, (net of unearned income) ................. $ 14,378 $ 12,791 $ 11,219 $ 5,463 $ 3,941 ======== ======== ======== ======== ======== Average loans* and leases outstanding (net of unearned income) ................. $ 13,649 $ 11,819 $ 7,632 $ 4,547 $ 3,560 ======== ======== ======== ======== ======== Allowance for loan losses: Balance at beginning of year ................... $ 204 $ 213 $ 89 $ 77 $ 73 Allowance of companies acquired ................ 2 3 126 14 3 Provision charged against earnings ............. 32 18 14 6 5 Loans and leases charged off: Commercial, financial and agricultural .... (38) (32) (9) (6) (1) Real estate ............................... (4) (3) (6) -- -- Consumer .................................. (9) (9) (9) (8) (8) Lease financing ........................... (2) (2) (1) -- -- -------- -------- -------- -------- -------- Total ................................ (53) (46) (25) (14) (9) -------- -------- -------- -------- -------- Recoveries: Commercial, financial and agricultural .... 6 6 3 2 2 Real estate ............................... 1 7 3 2 -- Consumer .................................. 3 3 3 2 2 Lease financing ........................... 1 -- -- -- 1 -------- -------- -------- -------- -------- Total ................................ 11 16 9 6 5 -------- -------- -------- -------- -------- Net loan and lease charge-offs ................. (42) (30) (16) (8) (4) -------- -------- -------- -------- -------- Balance at end of year ......................... $ 196 $ 204 $ 213 $ 89 $ 77 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans and leases .................. .31% .25% .21% .19% .11% Ratio of allowance for loan losses to loans and leases outstanding on December 31, .... 1.36% 1.60% 1.89% 1.62% 1.95% Ratio of allowance for loan losses to nonperforming loans on December 31, ....... 320.69% 310.87% 354.94% 655.59% 546.81% Ratio of allowance for loan losses to nonaccrual loans and accruing loans past due 90 days or more on December 31, ....... 229.35% 238.07% 264.20% 389.19% 458.91% *Includes loans held for sale.
54 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 2000 and 1999, the Company's duration of equity was estimated to be approximately 4.0 years and 3.4 years, respectively. A 200-basis-point immediate increase in rates was estimated to increase the duration of equity to 4.6 years in 2000 and 4.4 years in 1999. Conversely, an immediate decrease in rates of similar magnitude was estimated to decrease the duration of equity to 3.2 years in 2000 and 2.5 years in 1999. 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 2000 and 1999, net interest income was expected to decline 0.4% and 0.6%, respectively, 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 decrease 1.6% and 2.3%, respectively. 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 $1,140 million: i.e., the $12,522 million of assets that mature or reprice during 2001 was less than the sum of $12,065 million of liabilities and the negative $1,597 million net effect of off-balance sheet swaps that mature or reprice during the same period. This gap represented 5.2% 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. 55 SCHEDULE 13 MATURITIES AND INTEREST RATE SENSITIVITY ON DECEMBER 31, 2000
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 ........... $ 9 $ 4 $ 8 $ 21 Federal funds sold .................. 51 51 Security resell agreements .......... 456 456 Securities: Held to maturity ............... 974 862 1,087 $ 202 3,125 Available for sale ............. 155 209 259 159 782 Trading account ................ 280 280 Loans and leases .................... 7,989 1,533 3,522 1,139 14,183 Nonearning assets ........................ $ 3,041 3,041 ---------- ---------- ---------- ---------- ---------- ---------- Total uses of funds ....... $ 9,914 $ 2,608 $ 4,876 $ 1,500 $ 3,041 $ 21,939 ---------- ---------- ---------- ---------- ---------- ---------- SOURCES OF FUNDS Interest-bearing deposits and liabilities: Savings and money market deposits ... $ 2,822 $ 860 $ 4,014 $ 574 $ 8,270 Time deposits under $100,000 ........ 380 836 403 9 1,628 Time deposits $100,000 or more ...... 549 694 200 6 1,449 Foreign ............................. 136 136 Securities sold, not yet purchased .. 291 291 Federal funds purchased ............. 1,069 1,069 Security repurchase agreements ...... 1,328 1,328 Commercial paper .................... 173 25 198 FHLB advances and other borrowings: Less than one year ............. 1,036 255 1,291 Over one year .................. 2 14 128 144 Long-term debt ...................... 118 302 420 Noninterest-bearing deposits ............. 1,608 1 280 $ 1,697 3,586 Other liabilities ........................ 310 310 Minority interest ........................ 40 40 Shareholders' equity ..................... 1,779 1,779 ---------- ---------- ---------- ---------- ---------- ---------- Total sources of funds .... $ 9,392 $ 2,673 $ 5,029 $ 1,019 $ 3,826 $ 21,939 ---------- ---------- ---------- ---------- ---------- ---------- Off-balance sheet items affecting interest rate sensitivity ............. $ (2,022) $ 425 $ 1,587 $ 10 Interest rate sensitivity gap ............ $ (1,500) $ 360 $ 1,434 $ 491 $ (785) Percent of total assets .................. (6.84)% 1.64 % 6.54% 2.24% (3.58)% Cumulative interest rate sensitivity gap . $ (1,500) $ (1,140) $ 294 $ 785 Cumulative as a % of total assets ........ (6.84)% (5.20)% 1.34% 3.58%
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 basis used for pricing many of 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 the Notes to Consolidated Financial Statements. SCHEDULE 14 INTEREST RATE SWAP MATURITIES AND AVERAGE RATES
(Amounts in millions) 2001 2002 2003 2004 Thereafter Total --------- --------- --------- --------- --------- --------- Receive fixed rate/pay variable rate: Notional amount ................... $ 425 $ 668 $ 302 $ 324 $ 303 $ 2,022 Weighted average rate received .... 7.05% 7.06% 6.68% 6.73% 7.16% 6.96% Weighted average rate paid ........ 6.73% 6.75% 6.71% 6.73% 6.74% 6.74%
56 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. The Parent'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, 2000, $117.6 million of dividend capacity was available from subsidiaries to pay to the Parent without having to obtain regulatory approval. During 2000, dividends from subsidiaries were $164.0 million. During 1998 the Company started a program to issue short-term commercial paper. At December 31, 2000, outstanding commercial paper was $198.2 million. At December 31, 2000, the Parent had revolving credit facilities with two banks totaling $65 million and borrowing on the facilities of $65 million. FORWARD-LOOKING INFORMATION Statements in Management's Discussion and Analysis that are not based on historical data are forward-looking, including, for example, the projected performance of the Company and its operations. These statements constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from the projections discussed in Management's Discussion and Analysis since such projections involve significant risks and uncertainties. Factors that might cause such differences include, but are not limited to: the timing of closing proposed acquisitions being delayed or such acquisitions being prohibited; competitive pressures among financial institutions increasing significantly; economic conditions, either nationally or locally in areas in which the Company conducts its operations, being less favorable than expected; and legislation or regulatory changes which adversely affect the Company's operations or business. The Company 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.
(Amounts in millions) 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Net interest income ......................................... $ 803.4 $ 741.5 $ 573.9 $ 369.6 $ 297.1 Noninterest income(2) ....................................... 289.1 266.5 210.1 148.3 117.5 --------- --------- --------- --------- --------- Total revenue .......................................... 1,092.5 1,008.0 784.0 517.9 414.6 Provision for loan losses ................................... 31.8 17.9 14.0 5.9 4.8 Noninterest expense(1) ...................................... 638.2 617.9 486.8 305.1 237.5 --------- --------- --------- --------- --------- Pretax cash earnings ................................... 422.5 372.2 283.2 206.9 172.3 Income tax expense .......................................... 138.7 123.5 88.4 68.6 57.3 Minority interest ........................................... 2.4 5.9 0.4 -- -- --------- --------- --------- --------- --------- Cash earnings(1) ....................................... 281.4 242.8 194.4 138.3 115.0 Amortization of goodwill and core deposit intangibles ....... 37.2 36.0 31.7 7.1 2.3 Merger expense .............................................. 45.5 27.7 38.1 0.7 -- Impairment loss on First Security Corporation common stock .. 96.9 -- -- -- -- Income tax benefit .......................................... (59.0) (14.0) (18.8) (0.9) (0.1) Minority interest operating cash adjustment ................. 0.9 1.0 -- -- -- --------- --------- --------- --------- --------- Net income ............................................. $ 161.7 $ 194.1 $ 143.4 $ 131.4 $ 112.8 ========= ========= ========= ========= ========= Operating cash earnings per share (diluted) (1).............. $ 3.23 $ 2.83 $ 2.37 $ 2.03 $ 1.73 ========= ========= ========= ========= ========= Net income per share (diluted) .............................. $ 1.86 $ 2.26 $ 1.75 $ 1.92 $ 1.69 ========= ========= ========= ========= =========
(1) Before amortization of goodwill and core deposit intangible assets and merger expense. (2) Excluding impairment loss on First Security Corporation common stock. 57 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
(In thousands, except share amounts) 2000 1999 ------------ ------------ ASSETS Cash and due from banks .............................................................. $ 1,047,252 898,300 Money market investments: Interest-bearing deposits ....................................................... 21,237 17,371 Federal funds sold .............................................................. 50,426 85,898 Security resell agreements ...................................................... 456,404 421,900 Investment securities: Held to maturity, at cost (approximate market value $3,152,740 and $3,290,508) .. 3,125,433 3,330,444 Available for sale, at market (2000 - includes $151,424 pledged as collateral for security repurchase agreements) ............................................ 782,466 778,930 Trading account, at market (2000 - includes $15,096 pledged as collateral for security repurchase agreements) ............................................ 280,410 327,845 ------------ ------------ 4,188,309 4,437,219 Loans: Loans held for sale ............................................................. 181,159 204,800 Loans, leases, and other receivables ............................................ 14,276,999 12,648,325 ------------ ------------ 14,458,158 12,853,125 Less: Unearned income and fees, net of related costs ............................. 80,125 62,480 Allowance for loan losses .................................................. 195,535 204,114 ------------ ------------ Net loans ............................................................. 14,182,498 12,586,531 Premises and equipment, net .......................................................... 314,938 287,448 Goodwill ............................................................................. 571,365 583,849 Core deposit intangibles ............................................................. 70,075 82,370 Other real estate owned .............................................................. 9,574 8,939 Other assets ......................................................................... 1,027,365 871,075 ------------ ------------ $ 21,939,443 20,280,900 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing ............................................................. $ 3,585,672 3,276,097 Interest-bearing: Savings and money market ................................................... 8,270,122 7,660,786 Time: Under $100,000 ........................................................ 1,628,890 1,836,645 Over $100,000 ......................................................... 1,448,905 1,078,631 Foreign .................................................................... 136,394 209,780 ------------ ------------ 15,069,983 14,061,939 Securities sold, not yet purchased ................................................... 291,102 237,020 Federal funds purchased .............................................................. 1,069,124 825,997 Security repurchase agreements ....................................................... 1,327,721 1,366,653 Accrued liabilities .................................................................. 310,287 247,406 Commercial paper ..................................................................... 198,239 238,660 Federal Home Loan Bank advances and other borrowings: Less than one year .............................................................. 1,290,960 1,038,045 Over one year ................................................................... 143,776 112,622 Long-term debt ....................................................................... 419,550 453,471 ------------ ------------ Total liabilities .......................................................... 20,120,742 18,581,813 ------------ ------------ Minority interest .................................................................... 39,857 39,249 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, 87,100,188 shares and 85,592,643 shares ....... 907,604 888,231 Accumulated other comprehensive loss ............................................ (3,644) (4,158) Retained earnings ............................................................... 874,884 775,765 ------------ ------------ Total shareholders' equity ....................................... 1,778,844 1,659,838 ------------ ------------ $ 21,939,443 20,280,900 ============ ============
See accompanying notes to consolidated financial statements. 58 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except per share amounts) 2000 1999 1998 ---------- ---------- ----------- Interest income: Interest and fees on loans .................................. $1,236,588 1,001,741 694,338 Interest on loans held for sale ............................. 14,477 12,194 14,256 Lease financing ............................................. 17,222 13,293 12,630 Interest on money market investments ........................ 67,353 67,234 92,248 Interest on securities: Held to maturity: Taxable ........................................... 196,917 175,701 131,712 Nontaxable ........................................ 16,398 18,784 16,154 Available for sale: Taxable ........................................... 33,792 36,480 44,735 Nontaxable ........................................ 7,147 3,844 2,733 Trading account ........................................ 36,289 30,067 24,043 ---------- ---------- ----------- Total interest income ........................ 1,626,183 1,359,338 1,032,849 ---------- ---------- ----------- Interest expense: Interest on savings and money market deposits ............... 329,373 247,729 173,833 Interest on time and foreign deposits ....................... 174,460 166,749 143,313 Interest on borrowed funds .................................. 318,972 203,371 141,761 ---------- ---------- ----------- Total interest expense ................................. 822,805 617,849 458,907 ---------- ---------- ----------- Net interest income .................................... 803,378 741,489 573,942 Provision for loan losses ........................................ 31,811 17,956 14,034 ---------- ---------- ----------- Net interest income after provision for loan losses .... 771,567 723,533 559,908 ---------- ---------- ----------- Noninterest income: Service charges on deposit accounts ......................... 78,269 76,756 61,131 Other service charges, commissions, and fees ................ 65,315 66,098 57,027 Trust income ................................................ 18,205 15,762 10,969 Investment securities gain (loss), net ...................... 14,804 (2,970) 4,055 Impairment loss on First Security Corporation common stock .. (96,911) -- -- Underwriting and trading income ............................. 10,065 11,551 9,239 Loan sales and servicing income ............................. 51,741 40,516 50,365 Other ....................................................... 50,676 58,832 17,411 ---------- ---------- ----------- Total noninterest income ............................... 192,164 266,545 210,197 ---------- ---------- ----------- Noninterest expense: Salaries and employee benefits .............................. 348,293 346,710 261,531 Occupancy, net .............................................. 51,671 49,393 33,387 Furniture and equipment ..................................... 52,704 45,477 38,256 Other real estate expense (income) .......................... 356 (66) 656 Legal and professional services ............................. 19,707 16,156 16,345 Supplies .................................................... 10,972 11,168 11,904 Postage ..................................................... 10,916 11,656 11,030 Advertising ................................................. 25,416 18,502 12,613 Merger-related expense ...................................... 45,492 27,691 38,128 FDIC premiums ............................................... 3,349 2,152 1,528 Amortization of goodwill .................................... 25,715 24,295 19,829 Amortization of core deposit intangibles .................... 11,508 11,713 11,812 Other ....................................................... 114,728 116,720 99,681 ---------- ---------- ----------- Total noninterest expense .............................. 720,827 681,567 556,700 ---------- ---------- ----------- Income before income taxes and minority interest ................. 242,904 308,511 213,405 Income taxes ..................................................... 79,661 109,498 69,632 ---------- ---------- ----------- Net income before minority interest .................... 163,243 199,013 143,773 Minority interest ................................................ 1,534 4,949 420 ---------- ---------- ----------- Net income ............................................. $ 161,709 194,064 143,353 =========== ========== =========== Weighted-average common and common-equivalent shares outstanding during the year ............................ 87,120 85,695 81,918 =========== ========== =========== Net income per common share: Basic ....................................................... $ 1.87 2.29 1.77 =========== ========== =========== Diluted ..................................................... $ 1.86 2.26 1.75 =========== ========== ===========
See accompanying notes to consolidated financial statements. 59 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands) 2000 1999 1998 ------------- ------------- ------------- Cash flows from operating activities: Net income ............................................................ $ 161,709 194,064 143,353 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses ........................................ 31,811 17,956 14,034 Depreciation of premises and equipment ........................... 50,186 39,155 29,861 Amortization ..................................................... 64,786 51,367 50,506 Accretion of unearned income and fees, net of related costs ...... 16,983 18,437 (5,695) Income to minority interest ...................................... 1,534 4,949 420 Proceeds from sales of trading account securities ................ 184,357,455 188,710,001 175,432,243 Increase in trading account securities ........................... (184,310,020) (188,845,991) (175,540,070) Investment securities (gain) loss, net ........................... (14,804) 2,970 (4,055) Impairment loss on First Security Corporation common stock .................................................. 96,911 -- -- Proceeds from loans held-for-sale ................................ 533,285 878,638 1,237,514 Increase in loans held-for-sale .................................. (509,644) (852,309) (1,296,803) Net gain on sales of loans, leases and other assets .............. (36,240) (31,674) (43,644) Change in accrued income taxes ................................... 30,078 4,792 22,916 Change in accrued interest receivable ............................ (34,447) (15,457) 1,420 Change in accrued interest payable ............................... 11,342 201 1,183 Other, net ....................................................... (101,738) (155,462) (53,285) ------------- ------------- ------------- Net cash provided by (used in) operating activities ......... 349,187 21,637 (10,102) ------------- ------------- ------------- Cash flows from investing activities: Net decrease (increase) in money market investments ................... (348) 135,386 874,130 Proceeds from maturities of investment securities held to maturity .... 881,175 804,139 3,466,594 Purchases of investment securities held to maturity ................... (663,948) (1,360,049) (3,519,660) Proceeds from sales of investment securities available for sale ....... 1,245,192 367,345 573,197 Proceeds from maturities of investment securities available for sale .. 134,785 353,714 275,785 Purchases of investment securities available for sale ................. (1,442,094) (652,017) (789,738) Proceeds from sales of loans and leases ............................... 1,175,687 1,005,530 918,948 Net increase in loans and leases ...................................... (2,665,154) (2,469,077) (2,033,560) Payments on leveraged leases .......................................... (8,125) (8,118) (3,840) Principal collections on leveraged leases ............................. 8,125 8,118 3,840 Proceeds from sales of premises and equipment ......................... 12,079 17,441 5,370 Purchases of premises and equipment ................................... (82,288) (93,769) (75,461) Proceeds from sales of other assets ................................... 13,927 7,892 10,299 Net cash received (paid) for acquisitions ............................. 11,886 8,847 (246,485) ------------- ------------- ------------- Net cash used in investing activities ............................ (1,379,101) (1,874,618) (540,581) ------------- ------------- ------------- Cash flows from financing activities: Net increase (decrease) in deposits ................................... 784,806 (365,695) 782,325 Net change in short-term funds borrowed ............................... 470,771 2,193,152 (91,272) Proceeds from FHLB advances over one year ............................. 600,000 365,000 4,665 Payments on FHLB advances over one year ............................... (568,846) (309,755) (167,886) Proceeds from issuance of long-term debt .............................. -- -- 195,041 Payments on long-term debt ............................................ (33,921) (264) (20,556) Proceeds from issuance of common stock ................................ 6,717 9,753 137,404 Payments to redeem common stock ....................................... (3,899) (6,650) (25,744) Dividends paid ........................................................ (76,762) (56,914) (41,600) ------------- ------------- ------------- Net cash provided by financing activities ........................ 1,178,866 1,828,627 772,377 ------------- ------------- ------------- Net increase (decrease) in cash and due from banks ......................... 148,952 (24,354) 221,694 Cash and due from banks at beginning of year ............................... 898,300 922,654 700,960 ------------- ------------- ------------- Cash and due from banks at end of year ..................................... $ 1,047,252 898,300 922,654 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest .............................................................. $ 812,018 617,610 459,700 Income taxes .......................................................... 63,825 28,300 55,400 Loans transferred to other real estate owned ............................... 13,872 11,282 5,055
See accompanying notes to consolidated financial statements. 60 Zions Bancorporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income Years ended December 31, 2000, 1999 and 1998
Accumulated Common stock other Total ------------------------- Comprehensive comprehensive Retained shareholders' (In thousands, except share amounts) Shares Amount income income (loss) earnings equity ---------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1997 ................ 69,964,518 $ 292,383 4,537 559,686 856,606 Net income ................................ -- -- 143,353 -- 143,353 143,353 Other comprehensive loss, net of tax: Realized and unrealized holding loss arising during the year, net of tax benefit of $3,595 ................. -- -- (5,803) -- -- -- Reclassification for realized gain recorded in the income statement, net of tax expense of $1,551 ...... -- -- (2,504) -- -- -- ----------- Other comprehensive loss ............. -- -- (8,307) (8,307) -- (8,307) ----------- Total comprehensive income ................ -- -- $ 135,046 -- -- -- =========== Cash dividends: Common, $.54 per share .............. -- -- -- (40,715) (40,715) Preferred dividends of acquired companies prior to merger ........ -- -- -- (887) (887) Stock dividend of acquired company ........ 446,452 21,000 (21,009) (9) Net proceeds from stock offering .......... 2,760,000 130,131 -- -- 130,131 Issuance of common shares for acquisitions 10,041,306 368,259 363 19,091 387,713 Exercise of acquired company warrants prior to acquisition ................... 257,056 1,852 -- -- 1,852 Stock redeemed and retired ................ (591,009) (25,696) -- -- (25,696) Stock options exercised, net of shares tendered and retired ................... 676,307 8,590 -- -- 8,590 ---------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1998 ................ 83,554,630 796,519 (3,407) 659,519 1,452,631 Net income ................................ -- -- 194,064 -- 194,064 194,064 Other comprehensive loss, net of tax: Realized and unrealized holding loss arising during the year, net of tax benefit of $5,405 ................. -- -- (8,726) -- -- -- Reclassification for realized loss recorded in the income statement, net of tax benefit of $4,940 ...... -- -- 7,975 -- -- -- ----------- Other comprehensive loss ............. -- -- (751) (751) -- (751) ----------- Total comprehensive income ................ -- -- $ 193,313 -- -- -- =========== Cash dividends: Common, $.72 per share ............... -- -- -- (56,914) (56,914) Stock dividend of acquired company ........ 107 21,694 -- (21,701) (7) Issuance of common shares for acquisitions 1,571,143 58,358 -- 797 59,155 Stock redeemed and retired ................ (115,769) (6,650) -- -- (6,650) Stock options exercised, net of shares tendered and retired ................... 582,532 18,310 -- -- 18,310 ---------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1999 ................ 85,592,643 888,231 (4,158) 775,765 1,659,838
61 Zions Bancorporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (continued) Years ended December 31, 2000, 1999 and 1998
Accumulated Common stock other Total ------------------------- Comprehensive comprehensive Retained shareholders' (In thousands, except share amounts) Shares Amount income income (loss) earnings equity ---------- ----------- ----------- ----------- ----------- ----------- Net income ................................. -- $ -- 161,709 -- 161,709 161,709 Other comprehensive loss, net of tax: Realized and unrealized holding loss arising during the year, net of tax benefit of $31,088 ................. -- -- (50,187) -- -- -- Reclassification for realized loss recorded in the income statement, net of tax benefit of $31,406 ...... -- -- 50,701 -- -- -- ----------- Other comprehensive income ............ -- -- 514 514 -- 514 ----------- Total comprehensive income ................. -- -- $ 162,223 -- -- -- =========== Cash dividends: Common, $.89 per share ................ -- -- -- (76,762) (76,762) Issuance of common shares for acquisitions .......................... 1,202,593 13,103 -- 14,172 27,275 Stock redeemed and retired ................. (80,174) (3,899) -- -- (3,899) Stock options exercised, net of shares tendered and retired .................... 385,126 10,169 -- -- 10,169 ---------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2000 ................. 87,100,188 $ 907,604 (3,644) 874,884 1,778,844 ========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 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, Nevada, Arizona, Colorado, 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 current financial statement presentation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and prevailing practices within the financial services industry. 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 values remain sufficient to protect against counterparty default. The Company is permitted by contract to sell or repledge certain securities it accepts as collateral for security resell agreements. If sold, the Company's obligation to return the collateral is recorded as a liability and included in the consolidated balance sheet as "Securities sold, not yet purchased." Security resell agreements averaged approximately $976 million during 2000, and the maximum amount outstanding at any month-end during 2000 was $1,453 million. INVESTMENT SECURITIES The Company classifies its securities according to their purpose and holding period. Gains or losses on the sale of securities are recognized using the specific identification method and recorded in noninterest income. 62 Held-to-maturity securities, primarily debt securities, are stated at cost, net of unamortized premiums and unaccreted discounts. The Company has the intent and the ability to hold such securities until maturity. Upon adoption on January 1, 2001 of Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, issued by the Financial Accounting Standards Board (FASB), the Company will transfer substantially all held-to-maturity securities to either the available-for-sale or trading category (see additional discussion in Note 2). Debt securities that may not be held until maturity and marketable equity securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, after applicable taxes, reported as a component of other comprehensive income. Any declines in the value of debt securities and marketable equity securities that are considered other than temporary are recorded in noninterest income. Securities acquired for short-term appreciation or other trading purposes are classified as trading securities and are recorded at fair value. Realized and unrealized gains and losses resulting from such fair value adjustments and from recording the results of sales are recorded in trading income. The market values of available-for-sale and trading securities are generally based on quoted market prices or dealer quotes. If a quoted market price is not available, market value is estimated using quoted market prices for similar securities. NONMARKETABLE SECURITIES Nonmarketable securities include certain venture capital securities and securities acquired for various debt and regulatory requirements. Nonmarketable venture capital securities are reported at estimated fair values, in the absence of readily ascertainable market values. Changes in fair value and gains and losses from sales are recognized in noninterest income. The values assigned to the securities where no market quotations exist are based upon available information and may not necessarily represent amounts that will ultimately be realized. Such estimated amounts depend on future circumstances and will not be realized until the individual securities are liquidated. The valuation procedures applied include consideration of economic and market conditions, current and projected financial performance of the investee company, and the investee company's management team. Management believes that the cost of an investment is initially considered the best indication of estimated fair value unless there have been significant subsequent positive or negative developments that justify an adjustment in the fair value estimate. Other nonmarketable securities acquired for various debt and regulatory requirements are accounted for at cost. These nonmarketable securities are included in other assets on the Company's balance sheet. 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 principally an interest method. Loans held for sale are carried at the lower of cost or market value because the Company does not intend to hold these loans until maturity or sales of loans are pending. Gains and losses are recorded in noninterest income, based on the difference between sales proceeds and carrying value. NONACCRUAL LOANS 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 nonaccrual status, inasmuch as they are normally charged off when they become 120 days past due. A loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well-secured and in the process of collection. IMPAIRED LOANS Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. This assessment for impairment occurs when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. 63 RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured (accruing) loan. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified may be excluded from the impairment assessment and may cease to be considered impaired loans in the calendar years subsequent to the restructuring if they are not impaired based on the modified terms. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. 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 portfolio, and considers the results of independent internal credit reviews. 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 may be 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. This is accomplished by assigning high and low loss ranges for each portfolio segment. The low range sets the minimum required reserve and the high range provides a best estimate for risks and uncertainties. The unallocated portion of the allowance incorporates 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. ASSET SECURITIZATIONS When the Company sells receivables in securitizations of automobile loans, credit card receivables, home equity loans and small business loans, it may retain a cash reserve account, an interest-only strip, and in some cases a subordinated tranche, all of which are retained interests in the securitized receivables. Gain or loss on sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. Quoted market prices are generally not available for retained interests. To obtain fair values, the Company estimates the present value of future expected cash flows using management's best judgment of key assumptions, including credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. 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. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS Goodwill results from acquisitions made by the Company, and represents the excess of the purchase price over the fair value of net assets acquired. Substantially all of the Company's goodwill is amortized using the straight-line method over 25 years. Core deposit intangibles are amortized on an accelerated basis using an estimated useful life up to 10 years. The Company reviews its intangible assets periodically for other-than-temporary impairment. If such impairment is indicated, recoverability of the asset is based on expected undiscounted net cash flows. 64 COMMITMENTS AND LETTERS OF CREDIT In the ordinary course of business, the Company enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are only 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. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into a variety of off-balance sheet derivative financial instruments including interest rate exchange contracts (swaps), cap agreements, and spread maintenance 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. These instruments are generally 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 over 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 interest income or expense related to the hedged obligation or asset. The Company also enters into foreign exchange derivative financial instruments primarily as an accommodation to customers. These contracts are carried at fair market value with unrealized gains and losses recorded in noninterest income. Upon adoption of FASB Statement No. 133, the Company will modify its accounting for derivative financial instruments as appropriate to comply with the provisions of the Statement (see additional discussion in Note 2). INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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. 2. Recent Accounting Pronouncements FASB Statement No. 133, as amended by Statement Nos. 137 and 138, is effective for the Company as of January 1, 2001. Statement No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Statement requires that the Company recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under Statement No. 133, while derivative instruments used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. If the derivative is designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings together with the offsetting loss or gain on the hedged asset, liability, or firm commitment attributable to the risk being hedged. If the derivative is designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and is subsequently recognized in earnings when the hedged forecasted transaction affects earnings. The ineffective portion of a derivative's gain or loss will be immediately recognized in earnings. Derivatives that are not hedges must be adjusted to fair value through earnings. On January 1, 2001, all hedging relationships were designated anew by the Company in accordance with the provisions of the new Statement. Upon adoption of Statement No. 133, the Company estimates that the transition adjustment to establish the fair value of derivative instruments on the balance sheet will be a decrease in net income of approximately $.3 65 million (net of tax benefit of $.2 million) and an increase in accumulated other comprehensive income of approximately $21.3 million (net of tax expense of $13.2 million). In addition, in accordance with the transition provisions of the Statement, the Company estimates that the effect of transferring held-to-maturity securities to either the trading or available-for-sale category will be a decrease in net income of approximately $.2 million (net of tax benefit of $.1 million) and an increase in accumulated other comprehensive income of approximately $17.7 million (net of tax expense of $9.9 million), respectively. Accordingly, the total transition adjustment related to the adoption of Statement No. 133 will be a decrease in net income of approximately $.5 million (net of tax benefit of $.3 million) and an increase in accumulated other comprehensive income of approximately $39.0 million (net of tax expense of $23.1 million). The transition adjustments will be presented as cumulative effect adjustments, as described in Accounting Principles Board Opinion No. 20, Accounting Changes, in the Company's 2001 consolidated financial statements. The transition will also affect assets and liabilities reported on the balance sheet. The transition amounts were determined based on the interpretive guidance issued by the FASB to date. However, the FASB continues to issue interpretive guidance, which could change the Company's application of Statement No. 133 and require adjustments to the transition amounts. Statement No. 133, as applied to the Company's risk management strategies, will impact assets and liabilities reported on the balance sheet and may increase or decrease reported net income and shareholders' equity prospectively, but will have no effect on cash flows or economic risk. The ongoing effects of Statement No. 133 will depend on future market conditions and the Company's hedging activities. FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000 and replaces Statement No. 125. Statement No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures related to transferred assets. The provisions of Statement No. 140 relating to the recognition and reclassification of collateral, as well as the disclosures relating to collateral and securitization transactions, became effective for the Company as of December 31, 2000 (see disclosures related to asset securitizations in Note 21). Other provisions related to the transfer and servicing of financial assets and extinguishments of liabilities are effective for transactions occurring after March 31, 2001. Based on the Company's current position with respect to securitization transactions, including any planned revisions to existing agreements, management does not believe the new guidance will materially impact the Company's results of operations, financial position, or liquidity. 3. Mergers and Acquisitions Activity On June 6, 1999, the Company entered into a definitive Agreement and Plan of Merger (the "Agreement"), with First Security Corporation. First Security Corporation's stockholders unilaterally approved an alternative structure for the transaction at a meeting held on March 22, 2000. In a special meeting of shareholders held on March 31, 2000, the Company's shareholders declined to adopt the Agreement and the Company was notified the next day by First Security Corporation that it was terminating the Agreement. Included in merger-related expenses for 2000 are approximately $40.5 million of pre-tax merger expenses related to the termination of the merger and related disengagement. Also included in results of operations for 2000 are a pre-tax impairment loss on First Security Corporation common stock of $96.9 million recognized during the first quarter of the year and gains from the subsequent sale of the common stock of $23.6 million. On July 28, 2000, the Company completed the acquisition of County Bank, headquartered in Prescott, Arizona, in exchange for approximately 1.1 million shares of the Company's common stock. County Bank had assets of approximately $247 million and total shareholders' equity of $23 million. The acquisition was accounted for as a pooling of interests and was not considered material to the historical results of the Company and, accordingly, the Company's financial statements were not restated. On October 5, 1999, the Company acquired all of the outstanding shares of Regency Bancorp ("Regency"), a bank holding company headquartered in Fresno, California, in exchange for approximately one million shares of the Company's common stock. The acquisition was accounted for as a purchase and, accordingly, the Company's financial statements reflect its operations from the date of acquisition. Goodwill of approximately $33 million was recorded in the fourth quarter of 1999. The pro forma effect on prior period results of operations is not significant. On October 15, 1999, the Company completed its acquisition of Pioneer Bancorporation ("Pioneer"), located in Reno, Nevada, resulting in the issuance of approximately 5.4 million shares of the Company's common stock for all the outstanding shares of Pioneer common stock in a tax-free exchange. The acquisition of Pioneer was accounted for as a pooling of interests and, accordingly, financial information for all periods presented prior to the date of acquisition was restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. At September 30, 1999, Pioneer had assets of approximately $1 billion, net loans of $675 million, deposits of $941 million, shareholders' equity of $73 million, and net income for the nine months applicable to common shareholders of $10.6 million. 66 On January 6, 1998, the Company completed its acquisition of Vectra Banking Corporation ("Vectra") and its banking subsidiary, Vectra Bank, located in Denver, Colorado, in exchange for 4.0 million shares of the Company's common stock. The acquisition was accounted for using the purchase method of accounting. The results of the acquisition are included in the periods subsequent to the acquisition date. Goodwill of $129 million was recorded in the first quarter of 1998 in connection with this purchase. On May 22, 1998, the Company acquired all the outstanding shares of FP Bancorp, Inc. ("FP") of Escondido, California, and its banking subsidiary, First Pacific National Bank. The Company issued 1.9 million shares of the Company's common stock. The acquisition was accounted for as a purchase; the results of the acquisition are included in the periods subsequent to the acquisition date. Goodwill of $57 million was recorded in the second quarter of 1998 in connection with this purchase. On September 8, 1998, the Company acquired The Commerce Bancorporation ("Commerce"), and its banking subsidiary, The Commerce Bank of Washington, N.A. for 1.9 million shares of the Company's common stock. On the date of acquisition, Commerce had total assets of $318 million and total shareholders' equity of $24 million. The acquisition was accounted for as a pooling of interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. On October 1, 1998, the Company acquired The Sumitomo Bank of California ("Sumitomo"), located in San Francisco, California. Cash consideration of approximately $546.0 million was paid for the acquisition. Sumitomo had total assets of $4.5 billion and total shareholders' equity of $427 million at the date of acquisition. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of the acquisition are included in the periods subsequent to the acquisition date. The Company recorded $107 million of goodwill with this transaction. Sumitomo and FP were merged with Grossmont Bank and the name was changed to California Bank & Trust ("CB&T"). The Company sold a minority interest in CB&T to a limited partnership and Director of the Company for its cost basis of approximately $33 million. During 1998, the Company completed the acquisition of four additional banking organizations in Colorado, namely Sky Valley Bank Corp., Tri-State Finance Corporation, Routt County National Bank Corporation, and SBT Bankshares, for an aggregate of 2.4 million shares of common stock. These acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. The Company recorded $69 million in goodwill in connection with these purchases. During 1998, the Company issued 1.7 million shares of the Company's common stock to acquire four additional banking organizations in Colorado, namely Kersey Bancorp., N.A., Eagle Holding Company, Citizens Banco, Inc., and Mountain Financial Holding Company. Each of these acquisitions was accounted for as a pooling of interests and was not considered material to the historical results of the Company and, accordingly, the Company's financial statements were not restated. On November 20, 2000, the Company announced a definitive agreement to acquire Draper Bancorp ("Draper"), headquartered in Draper, Utah, and its banking subsidiary, Draper Bank, in exchange for Company common stock. At December 31, 2000, Draper had total assets of approximately $242 million (unaudited). This transaction will be accounted for as a pooling of interests and will close in the first quarter of 2001. On December 14, 2000, the Company announced a definitive agreement to acquire Eldorado Bancshares, Inc. ("Eldorado"), headquartered in Laguna Hill, California, and its banking subsidiaries, Eldorado Bank and Antelope Valley Bank. As of December 31, 2000, Eldorado had total assets of approximately $1.3 billion (unaudited). The transaction will be accounted for as a purchase and is expected to close during the first quarter of 2001. On December 27, 2000, the Company announced a definitive agreement with Pacific Century Financial Corporation to purchase nine Arizona branches. The purchase will include approximately $225 million (unaudited) in loans, and approximately $400 million (unaudited) in deposits, and branch facilities, and is expected to close during the second quarter of 2001. Merger-related expenses for each of the years in the three-year period ended December 31, 2000 are presented below (in thousands): 2000 1999 1998 ------- ------- ------- Severance and other employee benefits .. $ 6,206 12,363 11,762 Equipment and occupancy expense ........ 5,057 1,722 7,773 Integration of business operations ..... 9,674 451 5,834 Integration of information systems ..... 6,232 3,403 1,668 Legal and other professional fees ...... 12,815 4,810 5,957 Other integration costs ................ 5,508 4,942 5,134 ------- ------- ------- $45,492 27,691 38,128 ======= ====== ====== 67 In connection with the terminated First Security Corporation merger, the Company incurred pre-tax merger expenses of $40.5 million during 2000. These costs were comprised of $5.0 million in severance and other employee benefits, $3.1 million in equipment and occupancy related expense, $9.7 million in integration of business operations, $5.2 million in integration of information systems, $12.4 million in legal and other professional fees, and $5.1 million in other integration costs. In 2000, the Company paid $.7 million of pre-tax expense in connection with the acquisition of County Bank, which consisted of $.3 million in information system integration expense and $.4 million in legal and professional fees. During 2000, the Company also incurred $4.3 million in merger-related expenses relating to previously consummated acquisitions of Sumitomo and Vectra. The expenses consisted of $1.2 million in severance and other employee benefits, $2.0 million in equipment and occupancy related expense, $.7 million in integration of information systems, and $.4 million in other integration related costs. As of December 31, 2000, $1.4 million in severance, $.1 million in equipment and occupancy expense, and $.2 million in other integration costs related to the terminated First Security Corporation merger remain accrued. Also at December 31, 2000, approximately $2.9 million in severance remains accrued relating to the acquisitions of Sumitomo, Regency and Vectra. The Company expects that substantially all of the unpaid merger expenses at December 31, 2000 will be paid in 2001. In connection with the Regency and Pioneer mergers, the Company recorded pre-tax merger expenses of $14.3 million in 1999. These costs were comprised of $9.6 million in severance and other employee benefits, $.3 million in integration of information systems, $3.5 million in expenses for legal and other professional fees, and $.9 million in other integration costs. During 1999, the Company paid $4.5 million in accrued severance and other employee benefits and $3.5 million in legal and other professional fees and other integration costs. As a result of the consolidation effort associated with Sumitomo, the Company recorded additional pre-tax merger expenses of $8.4 million during 1999. Those costs were comprised of $2.3 million in severance and other employee benefits, $1.7 million in equipment and occupancy costs, $.5 million in integration of business operations, $3.1 million in integration of information systems, $.3 million in legal and professional fees, and $.5 million in other integration costs. During 1999, the Company paid $.5 million in severance and other employee benefits, $1.1 million in legal and other professional fees, and $3.5 million in other integration costs associated with earlier acquisitions. The Company recorded pre-tax merger expenses of $38.1 million in 1998 in connection with the Sumitomo and eleven other mergers. The Sumitomo merger expenses included $5.3 million in severance and other employee benefits, $7.8 million in real property lease terminations, $5.8 million in integration of business systems, and $1.7 million in integration of information systems. In connection with the other eleven mergers, the Company incurred $6.3 million in severance and other employee benefits, $6.0 million in legal and other professional fees, and $5.2 million in other integration costs. As a result of these twelve mergers, a liability of $22.1 million was recorded in 1998 and was paid in total during 1999. 4. Investment Securities Investment securities as of December 31, 2000 are summarized as follows (in thousands): Held to maturity ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- ---------- U.S. Treasury securities ........... $ 1,145 14 2 1,157 U.S. government agencies and corporations: Small Business Administration loan-backed securities ...... 560,328 6,644 3,816 563,156 Other agency securities ...... 1,268,763 24,732 8,350 1,285,145 States and political subdivisions ......... 292,521 4,357 1,127 295,751 Mortgage- backed securities ........... 1,002,676 7,119 2,264 1,007,531 ---------- ---------- ---------- ---------- $3,125,433 42,866 15,559 3,152,740 ========== ========== ========== ========== Available for sale ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- ---------- U.S. Treasury securities ........... $ 51,036 1,566 43 52,559 U.S. government agencies and corporations ......... 93,924 353 403 93,874 States and political subdivisions ......... 184,714 5,842 435 190,121 Mortgage- and other asset- backed securities ........... 274,307 447 1,725 273,029 ---------- ---------- ---------- ---------- 603,981 8,208 2,606 609,583 Equity securities: Mutual funds: Accessor Funds, Inc. ....... 159,264 1,245 798 159,711 Stock ................ 17,417 4,810 9,055 13,172 ---------- ---------- ---------- ---------- $ 780,662 14,263 12,459 782,466 ========== ========== ========== ========== 68 Investment securities as of December 31, 1999 are summarized as follows (in thousands): Held to maturity ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- ---------- U.S. Treasury securities ........... $ 1,497 -- 2 1,495 U.S. government agencies and corporations: Small Business Administration loan-backed securities ...... 439,818 7,077 2,284 444,611 Other agency securities ...... 1,269,677 445 36,903 1,233,219 States and political subdivisions ......... 313,743 1,265 6,146 308,862 Mortgage- backed securities ........... 1,305,709 4,448 7,836 1,302,321 ---------- ---------- ---------- ---------- $3,330,444 13,235 53,171 3,290,508 ========== ========== ========== ========== Available for sale ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- ---------- U.S. Treasury securities ........... $ 93,106 178 455 92,829 U.S. government agencies and corporations ......... 50,682 28 920 49,790 States and political subdivisions ......... 102,108 165 5,025 97,248 Mortgage- and other asset- backed securities ........... 146,920 350 4,453 142,817 ---------- ---------- ---------- ---------- 392,816 721 10,853 382,684 Equity securities: Mutual funds: Accessor Funds, Inc. ....... 140,935 186 2,447 138,674 Stock ................ 242,700 14,921 49 257,572 ---------- ---------- ---------- ---------- $ 776,451 15,828 13,349 778,930 ========== ========== ========== ========== The amortized cost and estimated market value of investment securities as of December 31, 2000 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 ... $ 435,938 437,910 69,444 69,537 Due after one year through five years ..... 2,110,156 2,109,913 209,293 211,306 Due after five years through ten years ...... 250,940 255,717 114,787 114,784 Due after ten years ...... 328,399 349,200 210,457 213,956 ---------- ---------- ---------- ---------- $3,125,433 3,152,740 603,981 609,583 ========== ========== ========== =========== Gross gains of $27.5 million, $2.4 million, and $9.4 million and gross losses of $12.7 million, $5.4 million, and $5.3 million were recognized in "Investment securities gain (loss), net" on sales and write-downs of investment securities for the years ended December 31, 2000, 1999, and 1998, respectively. The Company also recognized a pre-tax impairment loss of $96.9 million in 2000 on a write-down of First Security Corporation common stock. Net gains from securities held by the Company's venture capital subsidiaries, and included in other noninterest income, were $.9 million in 2000 and $42.6 million in 1999. Consolidated net income includes a net loss of approximately $1.5 million in 2000 and net income of approximately $22.9 million in 1999 from the Company's venture capital subsidiaries. As of December 31, 2000 and 1999, securities with an amortized cost of $2,130 million and $1,730 million, respectively, were pledged to secure public and trust deposits, advances, and for other purposes as required by law. 5. Loans and Allowance for Loan Losses Loans are summarized as follows at December 31 (in thousands): 2000 1999 ----------- ----------- Loans held for sale ...................... $ 181,159 204,800 Commercial, financial, and agricultural .. 3,614,977 3,036,229 Real estate: Construction ......................... 2,273,191 1,722,295 Other ................................ 7,363,070 6,902,855 Consumer ................................. 607,079 597,375 Lease financing .......................... 317,292 274,732 Foreign .................................. 26,263 52,697 Other receivables ........................ 75,127 62,142 ----------- ----------- $14,458,158 12,853,125 =========== ========== 69 As of December 31, 2000 and 1999, loans with a carrying value of $1,426 million and $1,140 million, respectively, were pledged as security for Federal Home Loan Bank advances. Sales of loans held for sale were $533 million in 2000, $879 million in 1999, and $1,238 million in 1998. Gain on the sales, excluding servicing, of both loans held for sale and loan securitizations was $33.5 million in 2000, $24.2 million in 1999, and $36.2 million in 1998. Changes in the allowance for loan losses are summarized as follows (in thousands): 2000 1999 1998 --------- --------- --------- Balance at beginning of year .... $ 204,114 212,557 88,622 Allowance for loan losses of companies acquired ........... 1,961 2,623 125,691 Additions: Provision for loan losses .. 31,811 17,956 14,034 Recoveries ................. 10,290 16,544 9,416 Deductions: Loan charge-offs ........... (52,641) (45,566) (25,206) --------- --------- --------- Balance at end of year .......... $ 195,535 204,114 212,557 ========= ========= ========= At December 31, 2000, 1999, and 1998, the allowance for loan losses includes an allocation of $22 million, $23 million, and $20 million, respectively, related to commitments to extend credit and standby letters of credit. The Company's total recorded investment in impaired loans was $46 million and $57 million at December 31, 2000 and 1999, respectively. Impaired loans of $16 million and $22 million at December 31, 2000 and 1999 required an allowance of $10 million and $16 million, respectively, which is included in the allowance for loan losses. Contractual interest due and interest foregone on impaired loans were $9.1 million and $6.7 million, respectively, for 2000, $5.3 million and $3.2 million, respectively, for 1999, and $3.8 million and $2.1 million, respectively, for 1998. The average recorded investment in impaired loans was $57 million in 2000, $27 million in 1999, and $18 million in 1998. 6. Concentrations of Credit Risk Credit risk includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. Concentrations of credit risk from financial instruments (whether on- or off-balance sheet) occur when groups of customers or counterparties having similar economic characteristics are unable to meet contractual obligations when similarly affected by changes in economic or other conditions. The Company limits its exposure to any individual customer or counterparty. Most of the Company's business activity is with customers located in the states of Utah, Idaho, California, Nevada, Arizona, Colorado, and Washington. The commercial loan portfolio is well diversified, consisting of 11 major industry classification groupings. As of December 31, 2000, 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. 7. Premises and Equipment Premises and equipment are summarized as follows at December 31 (in thousands): 2000 1999 -------- -------- Land ............................ $ 53,884 50,209 Buildings ....................... 166,607 150,399 Furniture and equipment ......... 288,882 263,270 Leasehold improvements .......... 71,160 64,887 -------- -------- Total ........................... 580,533 528,765 Less accumulated depreciation and amortization ............. 265,595 241,317 -------- -------- Net book value .................. $314,938 287,448 ======== ======= 8. Deposits At December 31, 2000, the scheduled maturities of all time deposits are as follows (in thousands): 2001 $2,459,550 2002 393,390 2003 120,812 2004 44,849 2005 and thereafter 59,194 ---------- $3,077,795 ========== At December 31, 2000, the contractual maturities of time deposits with a denomination of $100,000 or more were as follows: $549 million in 3 months or less, $295 million over 3 months through 6 months, $399 million over 6 months through 12 months and $206 million over 12 months. Deposit overdrafts that have been reclassified as loan balances were $43 million and $21 million at December 31, 2000 and 1999, respectively. 70 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): 2000 1999 1998 ---------- ---------- ---------- Federal funds purchased: Average amount outstanding ........... $ 851,465 717,085 401,412 Weighted average rate .... 6.12% 4.91% 4.61% Highest month end balance ............... 1,069,124 866,716 594,503 Year-end balance ......... 1,069,124 825,997 337,283 Weighted average rate on outstandings at year-end ........... 6.28% 4.69% 4.58% Security repurchase agreements: Average amount outstanding ........... $1,895,421 1,651,514 1,507,196 Weighted average rate .... 5.68% 4.44% 4.77% Highest month end balance ............... 2,664,768 2,462,928 1,771,702 Year-end balance ......... 1,327,721 1,366,653 992,671 Weighted average rate on outstandings at year-end ........... 5.56% 4.53% 4.40% 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. The counterparty, in certain instances, is contractually entitled to sell or repledge securities accepted as collateral. The carrying amount of such securities is disclosed in the consolidated balance sheet as of December 31, 2000. 10. Federal Home Loan Bank Advances and Other Borrowings Federal Home Loan Bank (FHLB) advances and other borrowings over one year are summarized as follows at December 31 (in thousands): 2000 1999 -------- -------- FHLB advances, 5.52%-8.32% .. $131,276 100,622 Notes payable, 5.66%-8.08% .. 12,500 12,000 -------- -------- $143,776 112,622 ======== ======= The FHLB advances are borrowed by Zions First National Bank (ZFNB) and Vectra Bank Colorado, N.A. (Vectra), wholly owned subsidiaries, under their lines of credit with the Federal Home Loan Banks of Seattle and Topeka, respectively. The lines of credit are secured under a blanket pledge whereby ZFNB and Vectra maintain unencumbered collateral with a 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. Interest expense on FHLB advances and other borrowings over one year was $8.5 million, $4.8 million, and $6.6 million for the years ended December 31, 2000, 1999, and 1998, respectively. Maturities of FHLB advances and other borrowings with original maturities over one year are as follows at December 31, 2000 (in thousands): 2001 $103,316 2002 3,005 2003 3,754 2004 2,570 2005 5,833 Thereafter 25,298 -------- $143,776 ======== 11. Long-Term Debt Long-term debt at December 31 is summarized as follows (in thousands): 2000 1999 -------- -------- Guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures ...... $189,575 223,000 Subordinated notes: Floating rate subordinated notes, maturity in 2005 and 2008 ........ 177,000 177,000 8.625% subordinated note, maturity in 2002 ................. 50,000 50,100 Capital leases and other notes payable ....................... 2,975 3,371 -------- -------- $419,550 453,471 ======== ======= The guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures include $170.1 million of 8.536 percent debentures issued by Zions Institutional Capital Trust A (ZICTA), $2.0 million of 10.25 percent debentures issued by GB Capital Trust (GBCT), and $17.5 million of 9.50 percent debentures issued by VBC Capital I Trust (VBCCIT). The ZICTA debentures are direct and unsecured obligations of ZFNB and are subordinate to the claims of depositors and general creditors. The Company has irrevocably and unconditionally guaranteed all of ZFNB's obligations under the debentures. The GBCT and VBCCIT debentures are direct and unsecured obligations of the Company through the acquisition of GB Bancorporation and Vectra Banking Corporation, and are subordinate to other indebtedness and general creditors of the Company. ZICTA, GBCT, and VBCCIT debentures have the right, with the approval of banking 71 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 quarterly beginning in 2000 and $110 million callable in 2003. These notes require quarterly interest payments. The 8.625 percent subordinated note is not redeemable prior to maturity and requires semiannual interest payments. All subordinated notes are unsecured. Interest expense on long-term debt was $34.2 million, $35.1 million and $29.1 million for the years ended December 31, 2000, 1999, and 1998, respectively. Maturities and sinking fund requirements on long-term debt are as follows for the years succeeding December 31, 2000 (in thousands): Consoli- Parent dated only -------- -------- 2001 $ 378 -- 2002 50,415 50,000 2003 450 -- 2004 446 -- 2005 67,354 67,000 Thereafter 300,507 110,000 -------- -------- $419,550 227,000 ======== ======= 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): 2000 1999 ---------- ---------- Commitments to extend credit .. $6,991,330 5,810,745 Standby letters of credit: Performance .............. 81,607 79,184 Financial ................ 180,826 110,676 Commercial letters of credit .. 11,831 17,689 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, 2000, a significant portion of the Company's commitments is expected to expire without being drawn upon; commitments totaling $4.9 billion expire in 2001. 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 $217.5 million expiring in 2001 and $44.9 million expiring thereafter through 2009. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds marketable securities and cash equivalents as collateral supporting those commitments for which collateral is deemed necessary. The Company enters into interest rate caps, spread maintenance agreements, exchange contracts (swaps), and forward 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. 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 contracts written, for which credit risk is de minimus) through credit approvals, limits, and monitoring procedures. No losses associated with counterparty nonperformance on interest rate contracts have occurred. Nevertheless, the related credit risk is considered and measured when and where appropriate. 72 Notional values of interest rate and foreign exchange contracts are summarized as follows (in thousands): 2000 1999 ---------- ---------- Caps and spread maintenance agreements ................. $2,073,827 875,634 Interest rate swaps .......... 2,022,011 711,228 Basis swaps .................. 2,537,860 -- Foreign exchange forwards .... 41,214 14,885 Interest rate caps and spread maintenance agreements 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 contractual interest rate spreads fall below specified levels. These derivative instruments, to which the Company is a party at December 31, 2000, have remaining terms of less than one year to twenty-six 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. Interest rate swaps, to which the Company is a party at December 31, 2000, have remaining terms ranging from under one year 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, 2000, the Company's forward contracts have remaining terms ranging from under one month to four months. 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, 2000 and 1999, the Company had outstanding commitments to purchase securities of $299 million and $240 million, respectively, and outstanding commitments to sell securities of $181 million and $243 million, respectively. These agreements at December 31, 2000 have remaining terms of one month or less. The contractual 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, 2000 and 1999, the regulatory risk-weighted values assigned to all off-balance sheet financial instruments described herein totaled $1,452 million and $1,389 million, respectively. At December 31, 2000, the Company has drawn the total $65 million available in lines of credit from two separate institutions, with interest rates ranging from 7.00 percent to 7.18 percent. There were no compensating balance arrangements on either of these lines of credit. At December 31, 2000, the Company was required to maintain a cash balance of $32 million with the Federal Reserve Banks to meet minimum balance requirements in accordance with Federal Reserve Board regulations. The Company is a defendant in various legal proceedings arising in the normal course of business. The Company does not believe that the outcome of any such proceedings will have a material adverse effect on its consolidated financial position, operations, or liquidity. The Company has commitments for leasing premises and equipment under the terms of noncancelable capital and operating leases expiring from 2001 to 2067. Premises leased under capital leases were recorded at $13.7 million, net of $12.4 million accumulated amortization at December 31, 2000. Amortization charges applicable to premises leased under capital leases are included in depreciation expense. Future aggregate minimum rental payments under existing noncancelable operating leases at December 31, 2000 are as follows (in thousands): 2001 $ 27,332 2002 25,849 2003 24,065 2004 22,179 2005 19,497 Thereafter 103,395 -------- $222,317 ======== Future aggregate minimum rental payments have been reduced by noncancelable subleases as follows: 2001, $1.2 million; 2002, $1.1 million; 2003, $1.0 million; 2004, $.9 million; 2005, $.6 million; and thereafter $2.2 million. Aggregate rental expense on operating leases amounted to $40.0 million, $40.3 million, and $33.3 million for the years ended December 31, 2000, 1999, and 1998, respectively. 73 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 and nonqualified plans, 3,244,000 and 400,000 shares, respectively, of common stock were reserved. During 2000 the qualified plan was amended and options equal to 2% of the issued and outstanding shares of the Company's common stock as of the first day of the year are automatically reserved for issuance under the plan. 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. Under the qualified plan, options are exercisable in increments from one to three years after the date of grant and expire seven years after the date of grant. Options granted previous to 2000 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 are exercisable in increments from six months to three and a half years after the date of grant and expire ten years after the date of grant. At December 31, 2000, there were 787,406 and 223,000 additional shares available for grant under the qualified and nonqualified plans, respectively. In 1998, the Company adopted a broad-based employee stock option plan in substitution of an employee profit-sharing plan. Substantially all participants of the employee profit-sharing plan are eligible to participate in this plan. Participation in this plan requires employment for a full year prior to the option grant date with service of 20 hours a week or more. However, executive officers of the Company are not eligible to participate in this plan. Stock options are granted to eligible employees based on an internal job grade structure. All options vest at the rate of one third each year with expiration at four years after date of grant. At December 31, 2000, there were 1,500,000 options authorized with 788,432 options outstanding. The plan is noncompensatory and results in no compensation expense recognized by 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 2000, 1999, and 1998 was $13.09, $19.20, and $14.95, respectively, on the date of grant as valued using the Black-Scholes option-pricing model. The following weighted-average assumptions were used in 2000, 1999, and 1998: expected dividend yield of 1.5%, expected volatility ranging from 26.6% to 39.4%, risk-free interest rates ranging from 4.1% to 6.8%, and expected life ranging from 2 to 7.5 years. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under FASB Statement No. 123, the Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below: 2000 1999 1998 ----------- ----------- ----------- Net income (in thousands): As reported .............. $ 161,709 194,064 143,353 Pro forma ................ 145,773 183,689 133,863 Net income per common share: As reported: Basic ............... $ 1.87 2.29 1.77 Diluted ............. 1.86 2.26 1.75 Pro forma: Basic ............... 1.69 2.17 1.65 Diluted ............. 1.67 2.14 1.63 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 previously because compensation cost is reflected over the options' vesting period, and compensation cost of options granted prior to January 1, 1995 is not considered. 74 The following table is a summary of the Company's stock option activity and related information for the three years ended December 31, 2000: Weighted- Number average of exercise shares price --------- ---------- Balance at December 31, 1997 .. 1,877,123 $ 16.57 Acquired ...... 430,998 11.35 Granted ....... 1,343,612 45.62 Exercised ..... (659,168) 11.38 Forfeited ..... (25,964) 32.82 -------------------------------------- Balance at December 31, 1998 .. 2,966,601 29.98 Acquired ...... 64,652 27.26 Granted ....... 1,172,542 65.29 Exercised ..... (625,537) 20.06 Forfeited ..... (232,567) 42.32 -------------------------------------- Balance at December 31, 1999 .. 3,345,691 43.30 Acquired ...... 132,097 11.48 Granted ....... 1,993,961 43.38 Exercised ..... (409,935) 18.25 Forfeited ..... (328,223) 51.03 -------------------------------------- Balance at December 31, 2000 .. 4,733,591 43.98 ====================================== Outstanding options exercisable as of: December 31, 2000 .. 1,701,254 36.55 December 31, 1999 .. 1,222,187 26.62 December 31, 1998 .. 1,116,087 14.90 Selected information on stock options as of December 31, 2000 follows: Outstanding options Exercisable options --------------------------------- --------------------- Weighted- Weighted- average Weighted- Exercise Number average remaining Number average price of exercise contractual of exercise range shares price life (years) shares price --------- --------- --------- --------- --------- --------- $2.37 to $ 6.91 36,484 $ 4.10 6.40 36,484 $ 4.10 $6.92 to $13.83 206,363 11.15 3.30 201,290 11.10 $13.84 to $20.74 263,860 17.31 3.30 241,997 17.36 $20.75 to $27.65 155,967 24.39 4.20 121,716 24.77 $27.66 to $34.56 343,707 30.86 2.70 250,001 30.81 $34.57 to $41.48 31,695 40.25 6.20 23,195 40.34 $41.49 to $48.39 1,962,364 42.62 5.60 235,911 43.18 $48.40 to $55.30 899,094 49.90 3.50 354,339 49.63 $55.31 to $62.21 23,484 55.79 4.60 1,046 55.98 $62.22 to $69.13 810,573 68.69 4.20 235,275 68.45 --------- --------- 4,733,591 $ 43.98 4.50 1,701,254 $ 36.55 ========= ========= 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): 2000 1999 1998 -------- -------- -------- Basic: Net income ................... $161,709 194,064 143,353 Less preferred dividends ............... -- 34 46 -------- -------- -------- Net income applicable to common stock ......... 161,709 194,030 143,307 Average common shares outstanding ...... 86,320 84,613 80,788 Net income per common share - basic .... $ 1.87 2.29 1.77 Diluted: Net income applicable to common stock ......... $161,709 194,030 143,307 Average common shares outstanding ...... 86,320 84,613 80,788 Stock option adjustment ...... 800 1,082 1,130 -------- -------- -------- Average common shares outstanding - diluted ... 87,120 85,695 81,918 Net income per common share - diluted .. $ 1.86 2.26 1.75 75 15. Shareholder Rights Protection Plan The Company has in place a Shareholder Rights Protection Plan. The Shareholder Rights Protection Plan contains provisions intended to protect shareholders in the event of unsolicited offers or attempts to acquire the Company, including offers that do not treat all shareholders equally, acquisitions in the open market of shares constituting control without offering fair value to all shareholders, and other coercive or unfair takeover tactics that could impair the Board of Directors' ability to represent shareholders' interests fully. The Shareholder Rights Protection Plan provides that attached to each share of common stock is one right (a "Right") to purchase one one-hundredth of a share of participating preferred stock for an exercise price of $90, subject to adjustment. The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person who 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 has 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): 2000 1999 1998 -------- -------- -------- Federal: Current .... $ 59,038 46,485 64,855 Deferred ... 6,342 43,648 (4,978) State ........... 14,281 19,365 9,755 -------- -------- -------- $ 79,661 109,498 69,632 ======== ======== ======== 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): 2000 1999 1998 -------- -------- -------- Income tax expense at statutory federal rate .. $ 85,016 107,979 74,694 State income taxes, net .... 9,283 12,587 6,341 Nondeductible expenses ..... 10,944 11,232 8,643 Nontaxable interest ........ (17,217) (13,893) (9,125) Tax credits and other taxes ................... (1,874) (1,819) (1,877) Corporate reorganization ... (6,416) (6,416) (6,117) Decrease in valuation allowance ............... -- -- (1,992) Other items ................ (75) (172) (935) -------- -------- -------- Income tax expense .... $ 79,661 109,498 69,632 ======== ======== ======== 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, 2000 and 1999, are presented below (in thousands): 2000 1999 --------- --------- Gross deferred tax assets: Book loan loss deduction in excess of tax ......................... $ 75,388 78,979 Postretirement benefits .................. 1,365 722 Deferred compensation .................... 9,862 8,996 Deferred loan fees ....................... 1,829 2,498 Deferred agreements ...................... 2,261 2,650 Capital leases ........................... 516 1,648 Other real estate owned .................. 260 4,584 Accrued severance costs .................. 252 1,685 Capital loss carryforward ................ 27,470 -- Other .................................... 19,259 23,452 --------- --------- Total deferred tax assets ........... 138,462 125,214 --------- --------- Gross deferred tax liabilities: Core deposits and purchase accounting ...................... (23,358) (27,609) Premises and equipment, due to differences in depreciation .. (5,690) (4,566) FHLB stock dividends ..................... (25,276) (21,320) Leasing operations ....................... (46,511) (33,416) Security investments ..................... (20,139) (20,192) Prepaid pension reserves ................. (1,730) (2,559) Mortgage servicing ....................... (112) (202) Other .................................... (6,401) (1,377) --------- --------- Total deferred tax liabilities ...... (129,217) (111,241) --------- --------- FASB Statement No. 115 market equity adjustment .......................... 2,174 2,628 --------- --------- Net deferred tax assets ............. $ 11,419 16,601 ========= ========= 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 exercise of stock options under the Company's nonqualified stock option plan, and nonqualified exercises of options under the qualified plan, resulted in tax benefits reducing the Company's current income tax payable and increasing common stock by $3.4 million, $8.6 million, and $3.4 million in 2000, 1999, and 1998, respectively. 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 76 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, 2000, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2000, the Company's capital ratios significantly exceed the minimum capital levels, and the Company 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. 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, 2000, the Company's subsidiaries had approximately $117.6 million available for the payment of dividends under the foregoing restrictions. The actual capital amounts and ratios of the Company and significant banking subsidiaries are as follows (in thousands):
Minimum for capital To be Actual adequacy purposes well capitalized ------------------ ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio ---------- ----- ---------- ----- ---------- ----- As of December 31, 2000: Total capital (to risk-weighted assets) The Company .......................... $1,737,176 10.83% $1,282,874 8.00% $1,603,593 10.00% Zions First National Bank ............ 680,382 12.30 442,604 8.00 553,255 10.00 California Bank & Trust .............. 584,124 10.71 436,446 8.00 545,558 10.00 Tier I capital (to risk-weighted assets) The Company .......................... 1,368,041 8.53 641,437 4.00 962,156 6.00 Zions First National Bank ............ 448,729 8.11 221,302 4.00 331,953 6.00 California Bank & Trust .............. 405,891 7.44 218,223 4.00 327,335 6.00 Tier I capital (to average assets) The Company .......................... 1,368,041 6.38 643,265 3.00 1,072,108 5.00 Zions First National Bank ............ 448,729 5.36 251,323 3.00 418,871 5.00 California Bank & Trust .............. 405,891 6.20 196,278 3.00 327,130 5.00 As of December 31, 1999: Total capital (to risk-weighted assets) The Company .......................... $1,646,581 11.29% $1,167,056 8.00% $1,458,820 10.00% Zions First National Bank ............ 692,026 14.73 375,744 8.00 469,680 10.00 California Bank & Trust .............. 527,964 10.32 409,093 8.00 511,367 10.00 Tier I capital (to risk-weighted assets) The Company .......................... 1,260,090 8.64 583,528 4.00 875,292 6.00 Zions First National Bank ............ 432,845 9.22 187,872 4.00 281,808 6.00 California Bank & Trust .............. 353,777 6.92 204,547 4.00 306,820 6.00 Tier I capital (to average assets) The Company .......................... 1,260,090 6.16 613,398 3.00 1,022,331 5.00 Zions First National Bank ............ 432,845 5.61 231,406 3.00 385,676 5.00 California Bank & Trust .............. 353,777 5.68 186,973 3.00 311,622 5.00
77 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. Plan benefits are defined as a lump-sum cash value or an annuity at age 65. The following table presents the change in the plan's benefit obligation for the years ended December 31, 2000 and 1999 (in thousands): 2000 1999 --------- --------- Benefit obligation at beginning of year ............... $ 106,390 108,973 Service cost ....................... 7,026 8,294 Interest cost ...................... 8,137 7,397 Actuarial (gain) loss .............. 5,274 (7,379) Benefits paid ...................... (9,313) (10,895) --------- --------- Benefit obligation at end of year .. $ 117,514 106,390 ========= ========= Plan assets include 123,142 shares of Company common stock as of December 31, 2000 and 88,558 shares as of December 31, 1999. The following table presents the change in plan assets for the years ended December 31, 2000 and 1999 (in thousands): 2000 1999 --------- --------- Fair value of plan assets at beginning of year .......... $ 138,989 107,245 Actual return on plan assets .. (9,918) 25,595 Employer contributions ........ -- 17,044 Benefits paid ................. (9,313) (10,895) --------- --------- Fair value of plan assets at end of year ................ $ 119,758 138,989 ========= ========= The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 2000 and 1999 (in thousands): 2000 1999 -------- ------- Funded status ................ $ 2,244 32,599 Unrecognized net actuarial (gain) loss ..... 6,581 (21,302) Unrecognized prior service cost .............. (2,243) (2,646) -------- ------- Net prepaid benefit cost .. $ 6,582 8,651 ======== ======= Net periodic benefit cost recognized for the years ended December 31, 2000, 1999, and 1998 includes the following components (in thousands): 2000 1999 1998 -------- -------- -------- Service cost ........................ $ 7,026 8,294 5,587 Interest cost ....................... 8,137 7,397 5,192 Expected return on plan assets ...................... (12,059) (9,300) (6,851) Amortization of prior service cost ..................... (403) (385) (385) Amortization of transitional asset ............... -- (431) (625) Recognized actuarial (gain) loss .... (632) -- 39 -------- -------- -------- Net periodic benefit cost recognized ............... $ 2,069 5,575 2,957 ======== ======== ======== The weighted average discount rate used in determining the pension benefit obligation was 7.50 percent in 2000 and 8.00 percent in 1999. The rate of compensation increase was 5.00 percent and the expected long-term rate of return was 9.00 percent for both 2000 and 1999. 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. The Company also sponsors three unfunded nonqualified supplemental executive retirement plans, which restore pension benefits limited by federal tax law. At December 31, 2000 and 1999, the Company's liability, included in accrued expenses, totaled $7.1 million and $5.7 million, respectively. In addition to the Company's defined benefit pension plan, the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time employees hired before January 1, 1993, who meet minimum age and service requirements. The plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. Plan coverage is provided by self-funding or health maintenance organizations (HMOs) options. Reductions in the Company's obligations to provide benefits resulting from cost sharing changes have been applied to reduce the plan's unrecognized transition obligation. During 1999 and 2000, the Company adopted several plan revisions that changed the liability for retiree medical coverage. In 1999 the Company eliminated retiree medical coverage for future California Bank & Trust employees and capped the Company's contributions for current California Bank & Trust employees to make these benefits consistent with 78 benefits provided to other employees of the Company. In 2000 the Company increased its contribution toward retiree medical coverage and permanently froze the Company contributions. In the future, retirees will pay the difference between the full premium rates and the capped Company contribution. The following table presents the change in the plan's benefit obligation for the years ended December 31, 2000 and 1999 (in thousands): 2000 1999 ------- ------- Benefit obligation at beginning of year .. $ 5,683 12,306 Service cost ............................. 265 91 Interest cost ............................ 767 852 Plan amendments .......................... 2,376 (1,950) Actuarial (gain) loss .................... 39 (1,874) Benefits paid ............................ (1,156) (148) Curtailments ............................. 940 (3,594) ------- ------- Benefit obligation at end of year ........ $ 8,914 5,683 ======= ======= The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 2000 and 1999 (in thousands): 2000 1999 -------- -------- Benefit obligation at end of year .. $ 8,914 5,683 Unamortized prior service cost ..... (341) 1,950 Unrecognized net actuarial gain .... 2,896 3,377 -------- -------- Accrued benefit cost ............... $ 11,469 11,010 ======== ======== Net periodic benefit cost recognized for the years ended December 31, 2000, 1999, and 1998 includes the following components (in thousands): 2000 1999 1998 -------- -------- -------- Service cost ........................ $ 265 91 114 Interest cost ....................... 767 852 230 Recognized prior service cost ....... 85 -- -- Recognized net gain ................. (441) (317) (515) -------- -------- -------- Net periodic benefit cost ...... 676 626 (171) Recognized curtailment (gain) loss .. 940 (3,594) -- Recognized liability due to acquisitions ................... -- -- 8,833 -------- -------- -------- Net periodic benefit cost (credit) after recognition of extraordinary items ......... $ 1,616 (2,968) 8,662 ======== ======== ======== The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5 percent at December 31, 2000 and 8.0 percent at December 31, 1999. Because the Company's contribution rate is capped, there is no effect from assumed increases or decreases in healthcare cost trend rates. 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 $5.5 million, $5.3 million, and $3.7 million for the years ended December 31, 2000, 1999, and 1998, respectively. 79 19. Fair Value of Financial Instruments The carrying value and estimated fair value of principal financial instruments are summarized as follows (in thousands):
December 31, 2000 December 31, 1999 ---------------------------- -------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ------------ ---------- ---------- ---------- Financial assets: Cash and due from banks ..................... $ 1,047,252 1,047,252 898,300 898,300 Money market investments .................... 528,067 528,067 525,169 525,169 Investment securities ....................... 4,188,309 4,215,616 4,437,219 4,397,283 Loans, net .................................. 14,182,498 14,682,170 12,586,531 12,627,743 ------------ ---------- ---------- ---------- Total financial assets ................. $ 19,946,126 20,473,105 18,447,219 18,448,495 ============ ========== ========== ========== Financial liabilities: Demand, savings, and money market deposits .. $ 11,855,794 11,855,794 10,936,883 10,936,883 Time deposits ............................... 3,077,795 3,092,466 2,915,276 2,898,930 Foreign deposits ............................ 136,394 136,131 209,780 209,726 Securities sold, not yet purchased .......... 291,102 291,102 237,020 237,020 Federal funds purchased and security repurchase agreements ........... 2,396,845 2,396,845 2,192,650 2,192,650 FHLB advances and other borrowings .......... 1,632,975 1,634,383 1,389,327 1,379,127 Long-term debt .............................. 419,550 443,553 453,471 446,056 ------------ ---------- ---------- ---------- Total financial liabilities ............ $ 19,810,455 19,850,274 18,334,407 18,300,392 ============ ========== ========== ========== Off-balance sheet instruments: Caps and spread maintenance agreements ...... $ -- -- (7,671) (7,671) Swaps ....................................... -- 33,936 -- (9,641) Foreign exchange forwards ................... (31) (31) -- -- ------------ ---------- ---------- ---------- Total off-balance sheet instruments .... $ (31) 33,905 (7,671) (17,312) ============ ========== ========== ==========
FINANCIAL ASSETS The estimated fair value approximates the carrying value of cash and due from banks and money market investments. For investment 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. 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 the LIBOR yield curve. The fair value of fixed-rate FHLB advances is estimated by discounting future cash flows using the LIBOR yield curve. Variable rate FHLB advances reprice with changes in market rates. As such, their carrying amounts approximate their fair 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. 80 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of the caps 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 and taking into account the current unrealized gains or losses of open contracts. The carrying amounts include unamortized fees paid or received and any 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. LIMITATIONS These fair value disclosures represent management's best estimates, based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates. Further, the calculations do not represent the underlying value of the Company. Other significant assets and liabilities, which are not considered financial assets or liabilities and for which no fair values have been estimated, include premises and equipment, goodwill and other intangibles, deferred taxes, and other liabilities. 20. Operating Segment Information Operating segments represent 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. The following is a summary of selected operating segment information for the years ended December 31, 2000, 1999, and 1998 (in thousands): 81
Zions First Nevada National California State Bank National Bank and Bank & and Bank of Subsidiaries Trust Subsidiaries Arizona ----------- ----------- ----------- ----------- 2000: Net interest income ............ $ 227,057 297,153 101,685 92,300 Provision for loan losses ...... 8,250 -- 10,060 3,570 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses ... 218,807 297,153 91,625 88,730 Noninterest income ............. 151,966 43,585 23,488 14,082 Merger expense and amortization of goodwill and core deposit intangibles ................. 4,470 23,677 6,798 2,315 Other noninterest expense ...... 219,114 183,581 74,226 50,396 ----------- ----------- ----------- ----------- Income before income taxes and minority interest ....... 147,189 133,480 34,089 50,101 Income taxes ................... 44,917 59,401 11,337 19,885 Minority interest .............. (2,142) -- -- -- ----------- ----------- ----------- ----------- Net income ..................... $ 104,414 74,079 22,752 30,216 ----------- ----------- ----------- ----------- Assets ......................... $ 8,095,001 6,952,940 2,373,585 1,943,675 Net loans and leases ........... 4,885,246 4,855,632 1,383,142 1,488,773 Deposits ....................... 4,173,002 5,588,601 1,992,947 1,551,182 Shareholders' equity ........... 459,951 714,322 176,168 160,925 =========== =========== =========== =========== 1999: Net interest income ............ $ 220,018 263,682 99,885 76,928 Provision for loan losses ...... 9,000 -- 3,660 2,400 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses ... 211,018 263,682 96,225 74,528 Noninterest income ............. 169,902 35,806 23,933 13,022 Merger expense and amortization of goodwill and core deposit intangibles ................ 2,135 25,909 14,070 1,831 Other noninterest expense ...... 208,159 182,034 78,596 42,909 ----------- ----------- ----------- ----------- Income before income taxes and minority interest 170,626 91,545 27,492 42,810 Income taxes ................... 53,327 42,101 9,001 16,617 Minority interest .............. 3,065 -- -- -- ----------- ----------- ----------- ----------- Net income ..................... $ 114,234 49,444 18,491 26,193 ----------- ----------- ----------- ----------- Assets ......................... $ 7,156,888 6,566,985 2,277,356 1,600,135 Net loans and leases ........... 4,085,175 4,559,136 1,340,534 1,212,531 Deposits ....................... 3,809,258 5,425,928 1,882,349 1,206,366 Shareholders' equity ........... 444,401 679,288 163,422 131,322 =========== =========== =========== =========== 1998: Net interest income ............ $ 222,044 112,726 90,518 70,687 Provision for loan losses ...... 23,000 (18,717) 3,685 1,800 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses .. 199,044 131,443 86,833 68,887 Noninterest income ............. 142,654 14,284 25,298 9,312 Merger expense and amortization of goodwill and core deposit intangibles ............... 2,717 37,363 1,490 1,867 Other noninterest expense ...... 216,405 78,596 71,856 40,131 ----------- ----------- ----------- ----------- Income before income taxes and minority interest 122,576 29,768 38,785 36,201 Income taxes ................... 35,477 13,360 11,835 14,013 Minority interest .............. -- -- -- -- ----------- ----------- ----------- ----------- Net income ..................... $ 87,099 16,408 26,950 22,188 ----------- ----------- ----------- ----------- Assets ......................... $ 6,047,071 6,183,044 2,150,095 1,451,866 Net loans and leases ........... 3,509,319 4,180,999 1,133,680 1,012,038 Deposits ....................... 3,933,823 5,348,694 1,829,117 1,225,796 Shareholders' equity ........... 383,350 606,195 152,530 116,262 =========== =========== =========== =========== 82 The Commerce Vectra Bank Bank of Consolidated Colorado Washington Other Company ----------- ----------- ----------- ----------- 2000: Net interest income ............ 89,094 19,991 (23,902) 803,378 Provision for loan losses ...... 9,112 819 -- 31,811 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses ... 79,982 19,172 (23,902) 771,567 Noninterest income ............. 20,223 1,472 (62,652) 192,164 Merger expense and amortization of goodwill and core deposit intangibles ................. 13,702 -- 31,753 82,715 Other noninterest expense ...... 72,593 8,817 29,385 638,112 ----------- ----------- ----------- ----------- Income before income taxes and minority interest ....... 13,910 11,827 (147,692) 242,904 Income taxes ................... 8,103 3,965 (67,947) 79,661 Minority interest .............. -- -- 3,676 1,534 ----------- ----------- ----------- ----------- Net income ..................... 5,807 7,862 (83,421) 161,709 ----------- ----------- ----------- ----------- Assets ......................... 2,155,929 552,661 (134,348) 21,939,443 Net loans and leases ........... 1,475,166 242,042 48,032 14,378,033 Deposits ....................... 1,385,271 404,864 (25,884) 15,069,983 Shareholders' equity ........... 390,252 33,226 (156,000) 1,778,844 =========== =========== =========== =========== 1999: Net interest income ............ 83,103 15,792 (17,919) 741,489 Provision for loan losses ...... 2,586 610 (300) 17,956 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses ... 80,517 15,182 (17,619) 723,533 Noninterest income ............. 17,206 735 5,941 266,545 Merger expense and amortization of goodwill and core deposit intangibles ................ 15,228 -- 4,526 63,699 Other noninterest expense ...... 74,877 7,452 23,841 617,868 ----------- ----------- ----------- ----------- Income before income taxes and minority interest 7,618 8,465 (40,045) 308,511 Income taxes ................... 5,616 2,788 (19,952) 109,498 Minority interest .............. -- -- 1,884 4,949 ----------- ----------- ----------- ----------- Net income ..................... 2,002 5,677 (21,977) 194,064 ----------- ----------- ----------- ----------- Assets ......................... 2,161,216 408,409 109,911 20,280,900 Net loans and leases ........... 1,372,710 200,320 20,239 12,790,645 Deposits ....................... 1,490,468 289,182 (41,612) 14,061,939 Shareholders' equity ........... 384,398 25,329 (168,322) 1,659,838 =========== =========== =========== =========== 1998: Net interest income ............ 73,447 13,939 (9,419) 573,942 Provision for loan losses ...... 4,588 78 (400) 14,034 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses .. 68,859 13,861 (9,019) 559,908 Noninterest income ............. 14,844 1,702 2,103 210,197 Merger expense and amortization of goodwill and core deposit intangibles ............... 17,076 7,702 1,554 69,769 Other noninterest expense ...... 57,310 7,453 15,180 486,931 ----------- ----------- ----------- ----------- Income before income taxes and minority interest 9,317 408 (23,650) 213,405 Income taxes ................... 5,745 346 (11,144) 69,632 Minority interest .............. -- -- 420 420 ----------- ----------- ----------- ----------- Net income ..................... 3,572 62 (12,926) 143,353 ----------- ----------- ----------- ----------- Assets ......................... 2,151,029 337,351 (270,833) 18,049,623 Net loans and leases ........... 1,216,359 154,892 12,199 11,219,486 Deposits ....................... 1,688,719 221,403 (26,642) 14,220,910 Shareholders' equity ........... 388,506 23,159 (217,371) 1,452,631 =========== =========== =========== ===========
82 [Continued] 21. Asset Securitizations During 2000 the Company sold $164 million of auto loans, $169 million of credit card receivables and $248 million of home equity loans in revolving securitization transactions for cash. New loans or receivable balances are sold monthly into the revolving securitization facilities. In these revolving securitizations the Company retains servicing responsibilities and receives servicing fees. Annualized servicing fees approximate 1% of the outstanding loan balances for the auto loans securitization, 2% for the credit card receivables securitization and 0.5% for the home equity loans securitization. The Company also has rights to future cash flows arising after the investors in the securitizations have received the return for which they contracted and administrative and other expenses have been paid. The Company retains subordinated tranche interests or cash reserve accounts that serve as credit enhancements on the securitizations. The Company's retained interests are subordinate to the investors' interests. The investors and the securitization vehicles have no recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are subject to credit, prepayment, and interest rate risks on the transferred loans and receivables. The Company recognized pre-tax gains from the transfer of the loans and receivables of $3.1 million for the auto loans, $6.1 million for the credit card receivables and $13.2 million for the home equity loans during 2000, which is included in loan sales and servicing income. Also during 2000, the Company completed the sale of $494 million of Small Business Administration (SBA) 504 and other low loan-to-value commercial mortgages in a securitization transaction. Except for the revolving features, the general characteristics of the securitizations and rights of the Company described previously also pertain to this transaction. Annualized servicing fees received by the Company approximate 1% of the outstanding loan balance for this securitization. The Company recognized a pre-tax gain from this securitization of $2.8 million, which is included in loan sales and servicing income. Residual cash flows paid to the Company's subsidiary, Zions First National Bank (ZFNB), from retained interests on revolving securitizations were $16.6 million, $5.8 million, and $7.7 million for the automobile, credit card, and home equity programs, respectively, and $.4 million on the securitization of SBA loans during 2000. Total servicing fees related to the securitization programs were $5.4 million in 2000. Key economic assumptions used for measuring the retained interests at the date of securitization for sales during 2000 were as follows: Automobile Credit Card Home Equity SBA 504 Loans Receivables Loans Loans ----------- ----------- ----------- ------------ Prepayment method ABS ABS ABS CPR Annualized prepayment speed 16.20 5.00 4.00 4, 8, 12 Ramp up Weighted average life (in months) 54 4 64 83 Expected annual net loss rate 1.00% 4.50% .25% 0.50% Residual cash flows discounted at 12.00% 12.00% 12.00% 12.00% The ABS prepayment model developed by Credit Suisse First Boston is used for the automobile, credit card, and home equity loan securitizations. The constant prepayment rate (CPR) method was used for the SBA 504 securitization. 83 At December 31, 2000, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% adverse changes in those assumptions are as follows for significant Company securitizations (in millions of dollars and annualized percentage rates): Credit Home Automobile Card Equity SBA 504 Loans Receivables Loans Loans ----------- ----------- ----------- ----------- Carrying amount/ fair value of retained interests $5.7 0.9 14.7 35.8 Weighted-average life (in months) 54 4 64 47-83 Prepayment speed assumption 16.20 5.00 4.00 4.00-15.00 Decrease in fair value due to adverse change -10% $0.1 0.0 0.1 1.2 -20% $0.2 0.0 0.1 2.3 Expected credit losses 1.00% 4.50% 0.25% 0.50% Decrease in fair value due to adverse change -10% $0.4 0.1 0.2 1.5 -20% $0.8 0.1 0.3 2.9 Residual cash flows discount rate 12.00% 12.00% 12.00% 12.00% Decrease in fair value due to adverse change -10% $0.1 0.0 0.2 1.7 -20% $0.1 0.0 0.3 2.9 These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on variations in assumptions cannot be extrapolated, as the relationship of the change in assumption to the change of fair value may not be linear. Also, the effect of a variation in one assumption is likely to further cause changes in other assumptions, which might magnify or counteract the sensitivities. As of December 31, 2000, the weighted-average expected static pool credit losses for SBA loans securitized in 2000 were 3.33%. Static pool losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. The table below presents quantitative information about delinquencies and net credit losses. The Company only securitizes loans originated or purchased by ZFNB. Therefore, only loans and related delinquencies and net credit losses of commonly managed ZFNB loans are included (in millions): Loans Past Due 30+ Days(1) Principal Principal Balance Balance December 31, December 31, Net Credit Loan Type 2000 2000 Losses(2) --------- ------------ ------------ ------------ Automobile loans .......... $ 506.8 10.0 4.1 Credit card receivables ............. 140.7 2.3 3.1 Home equity loans ......... 365.1 1.9 0.1 SBA 504 loans ............. 1,185.2 29.6 1.4 ------------ ------------ ------------ Total loans managed or securitized .......... 2,197.8 43.8 8.7 Less loans securitized(3).. 1,406.1 ------------ Loans held in portfolio ... $ 791.7 ============ (1) Loans 30 days or more past due based on end of period total loans. (2) Net credit losses are charge-offs net of recoveries and are based on total loans outstanding, both on-balance sheet and securitized. (3) Represents the principal amount of the loans. Interest-only strips and other retained interests held for securitized assets are excluded from this table because they are recognized separately. 84 22. Quarterly Financial Information (Unaudited) Financial information by quarter for the years ended December 31, 2000 and 1999 is as follows (in thousands, except per share amounts):
Income (loss)before income Diluted net Gross Net Non- Non- Provision taxes and income(loss) interest interest interest interest for loan minority Net per common income income income expense losses interest income(loss) share ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 2000: First quarter $ 379,555 190,992 (36,311) 200,312 5,248 (50,879) (28,492) (0.33) Second quarter 396,623 194,598 70,599 167,312 6,214 91,671 59,583 0.69 Third quarter 424,482 208,029 75,349 173,926 8,119 101,333 64,644 0.74 Fourth quarter 425,523 209,759 82,527 179,277 12,230 100,779 65,974 0.75 ---------- ---------- ---------- ---------- ---------- ---------- ---------- $1,626,183 803,378 192,164 720,827 31,811 242,904 161,709 1.86 ========== ========== ========== ========== ========== ========== ========== 1999: First quarter $ 318,170 176,855 65,480 162,605 4,741 74,989 46,904 0.55 Second quarter 333,524 185,303 63,007 165,886 4,143 78,281 50,832 0.59 Third quarter 344,284 187,817 63,591 163,038 4,517 83,853 53,779 0.63 Fourth quarter 363,360 191,514 74,467 190,038 4,555 71,388 42,549 0.49 ---------- ---------- ---------- ---------- ---------- ---------- ---------- $1,359,338 741,489 266,545 681,567 17,956 308,511 194,064 2.26 ========== ========== ========== ========== ========== ========== ==========
In the first quarter of 2000, noninterest income (loss) includes the $96.9 million impairment loss on First Security Corporation common stock as discussed in Note 3, and noninterest expense includes $41.5 million of pre-tax merger expenses mainly related to the terminated First Security Corporation merger. 23. Parent Company Financial Information Condensed financial information of Zions Bancorporation (parent only) follows: Condensed Balance Sheets December 31, 2000 and 1999 (In thousands) 2000 1999 ----------- ----------- ASSETS Cash and due from banks ................ $ 1,959 3,509 Interest-bearing deposits .............. 5,354 22,899 Investment securities .................. 8,763 251,949 Loans, lease financing, and other receivables, net .................... 15,164 15,794 Investments in subsidiaries: Commercial banks .................. 1,900,774 1,795,889 Other ............................. 167,208 84,160 Receivables from subsidiaries: Commercial banks .................. 125,000 110,000 Other ............................. 14,044 9,565 Other assets ........................... 85,477 63,092 ----------- ----------- $ 2,323,743 2,356,857 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accrued liabilities .................... $ 30,437 32,486 Borrowings less than one year .......... 267,239 413,660 Subordinated debt to subsidiary ........ 20,223 23,773 Long-term debt ......................... 227,000 227,100 ----------- ----------- Total liabilities ............ 544,899 697,019 ----------- ----------- Shareholders' equity: Common stock ...................... 907,604 888,231 Net unrealized holding losses on securities available for sale .. (3,644) (4,158) Retained earnings ................. 874,884 775,765 ----------- ----------- Total shareholders' equity ... 1,778,844 1,659,838 ----------- ----------- $ 2,323,743 2,356,857 =========== =========== 85 Condensed Statements of Income Years ended December 31, 2000, 1999, and 1998
(In thousands) 2000 1999 1998 --------- --------- --------- Interest income - interest and fees on loans and securities .......................... $ 18,034 11,846 7,066 Interest expense - interest expense on borrowed funds ................................ 48,641 32,529 17,307 --------- --------- --------- Net interest loss .................................................. (30,607) (20,683) (10,241) --------- --------- --------- Other income: Dividends from consolidated subsidiaries: Commercial banks ........................................................... 163,046 109,868 210,890 Other ...................................................................... 1,000 -- 1,430 Investment securities gain (loss), net .......................................... 25,076 800 -- Impairment loss on First Security Corporation common stock ...................... (96,911) -- -- Other income .................................................................... 10,236 3,168 7,064 --------- --------- --------- 102,447 113,836 219,384 --------- --------- --------- Expenses: Salaries and employee benefits .................................................. 9,311 8,659 5,504 Merger-related expense .......................................................... 28,291 884 1,191 Operating expenses .............................................................. 5,661 1,633 7,321 --------- --------- --------- 43,263 11,176 14,016 --------- --------- --------- Income before income tax benefit and undistributed income of consolidated subsidiaries 28,577 81,977 195,127 Income tax benefit ................................................................... 60,661 14,471 8,304 --------- --------- --------- Income before equity in undistributed income of consolidated subsidiaries ............ 89,238 96,448 203,431 Equity in undistributed income of consolidated subsidiaries: Commercial banks and bank holding company ....................................... 78,628 103,767 (55,306) Other ........................................................................... (6,157) (6,151) (4,772) --------- --------- --------- Net income ........................................................................... $ 161,709 194,064 143,353 ========= ========= =========
Condensed Statements of Cash Flows Years ended December 31, 2000, 1999, and 1998
(In thousands) 2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income ............................................................. $ 161,709 194,064 143,353 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net (income) losses of consolidated subsidiaries .... (72,471) (97,616) 60,078 Depreciation of premises and equipment ............................ 117 145 160 Investment securities gain ........................................ (25,076) (800) -- Impairment loss on First Security Corporation common stock ........ 96,911 -- -- Amortization ...................................................... 660 663 644 Other ............................................................. (23,615) (14,219) 16,272 --------- --------- --------- Net cash provided by operating activities .................... 138,235 82,237 220,507 --------- --------- --------- Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits ................... 17,545 (2,155) (17,895) Collection of advances to subsidiaries ................................. 12,846 9,890 8,054 Advances to subsidiaries ............................................... (32,325) (16,590) (118,261) Proceeds from sale of investment securities available for sale ......... 162,282 20,664 -- Purchase of investment securities available for sale ................... (1,065) (250,780) -- Increase of investment in subsidiaries ................................. (75,674) (88,725) (335,340) Other .................................................................. 621 178 (18,344) --------- --------- --------- Net cash provided by (used in) investing activities .......... 84,230 (327,518) (481,786) --------- --------- --------- Cash flows from financing activities: Net change in commercial paper and other borrowings under one year ..... (146,421) 302,443 38,167 Payment on borrowings over one year .................................... -- -- (25,000) Proceeds from issuance of long-term debt ............................... -- -- 177,267 Payments on long-term debt ............................................. (3,650) -- (2,000) Proceeds from issuance of common stock ................................. 6,717 9,753 139,974 Payments to redeem common stock ........................................ (3,899) (6,650) (26,741) Dividends paid ......................................................... (76,762) (56,914) (41,600) --------- --------- --------- Net cash provided by (used in) financing activities .......... (224,015) 248,632 260,067 --------- --------- --------- Net increase (decrease) in cash and due from banks .......................... (1,550) 3,351 (1,212) Cash and due from banks at beginning of year ................................ 3,509 158 1,370 --------- --------- --------- Cash and due from banks at end of year ...................................... $ 1,959 3,509 158 ========= ========= =========
The parent company paid interest of $50.1 million, $30.7 million, and $16.4 million for the years ended December 31, 2000, 1999, and 1998, respectively. 86 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS ZIONS BANCORPORATION: We have audited the accompanying consolidated balance sheet of Zions Bancorporation and subsidiaries as of December 31, 2000, and the related consolidated statements of income, cash flows, and changes in shareholders' equity and comprehensive income for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Zions Bancorporation as of December 31, 1999 and for each of the years in the two-year period then ended, were audited by other auditors whose report dated February 7, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2000 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zions Bancorporation and subsidiaries at December 31, 2000, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ERNST & YOUNG LLP Salt Lake City, Utah January 24, 2001 87