Unaudited interim financial statements of Amegy Bancorporation, Inc.

EX-99.2 4 exhibit-992.htm UNAUDITED INTERIM FINANCIAL STATEMENTS OF AMEGY BANCORPORATION, INC. Unaudited interim financial statements of Amegy Bancorporation, Inc.

EXHIBIT 99.2

UNAUDITED INTERIM FINANCIAL STATEMENTS OF AMEGY BANCORPORATION, INC.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(unaudited)


			September 30,			December 31,
			2005			2004

			(Dollars in thousands,
			except per share amounts)
ASSETS
Cash and due from banks			$	345,926		$	327,558
Federal funds sold and other cash equivalents				48,135			14,417

		Total cash and cash equivalents		394,061			341,975
Securities available for sale (including $383,701 and $319,599 pledged to creditors)				1,845,884			1,927,204
Securities held to maturity (fair value of $46,835 and $58,569)				47,005			58,033
Loans held for sale				103,423			107,404
Loans held for investment, net of allowance for loan losses of $49,189 and $49,408				4,857,108			4,490,170
Premises and equipment, net				166,843			164,443
Accrued interest receivable				36,949			30,200
Goodwill				150,426			149,846
Core deposit intangibles				20,785			27,246
Other assets				271,887			209,082

		Total assets	$	7,894,371		$	7,505,603


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
	Demand — noninterest-bearing		$	1,984,716		$	1,871,228
	Demand — interest-bearing			123,866			135,003
	Money market accounts			2,167,935			2,091,624
	Savings			202,557			205,593
	Time, $100 and over			1,493,457			944,283
	Other time			396,988			372,312

		Total deposits		6,369,519			5,620,043
Federal funds purchased and securities sold under repurchase agreements				441,181			482,968
Other borrowings				208,048			560,410
Senior subordinated debenture				75,000			75,000
Junior subordinated deferrable interest debentures				149,486			149,486
Accrued interest payable				3,676			2,902
Other liabilities				30,415			34,380

		Total liabilities		7,277,325			6,925,189

Commitments and contingencies
Shareholders’ equity:
	Preferred stock — $0.01 par value, 1,000,000 shares authorized; 0 issued and outstanding at September 30, 2005 and December 31, 2004			—			—
	Common stock — $1 par value, 300,000,000 shares authorized; 70,880,202 issued and 70,767,938 outstanding at September 30, 2005; 70,198,456 issued and 70,095,949 outstanding at December 31, 2004			70,880			70,198
	Additional paid-in capital			101,926			92,330
	Retained earnings			473,866			428,311
	Deferred compensation			(6,943	)		(5,469	)
	Accumulated other comprehensive loss			(20,870	)		(3,221	)
	Treasury stock, at cost — 112,264 shares and 102,507 shares, respectively			(1,813	)		(1,735	)

		Total shareholders’ equity		617,046			580,414

		Total liabilities and shareholders’ equity	$	7,894,371		$	7,505,603

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(unaudited)


				Three Months Ended					Nine Months Ended
				September 30,					September 30,

				2005		2004			2005		2004

				(Dollars in thousands, except per share amounts)
Interest income:
	Loans			$	80,060	$	55,282		$	220,144	$	154,632
	Securities:
		Taxable			17,341		13,558			52,177		38,724
		Tax-exempt			2,737		2,585			8,042		6,646
	Federal funds sold and other				555		192			1,176		500

	Total interest income				100,693		71,617			281,539		200,502

Interest expense:
	Deposits				25,740		10,028			61,722		26,506
	Interest on subordinated debentures				3,108		698			8,463		1,793
	Interest on other borrowings				8,098		3,892			23,025		8,389

		Total interest expense			36,946		14,618			93,210		36,688

		Net interest income			63,747		56,999			188,329		163,814
Provision for loan losses					1,900		2,878			6,500		7,710

		Net interest income after provision for loan losses			61,847		54,121			181,829		156,104

Noninterest income:
	Service charges on deposit accounts				10,959		11,184			32,968		33,414
	Investment services				4,291		3,164			12,538		9,019
	Other fee income				8,960		5,907			24,315		15,780
	Bank-owned life insurance income				2,567		2,154			6,149		5,551
	Other operating income				2,698		2,594			12,728		5,189
	Gain on sale of loans, net				18		368			1,147		818
	Gain (loss) on sale of securities, net				1,170		(46	)		1,156		(45	)

			Total noninterest income		30,663		25,325			91,001		69,726

Noninterest expenses:
	Salaries and employee benefits				34,902		28,829			104,370		85,267
	Occupancy expense				10,747		9,395			32,132		26,540
	Marketing and advertising				885		1,052			4,925		3,146
	Professional services				3,482		3,174			10,516		8,274
	Core deposit intangible amortization expense				2,042		799			6,461		2,710
	Other operating expenses				10,455		9,035			34,569		26,676

			Total noninterest expenses		62,513		52,284			192,973		152,613

			Income before income taxes		29,997		27,162			79,857		73,217
Provision for income taxes					8,549		7,496			22,308		22,043

	Net income			$	21,448	$	19,666		$	57,549	$	51,174

Earnings per common share:
			Basic	$	0.30	$	0.28		$	0.82	$	0.74

			Diluted	$	0.30	$	0.28		$	0.80	$	0.73

Dividends per common share				$	0.11	$	0.03		$	0.17	$	0.09

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)


		Preferred																Accumulated
		Stock				Common Stock				Additional								Other						Total
										Paid-In		Retained			Deferred			Comprehensive			Treasury			Shareholders’
		Shares		Dollars		Shares		Dollars		Capital		Earnings			Compensation			Loss			Stock			Equity

		(Dollars in thousands, except per share amounts)
BALANCE, DECEMBER 31, 2004			—	$	—		70,198,456	$	70,198	$	92,330	$	428,311		$	(5,469	)	$	(3,221	)	$	(1,735	)	$	580,414
	Exercise of stock options						491,715		492		6,465														6,957
	Issuance of restricted common stock, net of shares forfeited into Treasury						186,384		186		3,062					(3,243	)					(5	)		—
	Issuance of non-employee director stock						3,647		4		69														73
	Purchase of treasury stock																					(73	)		(73	)
	Deferred compensation amortization															1,769									1,769
	Cash dividends, $0.17 per common share												(11,994	)											(11,994	)
	Comprehensive income (loss):
	Net income for the nine months ended September 30, 2005												57,549												57,549
	Other comprehensive loss																		(17,649	)					(17,649	)

	Total comprehensive income																								39,900

BALANCE, SEPTEMBER 30, 2005			—	$	—		70,880,202	$	70,880	$	101,926	$	473,866		$	(6,943	)	$	(20,870	)	$	(1,813	)	$	617,046

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)


					Nine Months Ended
					September 30,

					2005			2004

					(Dollars in thousands)
Cash flows from operating activities:
	Net income				$	57,549		$	51,174
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses				6,500			7,710
		Deferred tax benefit				(3,638	)		(1,487	)
		Depreciation				13,061			10,707
		Realized (gain) loss on securities available for sale, net				(1,156	)		45
		Gain on sale of premises and equipment, net				(661	)		(2	)
		Amortization and accretion of securities’ premiums and discounts, net				2,432			4,346
		Amortization of mortgage servicing rights				1,273			1,677
		Amortization of computer software				5,767			4,873
		Amortization of core deposit intangibles				6,461			2,710
		Other amortization				1,769			1,248
		Income tax benefit from exercise of stock options				1,278			2,135
		Net change in:
			Loans held for sale			3,981			877
			Other assets and liabilities, net			(5,499	)		4,871

				Net cash provided by operating activities		89,117			90,884

Cash flows from investing activities:
	Proceeds from maturity and call of securities available for sale					18,454			36,615
	Proceeds from sale of securities available for sale					369,599			794,031
	Principal paydowns of mortgage-backed securities available for sale					191,714			228,351
	Principal paydowns of mortgage-backed securities held to maturity					11,002			—
	Purchase of securities available for sale					(520,625	)		(1,176,021	)
	Purchase of Federal Reserve Bank stock					(6,729	)		(3,444	)
	Purchase of Federal Home Loan Bank stock					(40,264	)		(24,512	)
	Proceeds from redemption of Federal Home Loan Bank stock					40,779			15,102
	Net increase in loans held for investment					(374,550	)		(492,923	)
	Proceeds from sale of premises and equipment					2,565			733
	Purchase of premises and equipment					(23,132	)		(36,809	)
	Purchase of mortgage servicing rights					(287	)		—
	Purchase of Bank-owned life insurance policies					(50,000	)		—
	Purchase of Reunion Bancshares, Inc., net of cash acquired of $30,596					—			(20,004	)
	Investment in unconsolidated equity investees					(4,496	)		(2,431	)

				Net cash used in investing activities		(385,970	)		(681,312	)

Cash flows from financing activities:
	Net increase in noninterest-bearing demand deposits					113,488			22,327
	Net increase in time deposits					573,850			104,986
	Net increase in other interest-bearing deposits					62,138			66,845
	Issuance of junior subordinated deferrable interest debentures, net of cost					—			36,083
	Issuance of senior subordinated debentures					—			75,000
	Net increase (decrease) in short-term borrowings					(391,787	)		321,361
	Proceeds from long-term borrowings					—			2,200
	Payments on long-term borrowings					(2,362	)		(200,332	)
	Payments of cash dividends					(11,994	)		(6,195	)
	Net proceeds from exercise of stock options					5,679			5,132
	Purchase of treasury stock					(73	)		(927	)

				Net cash provided by financing activities		348,939			426,480

Net increase (decrease) in cash and cash equivalents						52,086			(163,948	)
Cash and cash equivalents at beginning of period						341,975			485,798

Cash and cash equivalents at end of period					$	394,061		$	321,850

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Amegy Bancorporation, Inc. (“the Bancorporation”) and all other entities in which the Bancorporation has a controlling financial interest (collectively referred to as the “Company”). All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position at September 30, 2005 and December 31, 2004, consolidated net income for the three and nine months ended September 30, 2005 and 2004, consolidated cash flows for the three and nine months ended September 30, 2005 and 2004, and consolidated changes in shareholders’ equity for the nine months ended September 30, 2005. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The accounting and financial reporting policies the Company follows conform, in all material respects, to accounting principles generally accepted in the United States of America and to general practices within the financial services industry.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly owned subsidiaries, Statutory Trust I, Statutory Trust II, and Statutory Trust III (“the Trusts”), are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not consolidated in the Company’s financial statements.

On March 7, 2005, Southwest Bank of Texas National Association changed its name to Amegy Bank National Association (“the Bank”). The Bank’s subsidiary, Mitchell Mortgage Company, L.L.C., changed its name to Amegy Mortgage Company, L.L.C. (“Amegy Mortgage”) on the same date. On May 5, 2005, the name of the Bancorporation changed to Amegy Bancorporation, Inc.

Substantially all of the Company’s revenue and income is derived from the operations of the Bank and Amegy Mortgage. The Bank provides a full range of commercial and private banking services to small and middle market businesses and individuals primarily in the Houston metropolitan area. Amegy Mortgage originates, sells, and services single family residential mortgages, residential and commercial construction loans, and commercial mortgages.

On January 31, 2004, the Company completed its merger with Reunion Bancshares, Inc. (“Reunion”), whereby Reunion was merged into the Company. On October 1, 2004, the Company completed its merger with Klein Bancshares, Inc. (“Klein”), whereby Klein was merged into the Company. The results of operations of Reunion and Klein have been included in the consolidated financial statements since their respective acquisition dates. See “Note 2 — Merger Related Activity” for further discussion of the mergers.

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements and the notes thereto should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2004.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Reclassifications*

Certain previously reported amounts have been reclassified to conform to the 2005 financial statement presentation. These reclassifications had no effect on net income, total assets, or shareholders’ equity.


	*Stock-Based Compensation*

The Company applies the intrinsic value method in accounting for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25 (“APB No. 25”). Because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized on options granted.

In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), which, if fully adopted by the Company, would change the method the Company applies in recognizing the expense of its stock-based compensation plans for awards subsequent to 1994. Adoption of the expense recognition provisions of SFAS No. 123 is optional and the Company decided not to elect these provisions of SFAS No. 123. However, pro forma disclosures as if the Company adopted the expense recognition provisions of SFAS No. 123 are required by SFAS No. 123 and are presented below.

If the fair value based method of accounting under SFAS No. 123 had been applied, the Company’s net income available for common shareholders and earnings per common share would have been reduced to the pro forma amounts indicated below (assuming that the fair value of options granted during the year are amortized over the vesting period):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2005		2004		2005		2004

		(Dollars in thousands, except per share amounts)
Net income
	As reported	$	21,448	$	19,666	$	57,549	$	51,174
	Pro forma	$	20,548	$	18,910	$	55,183	$	49,263
Stock-based compensation cost, net of income taxes
	As reported	$	463	$	338	$	1,150	$	811
	Pro forma	$	1,363	$	1,094	$	3,516	$	2,723
Basic earnings per common share
	As reported	$	0.30	$	0.28	$	0.82	$	0.74
	Pro forma	$	0.29	$	0.27	$	0.78	$	0.72
Diluted earnings per common share
	As reported	$	0.30	$	0.28	$	0.80	$	0.73
	Pro forma	$	0.28	$	0.27	$	0.77	$	0.70

The effect of applying SFAS No. 123 in the above pro forma disclosure is not indicative of future amounts. The Company anticipates making awards in the future under its stock-based compensation plans.

The Company expects to adopt the provisions of Statement of Financial Accounting Standards No. 123, Share-Based Payment (“SFAS No. 123R”), on January 1, 2006. See “Note 1 — New Accounting Pronouncements” for additional information.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*New Accounting Pronouncements*

On December 16, 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”). SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser’s initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual, or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (3) requires that subsequent decreases in expected cash flows be recognized as impairments. In addition, SOP 03-3 prohibits the creation or carrying over of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The requirements of SOP 03-3 did not have a material impact on the Company’s financial condition or results of operations.

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation using APB No. 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. The provisions of this statement become effective for all equity awards granted after January 1, 2006, as well as equity awards that are unvested on that date. Although the Company has not yet completed an analysis to quantify the exact impact the new standard will have on its future financial performance, the Stock-Based Compensation disclosures in “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” provide detail as to the Company’s financial performance as if the Company had applied the fair value based method and recognition provision of SFAS No. 123 to stock-based compensation in the current reporting periods.

On September 4, 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF Issue 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. Certain disclosure requirements of EITF Issue 03-01 were adopted in 2003. At its meeting on July 11, 2005, the FASB decided to nullify the guidance in paragraphs 10 through 18 of EITF Issue 03-1, which provided guidance on how to determine whether an investment is other-than-temporarily impaired. The remaining guidance in EITF Issue 03-1 regarding measurement, disclosure, and subsequent accounting for debt securities, as well as the evaluation of whether a cost method investment is impaired, is still applicable. The Company continues to follow the requirements of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities.

On July 14, 2005, the FASB issued an exposure draft of a proposed Interpretation, Accounting for Uncertain Tax Positions — an Interpretation of FASB Statement No. 109. The proposed interpretation would require companies to recognize the best estimate of an uncertain tax position only if it is probable of being sustained on audit by the taxation authorities. Subsequently, the tax benefit would be derecognized (by either recording a tax liability or decreasing a tax asset) when the probable threshold is no longer met and it is more likely than not that the tax position will not be sustained. The proposed Interpretation would be effective for years ending after December 15, 2005 and treated as a change in accounting policy. It would require companies to assess all uncertain tax positions and only those meeting the probable threshold at the transition date would continue to be recognized. The difference between the amount previously recognized and the amount recognized after applying the proposed Interpretation would be recorded as the cumulative-effect adjustment in the 2005 statement of earnings (restatement is not permitted). The comment period ended September 12, 2005.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2.	Merger Related Activity

The mergers described below were accounted for as purchase transactions. The purchase prices have been allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of the mergers. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill, none of which is expected to be deductible for tax purposes. Goodwill is evaluated annually for possible impairment under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets.

On January 31, 2004, the Company completed its merger with Reunion, whereby Reunion’s subsidiary, Lone Star Bank (“Lone Star”), was merged with and into the Bank. The addition of the five Lone Star branches expands the Company’s branch network to include the Dallas market and represents an attractive growth opportunity for the Company. The merger was a cash transaction with $43.5 million paid at closing and an additional $6.5 million deposited into an escrow account. The release of this account is contingent upon the performance of the loan portfolio and other potential liabilities over a three-year period. In addition, the Bank paid $600,000 to Reunion’s financial advisor in connection with this transaction. The purchase price was funded through the proceeds of $51.5 million of junior subordinated deferrable interest debentures issued in October 2003.

On October 1, 2004, the Company completed its merger with Klein, whereby Klein’s subsidiary, Klein Bank & Trust, was merged with and into the Bank. The addition of the 27 Klein branches expands the Company’s branch network in the northwest quadrant of the Houston metropolitan area. The merger was a cash and common stock transaction with $149.2 million of the $165.0 million purchase price paid in cash and the remainder paid through the issuance of 747,468 common shares of the Company. These shares were valued at the average of the closing price of the Company’s common stock for the fifteen business days ended five business days prior to the merger date. The cash portion of the purchase price was funded through the proceeds of $36.1 million of junior subordinated deferrable interest debentures and $75.0 million of senior subordinated debentures issued in 2004.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the merger:


	Reunion			Klein
	January 31,			October 1,
	2004			2004

	(Dollars in thousands)
Cash	$	30,596		$	78,060
Securities		30,946			329,864
Loans		163,822			163,086
Loan premium (discount)		(1,038	)		5,574
Allowance for loan losses		(2,116	)		(1,354	)
Goodwill		29,755			94,827
Core deposit intangibles		6,379			19,629
Other assets		3,779			23,969
Deposits		(207,026	)		(535,644	)
Deposit (premium) discount		(39	)		684
Borrowings		(2,000	)		—
Other liabilities		(2,458	)		(13,695	)

Cost	$	50,600		$	165,000

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Core deposit intangibles (“CDI”) are amortized using an economic life method based on deposit attrition projections derived from nationally-observed patterns within the banking industry. As a result, CDI amortization will decline over time with most of the amortization during the initial years. The Reunion CDI is being amortized over a weighted average period of thirteen and one-third years with no residual value. The Klein CDI is being amortized over a weighted average period of twelve years with no residual value.

The pro forma combined historical results, as if Reunion and Klein had been included in operations at January 1, 2004, are estimated to be as follows:


	Pro forma		Pro forma
	Three Months Ended		Nine Months Ended
	September 30, 2004		September 30, 2004

	(Dollars in thousands,
	except per share amounts)
Net interest income after provision for loan losses and noninterest income	$	90,968	$	256,583
Income before income taxes		31,142		81,413
Net income		22,284		56,569
Earnings per common share, basic	$	0.32	$	0.82
Earnings per common share, diluted	$	0.31	$	0.80


3.	Securities

The amortized cost and approximate fair value of securities classified as available for sale and held to maturity are as follows:


				September 30, 2005									December 31, 2004

						Gross Unrealized									Gross Unrealized
				Amortized									Amortized
				Cost		Gain		Loss			Fair Value		Cost		Gain		Loss			Fair Value

				(Dollars in thousands)
Available for sale:
	U.S. Government and agency securities			$	447,494	$	—	$	(8,842	)	$	438,652	$	388,061	$	246	$	(2,623	)	$	385,684
	Mortgage-backed securities				1,108,250		412		(25,997	)		1,082,665		1,237,420		3,820		(11,076	)		1,230,164
	Municipal securities				229,534		4,868		(1,056	)		233,346		246,705		7,564		(1,392	)		252,877
	Federal Reserve Bank stock				15,240		—		—			15,240		8,511		—		—			8,511
	Federal Home Loan Bank stock				32,259		—		—			32,259		32,772		—		—			32,772
	Other securities				43,710		12		—			43,722		17,196		—		—			17,196

		Total securities available for sale		$	1,876,487	$	5,292	$	(35,895	)	$	1,845,884	$	1,930,665	$	11,630	$	(15,091	)	$	1,927,204

Held to maturity:
	Mortgage-backed securities			$	47,005	$	—	$	(170	)	$	46,835	$	58,033	$	536	$	—		$	58,569

			Total securities held to maturity	$	47,005	$	—	$	(170	)	$	46,835	$	58,033	$	536	$	—		$	58,569

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table displays the gross unrealized losses and fair value of investments as of September 30, 2005 that were in a continuous unrealized loss position for the periods indicated:


			Less Than 12 Months					12 Months or More					Total

					Unrealized					Unrealized					Unrealized
			Fair Value		Loss			Fair Value		Loss			Fair Value		Loss

			(Dollars in thousands)
Available for sale:
	U.S. Government and agency securities		$	304,684	$	(4,631	)	$	133,967	$	(4,211	)	$	438,651	$	(8,842	)
	Mortgage-backed securities			543,763		(9,879	)		518,710		(16,118	)		1,062,473		(25,997	)
	Municipal securities			46,698		(359	)		30,848		(697	)		77,546		(1,056	)

		Total securities available for sale	$	895,145	$	(14,869	)	$	683,525	$	(21,026	)	$	1,578,670	$	(35,895	)

Held to maturity:
	Mortgage-backed securities		$	46,835	$	(170	)	$	—	$	—		$	46,835	$	(170	)

		Total securities held to maturity	$	46,835	$	(170	)	$	—	$	—		$	46,835	$	(170	)

Declines in the fair value of individual securities below their cost that are other than temporary would result in write-downs, as a realized loss, of the individual securities to their fair value. Management believes that based upon the credit quality of the debt securities and the Company’s intent and ability to hold the securities until their recovery, none of the unrealized loss on securities should be considered other than temporary.


4.	Allowance for Loan Losses

The allowance for loan losses is established through a provision for such losses charged against operations, which represents management’s estimate of probable losses inherent in the loan portfolio. The allowance is increased by provisions charged against current earnings and reduced by net charge-offs. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes is adequate to reflect the risks inherent in the existing loan portfolio and is based on evaluations of the collectibility and prior loss experience of loans. In making its evaluation, management considers growth in the loan portfolio, the diversification by industry of the Company’s commercial loan portfolio, the effect of changes in the local real estate market on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for current and prior periods, the amount of nonperforming loans and related collateral, and the evaluation of its loan portfolio by the loan review function.

The allowance has several components, which include specific reserves, migration analysis reserves, qualitative adjustments, a general reserve component, and a separate reserve for international, cross-border risk (allocated transfer risk reserve).

The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, the Company may ultimately incur losses which vary from management’s current estimates. Adjustments to the allowance for loan losses are reported in the period such adjustments become known or are reasonably estimable.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reflects the distribution of the allowance for loan losses among the various categories of loans based on collateral types for the dates indicated. The Company has allocated portions of its allowance for loan losses to cover the estimated losses inherent in particular risk categories of loans. This allocation is made for analytical purposes only and is not necessarily indicative of the categories in which loan losses may occur. The total allowance is available to absorb losses from any category of loans.


			September 30, 2005					December 31, 2004

					Percent of					Percent of
					Loans to					Loans to
			Amount		Total Loans			Amount		Total Loans

			(Dollars in thousands)
Balance of allowance for loan losses applicable to:
	Commercial and industrial		$	27,807		40.29	%	$	26,285		45.12	%
	Real estate:
		Construction and land development		5,730		20.70			7,547		17.55
		1-4 family residential		7,233		15.31			6,569		16.06
		Commercial		5,411		19.16			5,778		16.65
		Farmland		184		0.29			156		0.30
		Other		575		1.68			868		1.39
	Consumer			2,249		2.57			2,205		2.93

		Total allowance for loan losses	$	49,189		100.00	%	$	49,408		100.00	%


5.	Comprehensive Income (Loss)

Total comprehensive income is reported in the accompanying condensed consolidated statement of changes in shareholders’ equity. Information related to net other comprehensive income (loss) is as follows:


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2005			2004			2005			2004

Other comprehensive income (loss):
	Securities available for sale:
		Change in fair value during the period	$	(20,929	)	$	32,060		$	(26,326	)	$	(3,007	)
		Reclassification adjustment for gains included in income		(1,005	)		(855	)		(816	)		(599	)

				(21,934	)		31,205			(27,142	)		(3,606	)
Deferred tax effect				7,677			(10,814	)		9,493			1,371

		Net other comprehensive income (loss)	$	(14,257	)	$	20,391		$	(17,649	)	$	(2,235	)

The components of accumulated other comprehensive loss, net of tax, are as follows:


	September 30,			December 31,
	2005			2004

	(Dollars in thousands)
Net unrealized loss on securities available for sale	$	(19,899	)	$	(2,250	)
Minimum pension liability		(971	)		(971	)

Total accumulated other comprehensive loss	$	(20,870	)	$	(3,221	)

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	Mortgage Servicing Rights

The Company originates residential and commercial mortgage loans both for its own portfolio and to sell to investors with servicing rights retained primarily through its ownership of Amegy Mortgage. Amegy Mortgage also purchases mortgage servicing rights.

Mortgage servicing assets are periodically evaluated for impairment based upon the fair value of the rights as compared with amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and original loan term (primarily 15 and 30 years). Fair value is determined by using quoted market prices for mortgage servicing rights with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. In periods of falling market interest rates, accelerated loan prepayment speeds can adversely impact the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets increases in the future, the Company can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Any provision and subsequent recovery would be recorded as a component of other fee income in the condensed consolidated statement of income.

The following table summarizes the changes in capitalized mortgage servicing rights for the periods indicated:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2005			2004			2005			2004

		(Dollars in thousands)
Balance, beginning of period		$	7,253		$	7,593		$	7,121		$	8,299
	Originations		307			257			1,010			757
	Purchases		—			—			287			—
	Amortization		(415	)		(471	)		(1,273	)		(1,677	)

Balance, end of period		$	7,145		$	7,379		$	7,145		$	7,379

Loans serviced for others totaled $912.5 million at September 30, 2005 and $868.8 million at September 30, 2004. Capitalized mortgage servicing rights represent 78 basis points and 85 basis points of the portfolio serviced at September 30, 2005 and 2004, respectively.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7.	Earnings Per Common Share

Earnings per common share is computed as follows:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2005		2004		2005		2004

		(In thousands, except per share amounts)
Net income		$	21,448	$	19,666	$	57,549	$	51,174

Divided by average common shares and common share equivalents:
	Average common shares outstanding		70,646		69,100		70,354		68,798
	Average common shares issuable under the stock option plan		1,739		1,730		1,490		1,746

	Total average common shares and common share equivalents		72,385		70,830		71,844		70,544

Basic earnings per common share		$	0.30	$	0.28	$	0.82	$	0.74

Diluted earnings per common share		$	0.30	$	0.28	$	0.80	$	0.73

Stock options outstanding of 48,116 and 647 for the three months ended September 30, 2005 and 2004, respectively, and 715,070 and 241 for the nine months ended September 30, 2005 and 2004, respectively, have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented. Stock options are antidilutive when the exercise price is higher than the current market price of the Company’s common stock.


8.	Segment Information

The Company has two operating segments: the Bank and Amegy Mortgage. Each segment is managed separately because each business requires different marketing strategies and each offers different products and services.

The Company evaluates each segment’s performance based on the revenue and expenses from its operations. Intersegment financing arrangements are accounted for at current market rates as if they were with third parties.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summarized financial information by operating segment for the three and nine months ended September 30, 2005 and 2004 follows:


	Three Months Ended September 30,

	2005									2004

	Bank		Mortgage		Eliminations			Consolidated		Bank		Mortgage		Eliminations			Consolidated

	(Dollars in thousands)
Interest income	$	97,147	$	7,063	$	(3,517	)	$	100,693	$	69,287	$	3,939	$	(1,609	)	$	71,617
Interest expense		36,946		3,517		(3,517	)		36,946		14,618		1,609		(1,609	)		14,618

Net interest income		60,201		3,546		—			63,747		54,669		2,330		—			56,999
Provision for loan losses		1,800		100		—			1,900		1,852		1,026		—			2,878
Noninterest income		29,009		1,654		—			30,663		24,059		1,266		—			25,325
Noninterest expenses		59,957		2,556		—			62,513		50,497		1,787		—			52,284

Income before income taxes	$	27,453	$	2,544	$	—		$	29,997	$	26,379	$	783	$	—		$	27,162


	Nine Months Ended September 30,

	2005									2004

	Bank		Mortgage		Eliminations			Consolidated		Bank		Mortgage		Eliminations			Consolidated

	(Dollars in thousands)
Interest income	$	270,631	$	20,201	$	(9,293	)	$	281,539	$	193,772	$	10,988	$	(4,258	)	$	200,502
Interest expense		93,210		9,293		(9,293	)		93,210		36,688		4,258		(4,258	)		36,688

Net interest income		177,421		10,908		—			188,329		157,084		6,730		—			163,814
Provision for loan losses		6,105		395		—			6,500		5,596		2,114		—			7,710
Noninterest income		86,961		4,040		—			91,001		66,398		3,328		—			69,726
Noninterest expenses		184,744		8,229		—			192,973		147,234		5,379		—			152,613

Income before income taxes	$	73,533	$	6,324	$	—		$	79,857	$	70,652	$	2,565	$	—		$	73,217

Total assets	$	7,857,014	$	452,903	$	(415,546	)	$	7,894,371	$	6,601,850	$	322,221	$	(290,701	)	$	6,633,370

Intersegment interest was paid to the bank by the mortgage company in the amount of $3.5 million and $1.6 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, intersegment interest was $9.3 million and $4.3 million, respectively. Advances from the bank to the mortgage company of $415.5 million and $290.7 million were eliminated in consolidation at September 30, 2005 and 2004, respectively.


9.	Off-Balance Sheet Credit Commitments

In the normal course of business, the Company becomes a party to various financial transactions which, in accordance with generally accepted accounting principles, are not included in its consolidated balance sheet. These transactions involve various risks, including market and credit risks. Because these transactions generally are not funded, they do not necessarily represent future liquidity requirements. The Company offers these financial instruments to enable its customers to meet their financing objectives and to manage their interest rate risk. Supplying these instruments provides the Company with an ongoing source of fee income. These financial instruments include loan commitments and letters of credit. The Company has commitments to make additional equity investments in enterprises that primarily make investments in middle market businesses in the form of debt and equity capital. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the financial statements.

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The amount of the Company’s financial instruments with off-balance sheet risk as of September 30, 2005 and December 31, 2004 is presented below:


	September 30,		December 31,
	2005		2004
	Contract		Contract
	Amount		Amount

	(Dollars in thousands)
Unfunded loan commitments including unfunded lines of credit	$	3,091,354	$	2,720,246
Standby letters of credit		404,486		352,555
Commercial letters of credit		37,466		19,496
Unfunded commitments to unconsolidated investees		21,980		12,621

The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan commitments and letters of credit is limited to the contractual amount of those instruments. The Company uses the same credit policies in evaluating loan commitments and letters of credit as it does for on-balance sheet instruments. 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 payment of a fee. Because many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments by the Company to guarantee the performance of a customer to a third party. The Company evaluates each customer’s credit worthiness on a case-by-case basis. 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 held varies but may include certificates of deposit, accounts receivable, inventory, property, plant and equipment, and real property. As of September 30, 2005 and December 31, 2004, $264,000 and $402,000, respectively, has been recorded as a liability for the fair value of the Company’s potential obligations under these letters of credit.


10.	Goodwill and Core Deposit Intangibles

Changes in the carrying amount of the Company’s goodwill and core deposit intangibles for the nine months ended September 30, 2005 were as follows:


				Core Deposit
		Goodwill		Intangibles

		(Dollars in thousands)
Balance, December 31, 2004		$	149,846	$	27,246
	Adjustment to acquisition of Klein		580		—
	Amortization		—		(6,461	)

Balance, September 30, 2005		$	150,426	$	20,785

The following table shows the estimated future amortization expense for core deposit intangibles:


	Core Deposit
	Intangibles

	(Dollars in thousands)
Remaining 2005	$	1,517
2006		5,432
2007		4,141
2008		3,137
2009		2,212
Thereafter		4,346

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.	Subordinated Debentures


	*Junior Subordinated Deferrable Interest Debentures*

The Company has issued a total of $149.5 million of junior subordinated deferrable interest debentures to three wholly owned statutory business trusts, Statutory Trust I, Statutory Trust II, and Statutory Trust III (collectively, “the Trusts”). The Trusts are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, the accounts of the Trusts are not included in the Company’s consolidated financial statements. See “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” for additional information about the Company’s consolidation policy. Details of the Company’s transactions with these Trusts are presented below.

Trust

Junior

Interest

Preferred

Subordinated

Rate at

Issuance

Maturity

Securities

Debt Owned

September 30,

Redemption

Description

Date

Outstanding

by Trust

Interest Rate

2005

Date

(Dollars in thousands)

Statutory Trust I

10/7/2003

12/17/2033

50,000

51,547

3-month LIBOR plus 2.85

6.74

12/17/2008

Statutory Trust II

9/24/2004

10/7/2034

35,000

36,083

3-month LIBOR plus 1.90

5.50

10/7/2009

Statutory Trust III

12/13/2004

12/15/2034

60,000

61,856

3-month LIBOR plus 1.78

5.65

12/15/2009

145,000

149,486

The Debentures are the sole assets of the Trusts and are subordinate to all of the Company’s existing and future obligations for borrowed or purchased money, obligations under letters of credit and certain derivative contracts, and any guarantees by the Company of any of such obligations. The proceeds, net of issuance costs, from these offerings were used to fund the cash purchase price for Reunion and Klein and to augment the Company’s capital ratios to support its loan growth. See “Note 2 — Merger Related Activity” for further discussion of the mergers.

The Company’s obligations under the Debentures, the related indentures, the trust agreements relating to the trust securities, and the guarantees constitute full and unconditional guarantees by the Company of the obligations of the Trusts under the trust preferred securities.

The Debentures are subject to redemption at the option of the Company, subject to prior regulatory approval, in whole or in part on or after the dates indicated in the table above, or in full within 90 days after the occurrence of certain events that either would have a negative tax effect on the Trusts or the Company, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in the Trusts being treated as an investment company. Upon repayment of the Debentures at their stated maturity or following their earlier redemption, the Trusts will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.


	*Senior Subordinated Debentures*

On September 22, 2004, the Company entered into a Subordinated Debenture Purchase Agreement. Under the terms of this agreement, the Company issued an aggregate principal amount of $75.0 million in floating rate subordinated debt. All amounts due and owed under the Subordinated Debenture are to be repaid in full on September 22, 2014. At the Company’s election, the Subordinated Debenture bears interest at LIBOR plus 125 basis points or US Bank NA prime rate less 100 basis points. The interest rate on the Subordinated Debenture was 4.74% at September 30, 2005. This agreement includes a financial covenant that the Company shall maintain such capital as may be necessary to cause the Company to be classified as “adequately capitalized” and the Bank shall maintain such capital as may be necessary to cause it to be classified as “well capitalized” as of the end of each calendar quarter. Upon declaration of or a continuing event of default, the Company will be restricted from declaring or paying or causing or permitting any

AMEGY BANCORPORATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

subsidiary to pay a cash dividend or other distribution to parties that are ranked junior to the holders of the subordinated debt. The Company has agreed to certain restrictions on its ability to incur additional indebtedness that is senior to the Subordinated Debenture. If the subordinated debt ceases to qualify as Tier 2 capital under the applicable rules and regulations promulgated by the Board of Governors of the Federal Reserve System, the Company and the lender may restructure the debt as a senior unsecured obligation of the Company or the Company may repay the debt. The Company used the proceeds of the debenture to fund the cash purchase price for Klein and to augment the Company’s capital ratios to support its loan growth. See “Note 2 — Merger Related Activity” for further discussion of the merger.


12.	Common Stock Cash Dividend

On August 3, 2005, the Company’s Board of Directors declared a cash dividend of $0.11 cents per common share paid on September 15, 2005 to shareholders of record as of September 1, 2005.


13.	Common Stock Split

On June 17, 2004, the Company declared a stock split effected by a stock dividend payable at the rate of one share of the Company’s common stock for each share of the Company’s common stock issued and outstanding as of July 1, 2004, payable on July 15, 2004, to the holders of record as of the close of business on July 1, 2004. This stock split has been given retroactive effect in the accompanying financial statements and related notes. In addition, earnings and dividends per share data has been restated for all periods presented.


14.	Supplemental Cash Flow Information

On January 31, 2004, the Company purchased all of the capital stock of Reunion for $50.0 million. In conjunction with this acquisition, liabilities were assumed as follows:


		Reunion
		January 31,
		2004

		(Dollars in
		thousands)
Fair value of assets acquired		$	261,523
Cash paid for the capital stock			(50,000	)

	Liabilities assumed	$	211,523


15.	Subsequent Events

On October 11, 2005, the shareholders of the Company approved a definitive agreement under which Zions Bancorporation (“Zions”) will acquire the Company. Upon completion of the transaction, the Company is expected to operate under its current name, charter and management as a separate Zions banking subsidiary. The merger is subject to regulatory approval and is expected to close during the fourth quarter of this year.