-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GhwnN6AL2jrgWhPG+f+UdvxFWcR58eyLTGFTu8OrEbbIpnjS9tdt68iUgcVxyNyZ LsmS97qfRPPbKWaQqsLlTw== 0000950149-00-000246.txt : 20000215 0000950149-00-000246.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950149-00-000246 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZIONS BANCORPORATION /UT/ CENTRAL INDEX KEY: 0000109380 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 870227400 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-02610 FILM NUMBER: 537835 BUSINESS ADDRESS: STREET 1: ONE SOUTH MAIN STREET STREET 2: SUITE 1380 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 BUSINESS PHONE: 8015244787 MAIL ADDRESS: STREET 1: ONE SOUTH MAIN STREET STREET 2: SUITE 1380 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 FORMER COMPANY: FORMER CONFORMED NAME: ZIONS UTAH BANCORPORATION DATE OF NAME CHANGE: 19870615 FORMER COMPANY: FORMER CONFORMED NAME: ZIONS FIRST NATIONAL INVESTMENT CO DATE OF NAME CHANGE: 19660921 10-K/A 1 FORM 10-K/A FOR ZIONS BANCORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20459 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER 0-2610 ZIONS BANCORPORATION (Exact name of Registrant as specified in its charter) UTAH 87-0227400 (State of other jurisdiction of (Internal Revenue Service Employer incorporation or organization) Identification Number) ONE SOUTH MAIN, SUITE 1380 SALT LAKE CITY, UTAH 84111 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (801) 524-4787 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK - WITHOUT PAR VALUE - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [ ] Aggregate Market Value of Common Stock Held by Nonaffiliates at February 26, 1999.................. $ 4,362,248,000 Number of Common Shares Outstanding at February 26, 1999 ........................................... 78,752,711 Shares
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF 1998 ANNUAL REPORT TO SHAREHOLDERS - INCORPORATED INTO PARTS I, II AND IV PORTIONS OF PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS - INCORPORATED INTO PART III 2 FORM 10-K/A CROSS-REFERENCE INDEX
Page --------------------------------------------------------- Form Annual 10-K/A Report (1) PART I Item 1. Business Description of Business 3-7 2-80 Statistical Disclosure: Distribution of Assets, Liabilities and Stockholder's Equity; Interest Rates and Interest Differential - 12-15 Investment Portfolio - 18-20, 43-44, 52-54 Loan Portfolio - 21-22, 44-45, 54-55 Summary of Loan Loss Experience - 27-29, 44-45, 54-55 Deposits - 13-14, 23, 56 Return on Equity and Assets - 1, 9 Short-Term Borrowings - 57 Item 2. Properties 8 - Item 3. Legal Proceedings - 61 Item 4. Submission of Matters to a Vote of Security- Holders (in fourth quarter 1998) (3) - - Executive Officers of the Registrant 8-9 - PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 1 Item 6. Selected Financial Data - 1, 36 Item 7. Management's Discussion and Analysis of Finan- cial Condition and Results of Operations - 9-36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk - 30-34 Item 8. Financial Statements and Supplementary Data - 37-80 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (3) - - PART III Item 10. Directors and Executive Officers of the Registrant - - Item 11. Executive Compensation - - Item 12. Security Ownership of Certain Beneficial Owners and Management - - Item 13. Certain Relationships and Related Transactions - - PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 10-13 37-80 Signatures 14 -
- --------------------------------------------------------------- (1) The 1998 Annual Report to Shareholders, portions of which are incorporated by reference into this Form 10-K/A. 2 3 SIGNIFICANT FINANCIAL AND ACCOUNTING DEVELOPMENT As a result of a recent interpretation by the Securities and Exchange Commission Staff regarding the treatment of share repurchases under Staff Accounting Bulletin 96, the Company has decided to restate the presentation of 8 of 13 business combinations, consummated during 1998 and 1997, as purchases rather than as poolings of interests as previously reported. The Company and its independent auditors, KPMG LLP, believed and continue to believe that using the pooling-of-interests method of accounting for these transactions would also be appropriate and in accordance with Generally Accepted Accounting Principles. As a result of the foregoing, the Company's 1996, 1997, and 1998 consolidated financial statements have been restated from amounts previously reported. For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Zions Bancorporation has amended and restated in its entirety each item of the 1998 Form 10-K which has been affected by the Restatement. In order to preserve the nature and character of the disclosures set forth in such items as originally filed, no attempt has been made in this Form 10-K/A to modify or update such disclosures except as required to reflect the effects of the Restatement. BUSINESS DESCRIPTION OF BUSINESS Zions Bancorporation is a multibank holding company organized under the laws of Utah in 1955, and registered under the Bank Holding Company Act of 1956, as amended. Zions Bancorporation and Subsidiaries (the Company) owns and operates six commercial banks with a total of 333 offices. The Company provides a full range of banking and related services through its banking and other subsidiaries, primarily in Utah, Idaho, California, Colorado, Arizona, Nevada and Washington. On December 31, 1998 the Company had total assets of approximately $17.0 billion, loans of $10.6 billion, deposits of $13.3 billion and shareholders' equity of $1.4 billion. Active full-time equivalent employees totaled 6,793 at year-end 1998. For further information about the Company's industry segments see the Business Segment Results section of the 1998 Annual Report to Shareholders. GROWTH In 1998, the Company experienced unprecedented merger activity with the completion of 12 bank acquisitions in 3 states. The most significant acquisition during the year was the purchase of The Sumitomo Bank of California with total assets of approximately $4.5 billion. The Sumitomo Bank of California and First Pacific National Bank, also acquired during 1998, were merged with the Company's Grossmont Bank subsidiary which was renamed California Bank & Trust. The resulting bank is the sixth largest commercial banking organization in California with approximately $6 billion in total assets and 71 offices throughout the state. The Company also significantly expanded its operations in Colorado building on the acquisition of Aspen Bancshares in 1997. Acquisitions in Colorado during 1998 included Vectra Banking Corporation located in Denver and eight small banks which expanded the Company's operations into the Colorado Springs area, Steamboat Springs and the San Luis Valley in Southern Colorado. 3 4 Another acquisition completed during 1998 was The Commerce Bank of Washington with total assets of approximately $300 million. The Commerce Bank of Washington is based in Seattle and focuses on serving the needs of small and medium-sized businesses in the Puget Sound area. For further information about merger activities during the year see the 1998 Annual Report to Shareholders. PRODUCTS AND SERVICES The Company focuses on maintaining community-minded banking by strengthening its core business lines of retail banking, small and medium-sized business lending, residential mortgage and investment activities. The banks provide a wide variety of commercial and retail banking and mortgage-lending financial services. Commercial loans, lease financing, cash management, lockbox, customized draft processing, and other special financial services are provided for business and other commercial banking customers. A wide range of personal banking services are provided to individuals, including bankcard, student and other installment loans and home equity lines of credit, checking accounts, savings accounts, time certificates of various types and maturities, trust services, safe deposit facilities, direct deposit and 24 hour ATM access. Zions First National Bank also provides services to key segments through its Women's Financial, Private Banking and Executive Banking Groups. In addition to these core businesses, the Company has built specialized lines of business in capital markets and public finance. The Company is the only primary dealer in U.S. Treasury securities headquartered west of the Mississippi River. It has pioneered the online trading of government securities through its websites, which display live, executable quotes to financial institutions and money managers nationwide. The Company's combined public finance operations constitute one of the largest municipal finance advisory firms in the country and ranked ninth in the Securities Data Corporation's listing of the nation's top 100 municipal advisors. The Company is also a leader in U.S. Small Business Administration ("SBA") lending. Through Zions Small Business Finance division, the Company provides SBA 7(a) loans to small businesses throughout the United States. The Company's SBA 504 group works with Certified Development Companies and correspondent banks to provide the nation's largest source of secondary market financing for this loan program. The Company also owns nearly a 20 percent equity interest in the Federal Agricultural Mortgage Corporation ("Farmer Mac") and originates and sells qualified loans to Farmer Mac through its cash window program. The Company is developing a reputation as one of the industry's real innovators in providing customer solutions in the new world of electronic commerce. Digital Signature Trust Company ("DST"), a subsidiary of Zions First National Bank, became the first banking organization in the nation to be authorized by federal regulators to serve as a "certification authority," issuing digital certificates used to establish with certainty the identity and credentials of parties to transactions over networks such as the Internet. The Company has also developed an Internet presence for conducting retail banking business, including a Web-based bill payment system. The Company's banking subsidiaries will also introduce additional on-line capabilities over the next year. 4 5 OTHER NONBANKING SUBSIDIARIES The Company conducts various other bank-related business activities through subsidiaries of Zions First National Bank and the Parent. Zions Credit Corporation, a subsidiary of Zions First National Bank, engages in lease origination and servicing operations primarily in Utah, Nevada, and Arizona. Zions Investment Securities, Inc., also a subsidiary of the Bank, provides discount investment brokerage services on a nonadvisory basis to both commercial and consumer customers. Personal investment officers employed by this discount brokerage subsidiary provide customers with a wide range of investment products, including municipal bond, mutual funds and tax-deferred annuities. Zions First National Bank's Wasatch Venture Corporation provides early-stage capital, primarily for technology companies located in the West. Zions Life Insurance Company underwrites, as reinsurer, credit-related life and disability insurance. Zions Insurance Agency, Inc. operates an insurance brokerage business, which administers various credit-related insurance programs in the Company's subsidiaries and sells general lines of insurance. Zions Management Services Company provides administrative, data processing, and other services to other subsidiaries of the Company. 5 6 COMPETITION Zions Bancorporation and its subsidiaries operate in a highly competitive environment due to the diverse financial services and products they offer. Competitors include not only other banks, thrift institutions, credit unions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Most of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in many significant products. These competitive trends are likely to continue. SUPERVISION AND REGULATION Zion Bancorporation is a bank holding company within the meaning of the Bank Holding Company Act (the "Act") and is registered as such with the Federal Reserve Board. The Company is required to file reports of its operations with the Board of Governors of the Federal Reserve System and is subject to examination by it. Under the Act, the Company is restricted as to the activities in which it may engage and the nature of any company which it controls or holds more than 5% of the voting stock. Generally, allowable activities are those which are determined by the Federal Reserve Board to be closely related to banking and a proper incident thereto. Additionally under the Act, prior approval by the Board of Governors is required for a bank holding company to acquire substantially all the assets of any domestic bank or savings association or the ownership or control of more than 5% of its voting shares. Under the Riegle-Neal Interstate Branching and Efficiency Act of 1994, bank holding companies which are adequately capitalized and managed are permitted to acquire control of a bank located outside the bank holding company's home state subject to certain limitations. The merger of commonly owned banks in different states is also permitted except in states that have passed legislation to prohibit such mergers. The statute also permits banks to establish branches outside their home state in states that pass legislation to permit branch banking. The Federal Reserve Board has established risk-based capital guidelines for bank holding companies. The Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board have also issued regulations establishing capital requirements for banks under federal law. Failure to meet capital requirements could subject the Company and its subsidiary banks to a variety of restrictions and enforcement remedies. See Note 17 of Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders for information regarding risk-based capital requirements. The Company's banking subsidiaries are also subject to various requirements and restrictions in the laws of the U.S. and the states in which the banks operate. These include restrictions on the amount of loans to a borrower and its affiliates, the nature and amount of their investments, their ability to act as an underwriter of securities, the opening of branches and the acquisition of other banks or savings associations. The subsidiary banks are under the supervision of, and are subject to periodic examination by, the OCC or the respective state banking departments, and are subject to the rules and regulations of the OCC, the Board of Governors of the Federal Reserve System and the FDIC. They are also subject to certain laws of each state in which such banks are located. 6 7 Dividends payable by the subsidiary banks to Zions Bancorporation are subject to various legal and regulatory restrictions. These restrictions and the amount available for the payment of dividends at year-end are summarized in Note 17 of Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of any FDIC-assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") prescribes standards for safety and soundness of insured banks. These standards relate to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, as well as other operational and management standards deemed appropriate by the agencies. The Community Reinvestment Act ("CRA") requires banks to help serve the credit needs in their communities, including credit to low and moderate income individuals and geographies. Should the Company or its subsidiaries fail to adequately serve the community, there are penalties which might be imposed including denials of applications to expand branches, relocate, add subsidiaries and affiliates and merge with or purchase other financial institutions. Regulators and Congress continue to enact rules, laws, and policies to regulate the industry and protect consumers. The nature of these regulations and the effect of such policies on future business and earnings of the Company cannot be predicted. GOVERNMENT MONETARY POLICIES The earnings and business of the Company are affected not only by general economic conditions, but also by fiscal and other policies adopted by various governmental authorities. The Company is particularly affected by the policies of the Federal Reserve Board which affects the national supply of bank credit. The instruments of monetary policy available to the Federal Reserve Board include open-market operations in United States government securities; manipulation of the discount rates of member bank borrowings; imposing or changing reserve requirements against member bank deposits; and imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying combinations to influence the overall growth of bank loans, investments and deposits, and the interest rates charged on loans or paid for deposits. In view of the changing conditions in the economy and the effect of the credit policies of monetary authorities, it is difficult to predict future changes in loan demand, deposit levels and interest rates, or their effect on the business and earnings of the Company. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. 7 8 PROPERTIES Zions First National Bank operates 132 branches, of which 67 are owned by the Company and 65 are on leased premises. For Vectra Bank Colorado, 32 of 53 branches are owned and the remaining 21 branches are on leased premises. California Bank & Trust owns 22 of their 71 branches and leases the remaining 49 branch premises. Nevada State Bank operates 43 branches, of which 13 are owned and 30 are on leased premises. In Arizona, 13 of 33 branches are owned and the remaining 20 branches are on leased premises. In Washington, The Commerce Bank of Washington operates 1 branch on leased premises. The annual rentals under long-term leases for such banking premises are determined under various formulas and include as various factors, operating costs, maintenance and taxes. The Company's subsidiaries conducting lease financing, insurance, and discount brokerage activities operate from leased premises. For information regarding rental payments, see Note 12 of Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, positions, and backgrounds of the Company's executive officers as of February 26, 1999 are set forth as follows:
Positions and Offices Held With Individual Zions Bancorporation and Principal Subsidiaries Officer Since Age - ---------- ----------------------------------------------- ------------- --- Roy W. Simmons Chairman of the Company; Member of the Board of Directors of 1961 83 Zions First National Bank; prior to January 1998, Chairman of Zions First National Bank. Harris H. Simmons President and Chief Executive Officer of the Company; 1981 44 Chairman of Zions First National Bank; prior to January 1998, President and Chief Executive Officer of Zions First National Bank. A. Scott Anderson Executive Vice President of the Company; President and Chief 1997(1) 52 Executive Officer of Zions First National Bank; prior to January 1998, Executive Vice President of Zions First National Bank. Danne L. Buchanan Executive Vice President of the Company; prior to March 1995, 1995 41 Senior Vice President and General Manager of Zions Data Services Company. Gerald J. Dent Executive Vice President of the Company; Executive Vice 1987 57 President of Zions First National Bank. Dale M. Gibbons Executive Vice President, Chief Financial Officer and 1996 38 Secretary of the Company; Executive Vice President and Secretary of Zions First National Bank; prior to August 1996, Senior Vice President of First Interstate Bancorp. John J. Gisi Senior Vice President of the Company; Chairman and 1994 53 Chief Executive Officer of National Bank of Arizona. James C. Hawkanson Senior Vice President of the Company; Managing Director and 1998 55 Chief Executive Officer of The Commerce Bank of Washington.
8 9 W. David Hemingway Executive Vice President of the Company; Executive Vice 1997(2) 51 President of Zions First National Bank. Clark B. Hinckley Senior Vice President of the Company; prior to March 1994, 1994 51 President of Zions First National Bank of Arizona. George Hofmann III Senior Vice President of the Company; President and Chief 1995 49 Executive Officer of Nevada State Bank; prior to April 1995, Senior Vice President of Zions First National Bank. Gary S. Judd Senior Vice President of the Company; President and Chief 1998 58 Executive Officer of Vectra Bank Colorado. Robert G. Sarver Executive Vice President of the Company; Chairman and Chief 1998(3) 37 Executive Officer of California Bank & Trust; prior to 1995, President of National Bank of Arizona. Nolan X. Bellon Controller of the Company; prior to June 1998, Controller of 1987 50 Zions First National Bank.
(1) Officer of Zions First National Bank since 1990. (2) Officer of Zions First National Bank since 1977. (3) Member of the Board of Directors since 1994. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS Nasdaq: ZION High and low quarterly stock prices:
1998 1997 --------------------------- --------------------------- HIGH LOW HIGH LOW ---- --- ---- --- 1st Quarter $55.69 $39.56 $33.25 $25.69 2nd Quarter 54.00 48.06 37.63 28.38 3rd Quarter 57.25 38.38 41.13 34.69 4th Quarter 62.38 39.13 46.00 37.63
As of February 26, 1999, there were 6,191 common shareholders of the Company's stock. 9 10 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules, and Exhibits: (1) The consolidated financial statements and related notes and the Independent Auditor's Report that appear on pages 37 through 80 of the 1998 Annual Report to Shareholders are incorporated herein by reference. (2) The Financial Statement Schedules are omitted because conditions requiring their filing do not exist. (3) Exhibits Index:
Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation of Zions Bancorporation dated November 8, 1993, incorporated * by reference to Exhibit 3.1 of Form S-4 filed on November 22, 1993. 3.2 Restated Bylaws of Zions Bancorporation, dated November 8, 1993, incorporated by Reference to * Exhibit 3.2 of Form S-4 filed November 22, 1993. 3.3 Articles of Amendment to the Restated Articles of Incorporation of Zions Bancorporation dated * April 30, 1997, incorporated by reference to Exhibit 3.1 of Form 10-Q for the quarter ended June 30, 1997. 3.4 Articles of Amendment to the Restated Articles of Incorporation of Zions Bancorporation dated * April 24, 1998, incorporated by reference to Exhibit 3 of Form 10-Q for the quarter ended June 30, 1998. 3.5 Amendment to the Restated Bylaws of Zions Bancorporation, dated September 18, 1998, * incorporated by reference to Exhibit 3 of Form 10-Q for the quarter ended September 30, 1998. 4 Shareholder Protection Rights Agreement, dated September 27, 1996, incorporated by reference to * Exhibit 1 of Form 8-K filed October 12, 1996. 10.1 Amended and Restated Zions Bancorporation Pension Plan, incorporated by reference to Exhibit 10.1 of * Form 10-K for the year ended December 31, 1994. 10.2 Amendment to Zions Bancorporation Pension Plan effective December 1, 1994, incorporated by reference * to Exhibit 10.2 of Form 10-K for the year ended December 31, 1994. 10.3 Zions Bancorporation Supplemental Retirement Plan Form, incorporated by reference to Exhibit 19.4 of * Form 10-Q for the quarter ended September 30, 1985. 10.4 Zions Bancorporation Key Employee Incentive Stock Option Plan dated April 28, 1982, incorporated by * reference to Exhibit 10.1 of Form 10-Q for the quarter ended June 30, 1995. 10.5 Amendment No. 1 to Zions Bancorporation Key Employee Incentive Stock Option plan dated April 27, * 1990, incorporated by reference to Exhibit 10.2 of Form 10-Q for the quarter ended June 30, 1995.
10 11 10.6 Amendment No. 2 to Zions Bancorporation Key Employee Incentive Stock Option plan dated * April 28, 1995, incorporated by reference to Exhibit 10.3 of From 10-Q for the quarter ended June 30, 1995. 10.7 Amendment No. 3 to Zions Bancorporation Key Employee Incentive Stock Option plan dated * April 24, 1998, incorporated by reference to Exhibit 10 of Form 10-Q for the quarter ended June 30, 1998. 10.8 Zions Bancorporation Deferred Compensation Plan for Directors, as amended May 1, 1991, incorporated * by reference to Exhibit 19 of Form 10-K for the year ended December 31, 1991. 10.9 Zions Bancorporation Senior Management Value Sharing Plan, Award Period 1994-1997, incorporated by * reference to Exhibit 10.9 of Form 10-K for the year ended December 31, 1994. 10.10 Zions Bancorporation Senior Management Value Sharing Plan, Award Period 1995-1998, incorporated by * reference to Exhibit 10.14 of Form 10-K for the year ended December 31, 1995. 10.11 Zions Bancorporation Senior Management Value Sharing Plan, Award Period 1996-1999, incorporated by * reference to Exhibit 10.16 of Form 10-K for the year ended December 31, 1996 10.12 Zions Bancorporation Senior Management Value Sharing Plan, Award Period 1997-2000, incorporated by * reference to Exhibit 10.16 of Form 10-K for the year ended December 31, 1997. 10.13 Zions Bancorporation Executive Management Pension Plan, incorporated by reference to Exhibit 10.10 * of Form 10-K for the year ended December 31, 1994. 10.14 Employment Agreement between Zions Bancorporation and Mr. John Gisi, incorporated by reference to * Exhibit 10.13 of Form 10-K for the year ended December 31, 1995. 10.15 Zions Bancorporation Non-Employee Directors Stock Option Plan dated April 26, 1996, incorporated by * reference to Exhibit 10 of Form 10-Q for the quarter ended June 30, 1996. 10.16 Zions Bancorporation Pension Plan amended and restated effective April 1, 1997, Incorporated by * reference to Exhibit 10 of Form 10-Q for the quarter ended March 31, 1997. 10.17 Stock Option Agreement between Zions Bancorporation and W. David Hemingway dated April 13, 1983, * incorporated by reference to Exhibit 4.8 of Form S-8 filed March 10, 1999. 10.18 Amended Stock Option Agreement between Zions Bancorporation and W. David Hemingway dated * January 31, 1991, incorporated by reference to Exhibit 4.9 of Form S-8 Filed March 10, 1999
11 12 10.19 Shareholder Agreement, dated October 1, 1998, among Zions Bancorporation, The Robert G. Sarver * Separate Property Trust dated September 29, 1997 and CBT Holdings, incorporated by reference to Exhibit 10.1 of Form 8-K filed October 14, 1998. 10.20 Loan Agreement, dated October 1, 1998, between Zions Bancorporation and The Robert G. Sarver * Separate Property Trust dated September 29, 1997, incorporated by reference to Exhibit 10.2 of Form 8-K filed October 14, 1998. 10.21 Employment Agreement, dated October 1, 1998, between Grossmont Bank and Robert Sarver, incorporated * by reference to Exhibit 10.3 of Form 8-K filed October 14, 1998. 10.22 Promissory Note, dated October 1, 1998, by The Robert G. Sarver Separate Property Trust dated * September 29, 1997 in favor of Zions Bancorporation, incorporated by reference to Exhibit 10.4 of Form 8-K filed October 14, 1998. 10.23 Zions Bancorporation Senior Management Value Sharing Plan, Award Period 1998-2001 (filed) 13 1998 Annual Report to Shareholders, pages 1 through 73 (filed) 21 List of subsidiaries of Zions Bancorporation (filed) 23 Consent of KPMG LLP, independent certified public accountants (filed) 27.1 Article 9 Financial Data Schedule for the year ended December 31, 1998 (filed) 27.2 Article 9 Restated Financial Data Schedule for the year ended December 31, 1997 (filed) 27.3 Article 9 Restated Financial Data Schedule for the year ended December 31, 1996 (filed) 99.1 Form 11-K Annual Report of Zions Bancorporation Employee Stock Savings Plan (filed) 99.2 Form 11-K Annual Report of Zions Bancorporation Employee Investment Savings Plan (filed) - ----------------------- *incorporated by reference
12 13 (b) Zions Bancorporation filed the following reports on Form 8-K during the quarter ended December 31, 1998; 1) Filed December 10, 1998 (Item 7), amending the 8-K filed on October 14, 1998 which announced the consummation of the acquisition of The Sumitomo Bank of California ("Sumitomo"). This amendment contained Sumitomo's financial statements for the period ending June 30, 1998 as well as a pro forma Balance Sheet as of June 30, 1998 and pro forma Income Statement for the year ended December 31, 1997 and the six months ended June 30, 1998. 2) Filed October 14, 1998 (Item 2), announcing the consummation of the acquisition of The Sumitomo Bank of California by Zions Bancorporation. Zions Bancorporation's Annual Report on Form 10-K/A for the year ended December 31, 1998, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all documents filed prior to January 1, 1999 pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of an offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K/A. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will governed by the final adjudication of such issue. 13 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. February 14, 2000 ZIONS BANCORPORATION By /s/ Harris H. Simmons ---------------------------- HARRIS H. SIMMONS, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. February 14, 2000 /s/ Harris H. Simmons /s/ Dale M. Gibbons - --------------------------------------------- -------------------------------- HARRIS H. SIMMONS, President, Chief Executive Dale M. Gibbons, Executive Vice Officer and Director President, Chief Financial Officer and Secretary /s/ Roy W. Simmons /s/ Nolan Bellon - --------------------------------------------- -------------------------------- ROY W. SIMMONS, Chairman and Director NOLAN BELLON, Controller /s/ Jerry C. Atkin /s/ Robert G. Sarver - --------------------------------------------- -------------------------------- JERRY C. ATKIN, Director ROBERT G. SARVER, Director /s/ Grant R. Caldwell /s/ L.E. Simmons - --------------------------------------------- -------------------------------- GRANT R. CALDWELL, Director L.E. SIMMONS, Director /s/ R.D. Cash /s/ Shelley Thomas - --------------------------------------------- -------------------------------- R. D. CASH, Director SHELLEY THOMAS, Director /s/ Richard H. Madsen /s/ I.J. Wagner - --------------------------------------------- -------------------------------- RICHARD H. MADSEN, Director I.J. WAGNER, Director /s/ Roger B. Porter - --------------------------------------------- ROGER B. PORTER, Director 14 EX-10.23 2 SENIOR MANAGEMENT VALUE SHARING PLAN 1 EXHIBIT 10.23 Zions Bancorporation Senior Management Value Sharing Plan Award Period: 1998 - 2001 Objective: To provide an ongoing multi-year incentive for the senior managers of Zions Bancorporation and its subsidiaries which: A. Focuses managers' attention on the creation of long-term shareholder B. Creates an incentive that promotes teamwork across departments and subsidiaries, and which encourages managers to balance profit center accountability with Company-wide goals; and, C. Complements the short-range annual bonuses which reflect the achievement of annual objectives and the Company's short-term profitability. Eligibility: Participants in the Plan shall consist of designated members of the senior management group (and certain other key managers) of the Company and its major subsidiaries. Participants for each Award Period shall be specifically identified by the Company's Board of Directors (the "Board") or its Executive Compensation Committee (the "Committee"). Allocation of Awards: It is anticipated that during the first quarter of each year in which the Plan operates, the Board of Directors shall approve the establishment of a pool of Award Funds to be generated during the Award Period, according to the general formula outlined below. Participants shall be designated by the Board or the Committee. Claims against the pool of Award Funds for each Award Period shall be represented by Participation Units ("PU's), and each participant shall be allocated a specific number of PU's by the Committee. The PU's shall represent a pro-rata claim, in proportion to the total PU's designated for that Award Period, on any Award Funds generated by the Plan during the Award Period. Term: Each Award Period shall consist of a continuous four-calendar-year period. The Plan is intended to constitute a "moving four-year-average" incentive plan, with the anticipation that a new Award Period would be designated each year, with multiple Award Periods overlapping one another. Nevertheless, the establishment of a new Award Period each year is subject to the Board's discretion. 1 2 Determination of Award Funds: The amount of Award Funds in the pool for each Award Period shall be a function of the Aggregate Cash Earnings Per Share ("ACEPS") during the Award Period, together with the mathematical Average Modified Cash Return On Shareholders' Equity ("AMCROE") for each of the four years in the Award Period. Aggregate Cash Earnings Per Share (ACEPS) shall be defined as the aggregate, over the four year Award Period, of each year's diluted earnings per share before the cumulative effect of changes in accounting principles, plus the after-tax cost per share of amortization of goodwill and core deposit intangible assets, plus the after-tax cost per share of charges recognized to standardize accounting practices of acquired entities, less the after-tax cost per share of capitalized transaction costs which would have been expensed if pooling-of-interests accounting treatment had been employed. Average Modified Cash Return on Equity ("AMCROE") shall be defined as the average, for each of the four years in the Award Period, of the Company's Net Cash Income divided by the average Modified Tangible Equity. Net Cash Income shall mean the net income available to common shareholders, plus the after-tax cost of amortization of goodwill and core deposit intangible assets, plus the after-tax cost of charges recognized to standardize accounting practices of acquired entities, less the after-tax cost of capitalized transaction costs which would have been expensed if pooling-of-interests accounting had been employed. Modified Tangible Equity shall mean total common shareholders' equity, less goodwill and core deposit intangible assets, except if such intangible assets arise as a result of acquisitions of businesses, stock or deposits for cash. (If such acquisitions are made with a combination of cash and stock, goodwill and core deposit intangible assets shall be deducted from common shareholders' equity only to the extent that such items exceed the total value of Zions' shares issued in the transaction.) Each year, the Committee shall establish minimum targets for AMCROE and ACEPS for the Award Period. These minimum targets would both be required to be reached in order for any Award Funds to be earned. Additionally, the Committee may designate Award Fund allocation amounts based upon the achievement of higher levels of AMCROE, with upward adjustments possible if higher levels of ACEPS are achieved. The Committee may also designate other conditions and adjustment factors to ensure the Plan's integrity and consistency with shareholder and depositor interests. The 1998-2001 Award Period formula for the determination of the value of PU's is as indicated in the Appendix. For the 1998-2001 Award Period, the following parameters shall be established, and adjustments made to the Company's earnings calculations, for purposes of determining Award Funds available under the Plan: 1). The Plan is intended to create an incentive for increasing shareholder value. However, this is not to be accomplished by reducing capital levels or assuming extraordinary or unwarranted risks. Accordingly, it is expected that total risk-based capital levels shall be maintained at a level at least 125% of "well-capitalized" regulatory requirements. 2 3 2). The Company's reserve levels are to be conservatively maintained. To the extent that the consolidated Allowance for Loan and Lease Losses is less than 110% of the peer group level, as expressed in terms of reserves/non-current loans as reported in the most current Uniform Bank Performance Report available at December 31, 2001, an appropriate adjustment shall be made to after-tax earnings (for purposes of calculating Award Funds only) to compensate for any deficit relative to the 110% minimum target level. Actual reserve levels are, of course, subject to Board and/or regulatory decisions. No upward adjustments shall be made in "pro forma" earnings in the event actual reserve levels exceed 110% of the peer group target. 3). Unless determined otherwise by the Board, in the event of any merger involving an acquisition by Zions for the exchange of Zions' shares in a pooling-of-interests transaction, earnings per share prior to the acquisition date shall, for the purpose of calculating ACEPS during the Award Period, be determined using Zions' un-restated numbers. Other Terms and Conditions: The Plan is to be governed and interpreted by the Committee, whose decisions shall be final. The terms of the Plan are subject to change or termination at their sole discretion. The Company shall retain the right to withhold payment of Award Funds to participants in the event of a significant deterioration in the Company's financial condition, or if so required by regulatory authorities, or for any other reason considered valid by the Board in its sole discretion. Participants shall not vest in any benefits available under the Plan until the conclusion of each Award Period. Nevertheless, upon death, permanent disability, or normal or early retirement (unless upon early retirement the participant becomes employed by an entity which competes with Zions Bancorporation), participants (or their estates) shall be eligible to receive a proportionate share of Award Funds based upon the number of PU's granted, and the number of full calendar quarters the participant was engaged as an officer of the Company or its subsidiaries prior to death, disability, or retirement. The PU's shall not be transferable without the express approval of the Committee. In the event of the merger or acquisition of the Company, the Plan may be terminated as of the end of the fiscal quarter preceding the first full quarter before the transaction is consummated. The Board may make any reasonable estimates or adjustments necessary in calculating Award Funds for any Award Period. The Board may also, at its sole discretion, alter the terms of the Plan at any time during an Award Period. This document is intended to provide a guideline for the creation and distribution of incentive compensation. Nothing herein creates a contractual obligation binding on the Board, and no Participant shall have any legal rights with respect to an Award until such Award is distributed. Earnings per share calculations shall be adjusted to reflect any stock splits, stock dividends, or other such changes in capitalization, at the discretion of the Committee. 3 4 The award of PU's to any participant shall not confer any right with respect to continuance of employment by the Company or its subsidiaries, nor limit in any way the right of the Company to terminate his or her employment at any time, with or without cause. APPENDIX ZIONS BANCORPORATION VALUE-SHARING PLAN: 1998-2001 Calculation of Participation Unit Value Aggregate Cash Earnings Per Share (ACEPS) - -----------------------------------------
If the ACEPS is: The basic value of a Over - But not over- Participation Unit is- - ------------------------------------------------------------------------------------- $8.57 $8.78 $.00 plus $.015 per each cent of the amount over $8.57. $8.78 $9.00 $.322 plus $.030 per each cent of the amount over $8.78. $9.00 $9.22 $.979 plus $.046 per each cent of the amount over $9.00. $9.22 $9.44 $1.983 plus $.062 per each cent of the amount over $9.22. $9.44 $9.67 $3.349 plus $.076 per each cent of the amount over $9.44. $9.67 $9.90 $5.089 plus $.093 per each cent of the amount over $9.67. $9.90 $10.14 $7.217 plus $.105 per each cent of the amount over $9.90. $10.14 $10.38 $9.748 plus $.123 per each cent of the amount over $10.14. $10.38 $10.63 $12.695 plus $.135 per each cent of the amount over $10.38. $10.63 $10.88 $16.074 plus $.153 per each cent of the amount over 10.63. $10.88 $11.14 $19.90 plus $.165 per each cent of the amount over $10.88. $11.14 $11.40 $24.187 plus $.183 per each cent of the amount over $11.14.
4 5 $11.40 $11.67 $28.952 plus $.195 per each cent of the amount over $11.40. $11.67 $11.94 $34.209 plus $.179 per each cent of the amount over $11.67. $11.94 $12.22 $39.030 plus $.159 per each cent of the amount over $11.94. $12.22 $12.50 $43.493 plus $.146 per each cent of the amount over $12.22. $12.50 $12.78 $47.584 plus $.132 per each cent of the amount over $12.50. $12.78 $13.07 $51.286 plus $.114 per each cent of the amount over $12.78. $13.07 $13.37 $54.585 plus $.096 per each cent of the amount over $13.07. $13.37 $13.67 $57.463 plus $.081 per each cent of the amount over $13.37. $13.67 $13.98 $59.905 plus $.064 per each cent of the amount over $13.67. $13.98 $61.893
Average Modified Cash Return on Equity ("AMCROE") Modifier: - ----------------------------------------------------------- The basic Participation Unit value determined above shall be adjusted as follows: - - If AMCROE for 1998-2001 is less than 16.00%, the Participation Units shall have no value. - - If AMCROE is equal to or greater than 16.00% but less than 19.00%, the basic value of a Participation Unit shall be multiplied by a factor of 1.00. - - If AMCROE is equal to or greater than 19.00% but less than 24.00%, the basic value of a Participation Unit shall be multiplied by the following factor: 1+(AMCROE - .19)6.60. - - If AMCROE is 24.00% or more, the basic value of a Participation Unit shall be multiplied by 1.33. ****************************** Example: If ACEPS is $10.19 and AMCROE is 22.60%, each Participation Unit would be worth $36.71. [$9.748+100($10.19-$10.14)$.123] X [1+(.2260 - .19)6.6] = $12.825 5 EX-13 3 1998 ANNUAL REPORT 1 EXHIBIT 13 ZIONS BANCORP0RATION 1998 ANNUAL REP0RT FINANCIAL HIGHLIGHTS
98/97 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- CHANGE FOR THE YEAR (IN MILLIONS) Net income + 9% $130.1 $119.9 $104.7 $83.8 $65.8 OPERATING CASH EARNINGS (1) + 43% 181.1 126.8 106.9 85.9 67.4 PER SHARE Net income (diluted) - 11% $1.70 $1.91 $1.72 $1.36 $1.08 Net income (basic) - 11% 1.72 1.93 1.74 1.38 1.10 Operating cash earnings (diluted) (1) + 17% 2.37 2.02 1.75 1.42 1.12 Dividends declared + 15% .54 .47 .425 .3525 .29 Book value (2) + 44% 17.61 12.23 8.71 7.46 6.35 Market price - end + 37% 62.38 45.38 26.00 20.06 8.97 Market price - high 62.38 46.00 26.00 20.28 10.50 Market price - low 38.38 25.69 16.69 8.88 8.38
AT YEAR END (IN MILLIONS)
Assets + 71% $17,020 $9,943 $6,722 $5,803 $5,087 Loans and leases + 112% 10,636 5,023 3,585 2,922 2,489 Loans sold being serviced (3) + 1% 1,057 1,050 868 831 787 Deposits + 88% 13,321 7,090 4,738 4,242 3,836 Shareholders' equity + 72% 1,385 803 528 447 380 PERFORMANCE RATIOS Return on average assets .97% 1.34% 1.59% 1.44% 1.18% Return on average common equity 10.46% 19.03% 21.50% 20.29% 18.69% Efficiency ratio 71.00% 59.89% 56.57% 59.37% 62.23% Net interest margin 4.53% 4.19% 4.59% 4.54% 4.11% OPERATING CASH PERFORMANCE RATIOS (1) Return on average assets 1.40% 1.43% 1.63% 1.48% 1.21% Return on average common equity 26.98% 25.46% 23.44% 21.90% 20.22% Efficiency ratio 61.58% 58.42% 55.98% 58.63% 62.54%
CAPITAL RATIOS(2) Equity to assets 8.14% 8.08% 7.85% 7.70% 7.47% Tier 1 leverage 5.86% 6.96% 9.09% 6.40% 6.32% Tier 1 risk-based capital 8.34% 12.17% 14.83% 11.48% 11.84% Total risk-based capital 11.38% 14.11% 17.29% 14.27% 14.92%
SELECTED INFORMATION Average common-equivalent shares (in 76,527 62,895 60,976 60,633 59,959 thousands) Common dividend payout ratio 31.27% 24.19% 23.88% 24.53% 25.53% Full-time equivalent employees 6,793 4,393 3,118 2,892 2,732 Commercial Banking Offices 333 230 143 132 119 ATMs 463 485 327 255 215
(1) Before amortization of goodwill and core deposit intangible assets and merger expense. (2) At year end. (3) Amount represents the outstanding balance of loans sold and being serviced by the company, excluding long-term first mortgage residential real-estate loans. 1 2 [graphic omitted] Central to the Company's success is its core banking business. In 1998, Zions moved aggressively to expand its banking franchise, especially in the profitable and high-growth markets of California, Colorado, and Washington. The Company now provides banking services in eight western states. The Company's banking business continues to enjoy a generally favorable business climate and strong local economies. These eight states have enjoyed exceptional employment growth in recent years, and population growth over the next 30 years is projected to be among the highest in the nation. The approach has been to achieve profitable growth through the acquisition of strong banks, strategic deployment of new branches, and the introduction of a broader and more innovative array of products and services. The company's enhanced capital resources enable the acquired banks to take advantage of further growth opportunities in these markets. Unlike most other regional or super-regional banking operations, Zions Bancorporation's strategy is to maintain a strong, local presence for affiliate banks in each state. These banks have the authority and ability to respond to the financial needs of their local clients. Therefore, essential to the success of this philosophy is strong, local management that understands and can respond to unique business opportunities in the markets they serve. While Zions affiliates give their customers the attention and responsiveness of a community bank, the Company provides back-office and administrative support to yield greater efficiencies and cost savings in a manner transparent to the customer. Significant Acquisitions California The year 1998 is highlighted by the company's most significant acquisition to date. Starting from the base of the former Grossmont Bank in San Diego, Zions completed its acquisition of FP Bancorp and its subsidiary, First Pacific National Bank, with offices in San Diego and Riverside counties. In the first quarter, Zions surprised many observers when it announced an agreement to acquire The Sumitomo Bank of California ("Sumitomo"), with approximately $4.5 billion in assets. These moves give the Company a foothold in the important Los Angeles and San Francisco markets. The Sumitomo acquisition was completed during the fourth quarter. The three banks were merged into a single, statewide franchise, and the name was changed to California Bank & Trust ("CB&T") Referring to itself as a super-community bank, CB&T is headquartered in the San Francisco Bay area. However, consistent with the company's community banking philosophy, each region has local management and decision-making authority. California Bank & Trust has an initial statewide network of 71 offices and assets of approximately $6 billion, making it the sixth largest commercial bank in California. The state of California is projected to be the fastest growing in the United States over the next 30 years. California Bank & Trust will focus on delivering what Californians need and deserve: a bank with a statewide reach, centered around relationship banking and delivered through a regional approach. Largely as a result of initiatives by new local management and an expanded array of services and products, former Sumitomo customers are rewarding the new bank with their loyalty and additional business. 2 3 Colorado Aggressive acquisitions were undertaken to establish a significant and solid franchise within the growing state of Colorado during 1998. In order to develop a network of branches throughout the state, the Company acquired multiple banking organizations. This was necessary because, until recently, Colorado banking laws did not permit the development of statewide branch banking franchises. During the year, Zions completed mergers with Vectra Banking Corp., Routt County National Bank Corp., Sky Valley Bank Corp., Tri-State Finance Corp., Kersey Bancorp Inc., Mountain Financial Holding Company, SBT Bankshares, Eagle Holding Company and Citizens Banco Inc. All of these banking operations were merged into Vectra Bank Colorado, N.A. ("Vectra"). The Colorado economy is expected to remain very healthy into the next decade, with technology, tourism and service-related businesses serving as the engines of stability and prosperity. The state is a magnet to people looking for a combination of lifestyle and economic opportunity. With assets of nearly $2 billion, Vectra's statewide network of 52 offices makes it the state's fifth largest bank. Vectra also operates one office in Farmington, New Mexico. Washington Continuing the company's geographic expansion, 1998 marks Zions' entry into the fast-growing Seattle market with the acquisition of The Commerce Bancorporation, the holding company of The Commerce Bank of Washington, N.A. ("The Commerce Bank"). The Commerce bank's approach is unique. From a single office in downtown Seattle, The Commerce Bank operates very successfully within a narrowly-defined niche of business and private banking customers. As with other Zions affiliates, The Commerce Bank has achieved success based on providing superior service. Joining with Zions allows The Commerce Bank to rise to the next level in its ability to meet the needs of its clients. Expanded products and services, combined with its attentiveness and responsiveness to client needs, is sure to result in a win-win-win situation for the Company, The Commerce Bank of Washington, and its clients. The Seattle area is one of the nation's leading centers for advanced technology in computer software, bio-technology, electronics, medical equipment and environmental engineering. Seattle is also ranked as one of the top cities in the U. S. in which to live and locate a business. 3 4 Internal Growth In addition to acquiring other banking franchises, Zions Bancorporation's strategy is to leverage its existing branch network and selectively expand within the states it serves. Excluding the loans and deposits from the company's acquisitions, which are not reflected in the previous-year balances, on-balance-sheet and securitized loans in 1998 increased 20.9% and deposits were up 9.5% from a year ago. The company's Utah/Idaho banking affiliate, Zions First National Bank, continued to achieve growth through its well-developed branch and ATM distribution network, as well as the increasingly important online and telephone banking channels. A new branch was opened in Idaho Falls, Idaho, and the Bank moved into new offices in Park City, Utah and Rigby, Idaho. Also, three convenient new grocery store branches were opened, bringing the total to 44. In addition, the Bank targets key segments through its Private Banking, Executive Banking and women's Financial Groups. In 1998, Zions Bank celebrated its 125th anniversary with a retail loan campaign that generated record loan originations approaching $500 million. Nevada State Bank ("NSB") is the oldest state-chartered bank in Nevada (1959). In 1998, NSB added seven branches and grew to more than $1.1 billion in assets and a total of 44 locations. Because NSB competes with large, national banking operations, its strategy is to emphasize its community bank leadership position, providing personalized, client first service. As in previous years, National Bank of Arizona ("NBA") continues to focus on the business and executive banking segments, while expanding its retail branch operations. Three new offices were opened during the year: one in the southeast corner of Arizona, at Sierra Vista, and two in the popular Sedona area, at Cottonwood and the Village of Oak Creek. This brings the total to 33 branch offices statewide. ... on balance sheet and securitized loans in 1998 increased 20.9% and deposits were up 9.5% from a year ago. [graphic omitted] Complementary Businesses While banking is the company's core business, an ever-increasing component of revenue comes from complementary niche businesses. Each of these represents high growth prospects and potential for revenue enhancements, leveraging the company's competencies and resources. 4 5 Some of these businesses represent pioneering technologies while others merely represent underserved markets or undiscovered opportunities. The common thread is that these businesses result from creative, "outside the box" thinking. Because these businesses are providing complementary products to a growing client base, they help to deepen relationships with current clients and diversify earnings from the core banking franchise. Digital Signature Trust Company With the rapid growth in electronic commerce, Digital Signature Trust Company offers an intriguing opportunity for Zions Bancorporation's future. Early in the year, Zions Bank received approval from the Office of the Comptroller of the Currency ("OCC") to establish an operating subsidiary to act as a certification authority and repository for certificates used to verify digital signatures. DST was the first bank subsidiary in the nation to receive such approval. As a certification authority, DST issues, stores and verifies digital certificates that are used in the digital "signing" of electronic documents and transactions. Digital signatures are a form of electronic authentication, permitting a recipient to compare decoded signatures with the message and confirm that the message has not been altered. In September, DST announced it had become American Bankers association's exclusive partner in providing secure e-commerce technology services for a new ABA subsidiary. ABAecom(SM) will serve as the "trusted third party" in providing an assortment of electronic authentication and encryption services for financial institutions. These services will include a Web site authentication seal and digital certificates to allow financial institutions and their customers to engage in private, secure communications. Electronic Bond Trading As the only primary dealer in U.S. Treasury securities headquartered west of the Mississippi River, Zions Bank acts as underwriter and distributor of U.S. Treasury and Federal Agency securities. It has pioneered the online trading of such government securities through its Web sites, www.oddlot.com and www.govrate.com. The Web sites display live, executable quotes, available to financial institutions and money managers nationwide. In addition, prices and electronic trading are offered on Bloomberg and several other vendor systems. Accessor Capital Management During the year, Accessor Funds, a family of eight mutual funds totaling $1.1 billion in assets, placed two funds on U.S. Banker magazine's list of the top 20 bank-managed equity funds, and one fund on the magazine's list of top 10 international funds. Accessor Funds are advised by Seattle-based Accessor 5 6 Capital Management, which is approximately 25 percent owned by Zions First National Bank. Municipal Finance Zions is one of the largest municipal financial advisory firms in the country. Combined, the company's public finance offices operating under the names of Zions Bank Public Finance, Kelling, Northcross & Nobriga (California), Howarth & Associates (Nevada) and National Bank of Arizona Public Finance ranked ninth in the Securities Data corporation's listing of the nation's top 100 municipal financial advisors. U.S. Small Business Administration Lending Zions Bank continues to be a leader in U.S. Small Business Administration ("SBA") lending, originating loans in 31 of 65 markets identified by the SBA. Through its Zions Small Business Finance division, headquartered in St. Louis, the bank provides fast and efficient SBA 7(a) financing through offices strategically located across the country. In addition, Zions provides real estate financing for businesses through the SBA 504 loan program. Zions bank's Real Estate Securitization department works with certified development companies and correspondent banks throughout the country to provide the nation's largest source of secondary market financing for SBA 504 loans. Farmer Mac Federal Agricultural Mortgage Corporation ("Farmer Mac") continues to provide needed funding to the nation's farmers. Zions Bank maintains nearly a 20 percent equity interest in Farmer Mac and originates and sells qualified loans directly to Farmer Mac through its cash window program. Zions is the largest seller of agricultural mortgages to the Farmer Mac cash window. These agricultural mortgages are originated throughout the United States and underwritten and serviced by Zions Agricultural Finance, located in Ames, Iowa. Zions Agricultural Finance is a division of Zions First National Bank. Technology for the next millennium Technological advances already have changed the face of the financial services industry. This trend is expected to continue at a faster pace in future years. New technologies continue to revolutionize the industry, paving the way to a brighter, more customer-oriented financial services future. Zions Bancorporation is a leader in utilizing new technologies to provide state-of-the-art, creative solutions to satisfy financial needs. Rapidly expanding use of the Internet presents several new opportunities almost daily for many financial service providers. Internet banking is increasingly being used by individuals and businesses. In the state of Utah, the number of Zions Internet banking customers grew by over 200 percent in 1998. New electronic services include brokerage, bill payment and loan applications, each of which helps add to Zions bank's image as a regional area leader in Internet 6 7 banking. Nevada State Bank introduced its Web site and Internet banking in 1998. Internet banking applications are being developed for the company's other banking affiliates. Zions Bancorporation will continue to explore new, innovative applications of emerging technologies that have the potential of deepening client relationships, diversifying earnings, serving under-served markets or creating new, profitable business opportunities. Year 2000 In a few short months, the world will experience the much-anticipated transition to the new millennium. Opinions vary about the potential impact of computers that fail to read the Year 2000 (Y2K) correctly. Because of society's heavy reliance upon computer technology, the outcome is still somewhat uncertain. Since financial institutions rely heavily on date-based calculations, the industry has a particular challenge. Fortunately, Zions Bancorporation has been aggressively preparing. For several years, the Company has been identifying all of the computer hardware and software systems it uses, evaluating Y2K risks, and renovating or replacing these systems, as necessary. The task was simplified somewhat because in recent years, many of the company's operating systems already had been upgraded with Year 2000-compliant systems. During 1998, the Y2K team replaced or renovated most of its mission-critical systems. In December, the Company successfully completed its first of several planned off-site tests of mission-critical operating systems. Through the balance of 1999, each system is being subjected to rigorous testing and further remediation, if needed. Contingency plans have been prepared so Zions' affiliate banks can provide uninterrupted service during any difficulties. Affiliate banks continue to inform their clients about the Y2K issue and about the company's preparations, using a variety of marketing communications, including well-attended seminars that are being held throughout the market area. While Zions Bancorporation remains very optimistic, it considers preparations for Y2K as the company's highest priority for 1999. The Company is proud of the fact that Zions Bank President and CEO A. Scott Anderson recently was selected to represent the nation's banking industry as a member of the Senior Advisors Group to the president's Council on Year 2000 Conversion. Operational Integration Zions Bancorporation remains committed to the strategy of allowing local bank affiliates to run their own businesses with local managers who know their markets, understand unique community needs and deliver the highest quality customer service. Recognizing the need to also deliver these services in the most efficient and cost-effective manner, the Company centralized and 7 8 consolidated certain back-office, support functions. Zions Management Services Company ("ZMSC") was created in 1998 to provide this support. ZMSC serves as an umbrella organization, delivering a variety of support services to affiliates. It provides a higher level of quality, consistency, and cost-effective delivery of services than could be achieved by any of the affiliates on a stand-alone basis. At the same time, ZMSC provides a set of operating controls to assure that these support functions are being performed in a safe and sound manner. ZMSC provides assistance to affiliates in the areas of operations/information systems, human resources, finance and accounting, credit policy, credit administration, and investments. In addition, ZMSC operates centralized call centers for taking loan applications and providing telephone customer service. Call centers are equipped to respond to calls from customers of any affiliate, using a multiple que environment, which enables the bank to optimize staffing efficiency and allows a customer service representative to use the local bank's name and database to assist the caller. Winning Formula A business - like a chess player - utilizes various pieces to accomplish a goal. Each unit must work in harmony to be effective. Each piece is unique in shape, function and purpose. All are powerful if used effectively. (Even the pawn can capture the queen.) All pieces must act in unison complementary to a master strategy - in order to find a winning formula. Measured in shareholder value, 1998 was a year of winning strategies for Zions Bancorporation. 8 9 MANAGEMENT'S COMMENTS PERFORMANCE SUMMARY Zions Bancorporation reported record earnings of $130.0 million or $1.70 per share in 1998. Net income increased 8.5% over the $119.9 million earned in 1997 and 14.5% over the $104.7 million earned in 1996. On a diluted net income per share basis, per share earned decreased 11.0% from $1.91 in 1997 to 1.70 in 1998. Per share earnings increased 1.72 to 1.91, an 11.0% increase, from 1996 to 1997. Dividends per share were $.54 per share in 1998, an increase of 14.9% over $.47 in 1997, which were up 10.6% from $.425 in 1996. Financial results have been restated for prior periods to reflect the acquisition of The Commerce Bancorporation during 1998, which was accounted for as a pooling of interests and considered significant. The acquisitions of Vectra Banking Corporation, FP Bancorp, Inc., and The Sumitomo Bank of California were accounted for as purchases and results of operations are included as if the acquisitions had occurred January 1, 1998, April 1, 1998, and October 1, 1998, respectively. Therefore, results of operations for 1998 can not be compared directly with prior periods. Included in reported net income were after-tax merger expenses of $24.1 million or $.32 per share in 1998 and $.1 million or $.01 per share in 1997. Excluding merger expenses, earnings for 1998 would have been $154.2 million or $2.02 per share , an increase of 28.0% and 5.2%, respectively, over $120.5 or $1.92 for 1997. Merger expenses in 1998 relate to the company's acquisitions of twelve banking organizations during the year and are further discussed in Note 2 of Notes to Consolidated Financial Statements. The return on average shareholders' equity was 10.46% and the return on average assets was 0.97% for 1998, compared with 19.03% and 1.34%, respectively, in 1997, and 21.50% and 1.59%, respectively, in 1996. The Company is also providing its earnings performance on an operating cash basis since it believes that its cash operating performance is a better reflection of its financial position and shareholder value creation as well as its ability to support growth and return capital to shareholders than reported net income. Operating cash earnings are earnings before the amortization of goodwill and core deposit intangible assets and merger expense. Operating cash earnings were $181.1 million or $2.37 per share for 1998, an increase of 42.8% and 17.3%, respectively, over the $126.8 or $2.02 per share for 1997, which was up 18.6% and 15.4% over the $106.9 million or $1.75 per share in 1996. The return on average shareholders' equity and the return on average assets on an operating cash basis were 26.98% and 1.40%, respectively, for 1998 compared to 25.46 % and 1.43% for 1997 and 23.44% and 1.63% for 1996. The strong performance of the Company was driven by a 71.3% growth in average loans and leases and a 46.3% growth in average total earning assets that led to a 58.4% increase in taxable-equivalent net interest income to $541.9 million in 1998. Noninterest income increased 42.1% to $199.9 million in 1998, with strong growth in service charges, trust income, underwriting and trading income, and loan sales and servicing income. Noninterest expense, including merger expenses increased 82.1% to $526.7 million in 1998. Excluding merger expenses, noninterest expense increased 69.4% over 1997. The increase in revenue and noninterest expense is mainly attributable to the record growth of the Company during 1998 through acquisitions and expansion. The number of full-time equivalent employees increased to 6,793 at year-end 1998 from 4,393 at the end of 1997 and banking offices increased to 333 from 230. Increased expenses, related primarily to acquisitions and related conversion and functional integration, resulted in an increase in the Company's efficiency ratio, or noninterest expenses as a percentage of total taxable-equivalent net revenues to 71.00% for 1998 compared to 59.89% for 1997 and 56.57% for 1996. The operating cash performance efficiency ratio was 61.58% for 1998 compared to 58.42% for 1997 and 55.98% for 1996. The Company's provision for loan losses totaled $11.9 million for 1998 compared to $4.6 million for 1997. Net charge-offs were $14.9 million, or .21% of average loans and leases in 1998 compared to $8.1 million or .20% in 1997. Nonperforming assets increased to $64 million or .60% of loans and other real estate owned on December 31, 1998 from $16 million or .32% on December 31, 1997. Nonperforming assets on December 31, 1998 include $29 million related to the acquired loans of The Sumitomo Bank of California. 9 10 BUSINESS SEGMENT RESULTS The Company manages its operations and prepares management reports with a primary focus on geographical area. Operating segments information is presented in Note 20 of Notes to Consolidated Financial Statements. The company allocates centrally provided services to the business segments based upon estimated usage of those services. The operating segment identified as other includes the Parent, several smaller business units and inter-segment eliminations. ZIONS FIRST NATIONAL BANK AND SUBSIDIARIES Zions First National Bank and Subsidiaries include the Company's operations in Utah and Idaho. The Bank experienced strong internal growth in 1998 with loans increasing 26.2% over 1997 and deposits increasing 7.3%. Net income decreased 1.5% to $87.1 million compared to $88.5 million in 1997 which was up 6.4% from the $83.1 million earned in 1996. The decrease for 1998 was mainly the result of a $23.0 million provision for loan losses in 1998. The Bank did not make a provision for loans losses in 1997 o 1996. Net interest income for 1998 increased 7.8% to $222.0 million and noninterest income increased 25.4% to $142.7 million. CALIFORNIA BANK & TRUST During 1998 the Company acquired FP Bancorp, Inc. and The Sumitomo Bank of California and merged them into Grossmont Bank, which was renamed California Bank & Trust. The acquisitions were accounted for as purchases and results of operations, and are included in the segment information as if the acquisitions had occurred April 1, 1998 and October 1, 1998. Therefore, the year 1998 is not comparable to prior years. On the acquisition date The Sumitomo Bank of California had total assets of $4,545 million, loans of $3,417 million and deposits of $3,955 million. See Note 2 of Notes to Consolidated Financial Statements for further information about the acquisitions. The Bank incurred pre-tax merger expenses of $27.5 million during 1998 related to the FP and Sumitomo acquisitions. At year-end total assets were $6,183, total loans were $4,181 and total deposits were $5,349. VECTRA BANK COLORADO In January 1998 the Company acquired Vectra Banking Corporation in a transaction accounted for as a purchase. Vectra had total assets of $703 million, loans of $413 million and deposits of $556 million. During 1998 the Company also acquired eight smaller banks in Colorado. The acquired banks, along with previously owned Colorado banking organizations, were merged during 1998 under the name of Vectra Bank Colorado, National Association. See Note 2 of Notes to Consolidated Financial Statements for further information about the acquisitions. Net income for Vectra Bank Colorado increased 63.3% to $3.6 million from $2.2 million in 1997. Pre-tax merger expenses of $4.3 million were incurred during 1998 in connection with the acquisitions. The increased earnings for 1998 resulted from the acquisition of Vectra and other banks in 1998 and strong loan growth, which resulted in a 465.8% increase in net interest income. NATIONAL BANK OF ARIZONA Net income at National Bank of Arizona was up 24.7% to $22.2 million in 1998 as compared to $17.8 million in 1997 and $14.7 million for 1996. The increases for both 1998 and 1997 were driven by strong loan growth. Noninterest income for 1998 increased to $9.3 million from $6.3 for 1997, an increase of 47.6%. The increase in noninterest income for 1998 included a $1.4 million increase in service charges on deposit accounts and $.8 million from a new trust operation started in Arizona during 1998. 10 11 NEVADA STATE BANK Net income at Nevada State Bank increased 28.0% to $13.7 million as compared to $10.7 million in 1997 and $7.3 million for 1996. Earnings growth for 1998 and 1997 was driven by increases in net interest income, which increased 35.8% for 1998 compared to 1997 and 44.4% for 1997 compared to 1996. Noninterest income increased 26.1% to $15.0 million for 1998 compared to $11.9 million for 1997 mainly due to an increase of $2.0 million in service charges and other fee income. THE COMMERCE BANK OF WASHINGTON The Commerce Bank of Washington was acquired in September 1998 and accounted for as a pooling of interests. The bank operates one branch located in Seattle, Washington. Net income for 1998 was $.1 million including $5.4 million of after-tax merger expense compared to net income of $4.5 million for 1997 and $3.3 million for 1996. 11 12 INCOME STATEMENT ANALYSIS NET INTEREST INCOME, MARGIN AND INTEREST RATE SPREADS Net interest income on a tax-equivalent basis is the difference between interest earned on assets and interest paid on liabilities, with adjustments made to present income on assets exempt from income taxes comparable to other taxable income. Changes in the mix and volume of earning assets and interest-bearing liabilities, their related yields and overall interest rates have a major impact on earnings. In 1998, taxable-equivalent net interest income provided 73.1% of the Company's net revenues, compared with 70.9% in 1997 and 71.2% in 1996. The Company's taxable-equivalent net interest income increased by 58.4% to $541.9 million in 1998 as compared to $342.2 million in 1997 and $277.7 million in 1996. The increased level of taxable-equivalent net interest income was driven by a 46.3% and 35.1% growth in average earning assets for 1998 and 1997, respectively. The Company manages its earnings sensitivity to interest rate movements, in part, by matching the repricing characteristics of its assets and liabilities and, to a lesser extent, through the use of off-balance sheet arrangements such as caps, floors and interest rate exchange contracts. Net interest income from the use of such off-balance sheet arrangements for 1998 was $6.9 million compared to $2.5 million in 1997 and $2.0 million in 1996. The increase in net interest income was partially offset by the continued securitization and sale of loans. Securitized loan sales convert net interest income from loans to gains on loan sales and servicing revenue reported in noninterest income. Loan sales improve the Company's liquidity, limit its exposure to credit losses, and may reduce its capital requirements. The net interest margin, the ratio of taxable-equivalent net interest income to average earning assets, was 4.53% in 1998, 4.19% in 1997 and 4.59% in 1996. The decrease in the margin in 1997 was due primarily to interest expense on the $200 million in trust preferred securities issued in December 1996, and increased arbitrage activity in money market investments and short-term borrowings to mitigate the reduction in net interest income from the preferred securities. Schedule 1 analyzes the average balances, the amount of interest earned or paid, and the applicable rates for the various categories of earning assets and interest-bearing funds which represent the components of net interest income. Schedule 2 analyzes the year-to-year changes in net interest income on a fully taxable-equivalent basis for the years shown. In the schedules, the principle amounts of nonaccrual and renegotiated loans have been included in the average loan balances used to determine the rate earned on loans. Interest income on nonaccrual loans is included in income only to the extent that cash payments have been received and not applied to principal reductions. Interest on restructured loans is generally accrued at reduced rates. The incremental tax rate used for calculating the taxable-equivalent adjustment was 32% for all years presented. 12 13 SCHEDULE 1 DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY AVERAGE BALANCE SHEETS, YIELDS AND RATES
1998 1997 --------------------------------------- ----------------------------------- AMOUNT Amount AVERAGE OF AVERAGE Average of Average (Amounts in millions) BALANCE INTEREST (1) RATE Balance Interest (1) Rate ------- ---------- ------- ------- --------- ---------- ASSETS: Money market investments $ 1,559 $ 88.4 5.67% $ 1,492 $ 84.8 5.68% Securities: Held to maturity 2,227 152.4 6.84% 1,751 123.2 7.04% Available for sale 619 34.0 5.49% 500 34.4 6.88% Trading account 430 24.0 5.58% 276 16.2 5.87% -------- --------- -------- --------- Total securities 3,276 210.4 6.42% 2,527 173.8 6.88% -------- --------- -------- --------- Loans: Loans held for sale 202 14.3 7.08% 163 11.9 7.30% Net loans and leases (2) 6,919 659.1 9.53% 3,993 397.5 9.95% -------- --------- -------- --------- Total loans 7,121 673.4 9.46% 4,156 409.4 9.85% -------- --------- -------- --------- Total interest-earning assets $ 11,956 $ 972.2 8.13% $ 8,175 $ 668.0 8.17% --------- --------- Cash and due from banks 610 420 Allowance for loan losses (125) (75) Goodwill and core deposit intangibles 573 132 Other assets 460 317 -------- -------- Total Assets $ 13,474 $ 8,969 ======== ======= LIABILITIES: Interest-bearing deposits: Savings and NOW deposits $ 1,156 $ 35.2 3.04% $ 721 $ 21.3 2.95% Money market and super NOW deposits 3,442 121.2 3.52% 2,267 88.2 3.89% Time deposits under $100,000 1,573 81.6 5.19% 815 42.3 5.19% Time deposits $100,000 or more 823 45.5 5.53% 279 16.3 5.84% Foreign deposits 182 8.2 4.51% 142 6.4 4.51% -------- --------- -------- --------- Total interest-bearing deposits 7,176 291.7 4.06% 4,224 174.5 4.13% -------- --------- -------- --------- Borrowed funds: Securities sold, not yet purchased 202 10.0 4.95% 92 5.4 5.87% Federal funds purchased and security repurchase agreements 1,843 87.3 4.74% 2,170 113.0 5.21% Commercial paper 28 1.6 5.71% -- -- FHLB advances and other borrowings: Less than one year 63 4.0 6.35% 34 2.3 6.76% Over one year 114 6.6 5.79% 136 8.2 6.03% Long-term debt 347 29.1 8.39% 253 22.4 8.85% -------- --------- -------- --------- Total borrowed funds 2,597 138.6 5.34% 2,685 151.3 5.64% -------- --------- -------- --------- Total interest-bearing liabilities $ 9,773 $ 430.3 4.40% $ 6,909 $ 325.8 4.72% --------- --------- Noninterest-bearing deposits 2,255 1,276 Other liabilities 193 154 -------- -------- Total liabilities 12,221 8,339 Minority interest 9 -- Total shareholders' equity 1,244 630 -------- -------- Total liabilities and shareholders' equity $ 13,474 $ 8,969 ======== ======== Spread on average interest-bearing funds 3.73% 3.46% ==== ==== Net interest income and net yield on interest-earning assets $ 541.9 4.53% $ 342.2 4.19% ========= ==== ========= ====
(1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 13 14
1996 1995 1994 ------------------------------------------- ------------------------------------- ------------------------------------- Amount Amount Amount Average of Average Average of Average Average of Average Balance Interest (1) Rate Balance Interest (1) Rate Balance Interest(1) Rate --------- ---------- -------- ------- ---------- ---------- ------- ---------- ---------- $ 919 $ 51.5 5.60% $ 942 $ 56.0 5.94% $ 877 $ 35.4 4.04% 1,271 91.1 7.17% 1,138 83.3 7.32% 947 58.2 6.15% 457 30.1 6.59% 388 25.8 6.65% 340 20.6 6.06% 156 9.1 5.83% 147 9.2 6.26% 291 16.5 5.67% -------- --------- ------- --------- ------- --------- 1,884 130.3 6.92% 1,673 118.3 7.07% 1,578 95.3 6.04% -------- --------- ------- --------- ------- --------- 151 11.5 7.62% 116 9.3 8.02% 188 12.3 5.54% 3,098 308.3 9.95% 2,589 265.8 10.27% 2,478 225.7 9.11% -------- --------- ------- --------- ------- --------- 3,249 319.8 9.84% 2,705 275.1 10.17% 2,666 238.0 8.93% -------- --------- ------- --------- ------- --------- $ 6,052 $ 501.6 8.29% $ 5,320 $ 449.4 8.45% $ 5,121 $ 368.7 7.20% --------- --------- --------- 327 329 341 (71) (70) (70) 31 21 19 237 218 185 -------- ------- ------- $ 6,576 $ 5,818 $ 5,596 ======== ======= ======= $ 623 $ 19.4 3.11% $ 733 $ 22.7 3.10% $ 755 $ 22.5 2.98% 1,843 70.7 3.84% 1,484 61.8 4.16% 1,341 41.5 3.09% 668 35.0 5.24% 618 32.1 5.19% 519 20.6 3.97% 185 10.8 5.84% 147 8.8 5.99% 114 4.6 4.04% 121 5.4 4.46% 139 7.2 5.18% 108 4.4 4.07% -------- --------- ------- --------- ------- --------- 3,440 141.3 4.11% 3,121 132.6 4.25% 2,837 93.6 3.30% -------- --------- ------- --------- ------- --------- 77 4.4 5.71% 90 5.6 6.22% 184 11.0 5.98% 1,337 67.0 5.01% 1,048 57.2 5.46% 1,063 41.3 3.89% -- -- -- -- -- -- 18 1.2 6.67% 20 1.4 7.00% 33 1.8 5.45% 79 4.8 6.08% 94 6.0 6.38% 119 5.8 4.87% 58 5.2 8.97% 58 5.1 8.79% 59 4.8 8.14% -------- --------- ------- --------- ------- --------- 1,569 82.6 5.26% 1,310 75.3 5.75% 1,458 64.7 4.44% -------- --------- ------- --------- ------- --------- $ 5,009 $ 223.9 4.47% $ 4,431 $ 207.9 4.69% $ 4,295 $ 158.3 3.69% --------- --------- --------- 976 869 867 104 105 82 -------- ------- ------- 6,089 5,405 5,244 -- -- -- 487 413 352 -------- ------- ------- $ 6,576 $ 5,818 $5,596 ======== ======= ======= 3.82% 3.76% 3.51% ==== ==== ==== $ 277.7 4.59% $ 241.5 4.54% $ 210.4 4.11% ========= ===== ======= ===== ========= ====
14 15 SCHEDULE 2 ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATE
1998 OVER 1997 1997 OVER 1996 CHANGES DUE TO CHANGES DUE TO ------------------------ TOTAL --------------------- TOTAL (Amounts in Millions) VOLUME RATE (1) CHANGES VOLUME RATE (1) CHANGES ------ -------- ------- ------- ------ ------ INTEREST-EARNING ASSETS: Money market investments $ 3.5 $ 0.1 $ 3.6 $ 32.7 $ 0.6 $ 33.3 Securities: Held to maturity 31.9 (2.7) 29.2 34.1 (2.0) 32.1 Available for sale 6.2 (6.6) (0.4) 3.5 0.8 4.3 Trading account 8.6 (0.8) 7.8 7.1 -- 7.1 ------ ------ ------ ------ ------ ------ Total securities 46.7 (10.1) 36.6 44.7 (1.2) 43.5 ------ ------ ------ ------ ------ ------ Loans: Loans held for sale 2.7 (0.3) 2.4 0.9 (0.5) 0.4 Net loans and leases(2) 275.8 (14.2) 261.6 88.4 0.8 89.2 ------ ------ ------ ------ ------ ------ Total loans 278.5 (14.5) 264.0 89.3 0.3 89.6 ------ ------ ------ ------ ------ ------ Total interest-earning assets $328.7 $(24.5) $304.2 $166.7 $ (0.3) $166.4 ------ ------ ------ ------ ------ ------ INTEREST-BEARING LIABILITIES: Interest-bearing deposits: Savings and NOW deposits $ 14.6 $ (0.6) $ 14.0 $ 2.6 $ (0.7) $ 1.9 Money market and super NOW deposits 40.2 (7.3) 32.9 20.0 (2.5) 17.5 Time deposits under $100,000 39.3 -- 39.3 7.4 (0.1) 7.3 Time deposits $100,000 or more 30.1 (0.9) 29.2 5.7 (0.2) 5.5 Foreign deposits 1.8 -- 1.8 1.0 -- 1.0 ------ ------ ------ ------ ------ ------ Total interest-bearing deposits 126.0 (8.8) 117.2 36.7 (3.5) 33.2 ------ ------ ------ ------ ------ ------ Borrowed funds: Securities sold, not yet purchased 5.4 (0.8) 4.6 1.0 -- 1.0 Federal funds purchased and security repurchase agreements (15.6) (10.1) (25.7) 43.7 2.3 46.0 Commercial paper 0.8 0.8 1.6 -- -- -- FHLB advances and other borrowings: Less than one year 1.9 (0.2) 1.7 1.1 -- 1.1 Over one year (1.3) (0.3) (1.6) 3.5 (0.1) 3.4 Long-term debt 7.9 (1.2) 6.7 17.2 -- 17.2 ------ ------ ------ ------ ------ ------ Total borrowed funds (0.9) (11.8) (12.7) 66.5 2.2 68.7 ------ ------ ------ ------ ------ ------ Total interest-bearing liabilities $123.6 $(19.1) $104.5 $103.2 $ (1.3) $101.9 ------ ------ ------ ------ ------ ------ Change in net interest income $205.1 $ (5.4) $199.7 $ 63.5 $ 1.0 $ 64.5 ====== ====== ====== ====== ====== ======
(1) Taxable-equivalent income used where applicable. (2) Net of unearned income and fees. Loans include nonaccrual and restructured loans. In the analysis of interest changes due to volume and rate, the changes due to the volume/rate variance have been allocated to volume with the following exceptions: when volume and rate have both increased, the variance has been allocated proportionately to both volume and rate; when the rate has increased and volume has decreased, the variance has been allocated to rate. 15 16 PROVISION FOR LOAN LOSSES The provision for loan losses reflects management's judgment of the expense to be recognized in order to maintain an adequate allowance for loan losses. See the discussion on allowance for loan losses under Risk Elements. The provision for loan losses was $11.9 million in 1998 compared to $4.6 million in 1997 and $3.8 million in 1996. The provision was .17% of average loans for 1998, .11% in 1997 and .12% for 1996. NONINTEREST INCOME Noninterest income comprised 26.8% of net revenue in 1998 compared to 29.5% in 1997 and 29.3% in 1996. Noninterest income was $199.9 million in 1998, an increase of 42.1% over $140.7 million in 1997, which was up 25.6% over $112.1 million in 1996. Noninterest income for 1998 includes $5.3 million from Sumitomo since the acquisition date. Without Sumitomo, noninterest income increased 38.3% from 1997. Schedule 3 shows the major components of noninterest income. SCHEDULE 3 NONINTEREST INCOME
PERCENT PERCENT PERCENT PERCENT (Amounts in millions) 1998 CHANGE 1997 CHANGE 1996 CHANGE 1995 CHANGE 1994 ------ ------- ------ ------- ------ ------- ------ ------- ------- Service charges on deposit accounts $ 57.9 39.2% $ 41.6 25.7% $ 33.1 15.7% $ 28.6 18.2% $ 24.2 Other service charges, commissions and fees 54.4 41.7 38.4 32.9 28.9 14.7 25.2 10.5 22.8 Trust income 9.4 38.2 6.8 30.8 5.2 18.2 4.4 2.3 4.3 Investment securities gains (losses), net 2.0 150.0 .8 700.0 .1 -- -- -- (0.4) Underwriting and trading income (loss) 9.2 61.4 5.7 111.1 2.7 325.0 (1.2) (233.3) 0.9 Loan sales and servicing income 50.4 30.2 38.7 10.3 35.1 45.0 24.2 65.8 14.6 Other income 16.6 90.8 8.7 74.3 7.0 (15.7) 8.3 7.8 7.7 ------ ------ ------ ------ ------ Total $199.9 42.1 $140.7 25.6% $112.1 25.3% $ 89.5 15.4% $ 74.1 ====== ====== ====== ====== ======
The 39.2% and 25.7% increases in deposit service charges for 1998 and 1997 reflect the continued increase of the Company's deposit base through acquisitions and internal growth, as well as price adjustments. Other service charges, commissions and fees, which include investment brokerage and fiscal agent fees, electronic delivery system fees, insurance commissions, merchant fee income and other miscellaneous fees were $54.4 million in 1998, an increase of 41.7% over 1997 which was 32.9% above 1996. Loan sales and servicing income rose 30.2% in 1998 to $50.4 million over $38.7 million in 1997 which was 10.3% above 1996. Underwriting and trading income increased 61.4% to $9.2 million in 1998 from $5.7 million in 1997. During 1998, the Company commenced the providing of online executable government bond sales over Bloomberg and the Internet and the underwriting of municipal revenue bonds. Trust income increased to $9.4 million in 1998, up 38.2% from 1997, which was up 30.8% from 1996. Managed trust funds, including $649 million managed by California Bank & Trust, increased 58.2% to $2,876 million at year-end 1998 compared to $1,818 million at year-end 1997. Other income, which includes certain fees, income from unconsolidated subsidiaries and associated companies, net gains on sales of fixed assets, mortgage servicing and other assets, and other items was $16.6 million in 1998 an increase of 90.8% from 1997. The increase for 1998 was mainly due to increased income from the Company's investments in MACC Private Equities, Inc. and Federal Agricultural Mortgage Corporation accounted for under the equity method, income from bank-owned life insurance policies and increased gains from the sale of mortgage servicing. 16 17 NONINTEREST EXPENSE The Company's noninterest expense was $526.7 million in 1998, an increase of 82.1% over $289.2 million in 1997, which was up 31.2% over the $220.5 million in 1996. Included in 1998 expense was $38.1 million in merger expenses related to the Company's acquisitions during 1998. Also included for 1998 was an additional $35.9 million of other Sumitomo expense since the acquisition date. Without the merger and Sumitomo expense, noninterest expense for 1998 increased 69.7% over 1997. Schedule 4 shows the major components of noninterest expense. SCHEDULE 4 NONINTEREST EXPENSE
Percent Percent Percent Percent (Amounts in millions) 1998 Change 1997 Change 1996 Change 1995 Change 1994 ------- ------- -------- ------- ------ ------- ------- -------- ------ Salaries and benefits $ 247.6 61.0% $ 153.8 26.2 $121.9 14.0% $ 106.9 11.1% $ 96.2 Occupancy, net 29.7 92.9 15.4 32.8 11.6 9.4 10.6 7.1 9.9 Furniture and equipment 36.0 58.6 22.7 41.9 16.0 19.4 13.4 16.5 11.5 Other real estate expense 0.7 133.3 0.3 250.0 (0.2) (300.0) 0.1 200.0 (.1) Legal and professional services 15.3 104.0 7.5 59.6 4.7 4.4 4.5 (13.5) 5.2 Supplies 11.3 43.0 7.9 25.4 6.3 16.7 5.4 10.2 4.9 Postage 10.2 54.5 6.6 22.2 5.4 5.8 5.2 8.3 4.8 Advertising 11.8 73.5 6.8 28.3 5.3 9.9 5.2 52.9 3.4 FDIC premiums 1.4 75.0 0.7 -- -- -- 4.2 (46.2) 7.8 Merger expense 38.1 5,342.9 0.8 -- -- -- -- -- -- Amortization of goodwill/ core deposit intangibles 31.6 345.1 7.1 208.7 2.3 (36.1) 3.6 (2.7) 3.7 Amortization of mortgage servicing assets 5.5 150.0 2.2 69.2 1.3 -- -- -- -- Other expenses 87.5 52.4 57.4 25.1 45.9 22.7 37.4 14.7 32.6 ------- -------- ------ ------- ------ Total $ 526.7 82.1% $ 289.2 31.2% $220.5 12.2% $ 196.5 9.2% $179.9 ======= ======== ====== ======= ======
In 1998 and 1997, salaries and employee benefits increased primarily as a result of increased staffing from acquisitions and the opening of new offices, as well as general salary increases and bonuses which are based on increased profitability. The occupancy, furniture and equipment expense increase resulted primarily from the addition of office facilities, installation of personal computers and local area networks and expenses related to technology initiatives. The increase in all other expenses resulted primarily from increases related to acquisitions and expansion and increased expenditures in selected areas to enhance revenue growth. On December 31, 1998, the Company had 6,793 full-time equivalent employees and 333 offices for increases of 54.6% and 44.8%, respectively, compared to year-end 1997. On December 31, 1997, the Company had 4,393 full-time equivalent employees and 230 offices for increases of 40.9% and 60.8%, respectively, compared to year-end 1996. The Company's operating cash "efficiency ratio," or noninterest expenses, excluding amortization of goodwill and core deposit intangibles and merger expenses, as a percentage of total taxable-equivalent net revenues, increased to 61.6% in 1998 compared to 58.4% in 1997 and 56.0% in 1996. 17 18 INCOME TAXES The Company's income tax expense for 1998 was $64.7 million compared to $62.7 million in 1997 and $53.7 million in 1996. The Company's effective income tax rate was 33.1% in 1998, 34.3% in 1997 and 33.9% in 1996. The decrease in the effective tax rate for 1998 results primarily from decisions regarding a corporate reorganization over the past year. BALANCE SHEET ANALYSIS EARNING ASSETS Earning assets consist of money market investments, securities and loans. A comparative average balance sheet report, including earning assets, is presented in Schedule 1. Average earning assets increased 46.2% to $11,956 million in 1998 compared to $8,175 million in 1997. Earning assets comprised 88.7% of total average assets in 1998 compared with 91.2% in 1997. Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements increased 4.5% to $1,559 million in 1998 compared to $1,492 million in 1997. Average securities increased 29.6% to $3,276 million in 1998, compared to $2,527 million in 1997. Average held to maturity securities increased 27.2% to $2,227 million, available for sale securities increased 23.8% to $619 million and trading account securities increased 55.8% to $430 million. Average net loans and leases increased 71.3% to $7,121 million in 1998 compared to $4,156 million in 1997, representing 59.6% of earning assets in 1998 compared to 50.8% in 1997. Average net loans and leases were 75.5% of average total deposits in 1998, as compared to 75.6% in 1997. INVESTMENT SECURITIES PORTFOLIO Schedule 5 presents the Company's year-end investment securities on December 31, 1998, 1997, and 1996. Schedule 6 presents the Company's maturities and average yields on securities on December 31, 1998. See Note 3 of Notes to Consolidated Financial Statements for additional information about securities. 18 19 SCHEDULE 5 INVESTMENT SECURITIES PORTFOLIO
December 31, ------------------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------------------ AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET (Amounts in millions) COST VALUE COST VALUE COST VALUE ------------------------------------------------------------------------ HELD TO MATURITY: U.S. Treasury securities $ 62 $ 63 $ 4 $ 4 $ 4 $ 4 U.S. government agencies and corporations: Small Business Administration loan- backed securities 358 356 441 449 488 492 Other agency securities 941 944 1,422 1,427 530 529 States and political subdivisions 285 293 222 227 263 268 Mortgage-backed securities 1,159 1,166 82 83 61 62 ------ ------ ------ ------ ------ ------ 2,805 2,822 2,171 2,190 1,346 1,355 ------ ------ ------ ------ ------ ------ AVAILABLE FOR SALE: U.S. Treasury securities 46 47 37 38 20 20 U.S. government agencies and corporations: Small Business Administration originator fees certificates 85 68 75 72 50 46 Other agency securities 113 114 146 146 110 111 States and political subdivisions 15 16 26 27 40 41 Mortgage- and other asset-backed securities 179 180 28 28 87 85 ------ ------ ------ ------ ------ ------ 438 425 312 311 307 303 ------ ------ ------ ------ ------ ------ Equity securities: Mutual funds: Accessor Funds, Inc. 117 118 110 111 109 109 Stock: Federal Home Loan Bank 101 101 91 91 80 80 Other 36 41 27 32 15 16 ------ ------ ------ ------ ------ ------ 254 260 228 234 204 205 ------ ------ ------ ------ ------ ------ 692 685 540 545 511 508 ------ ------ ------ ------ ------ ------ Total $3,497 $3,507 $2,711 $2,735 $1,857 $1,863 ====== ====== ====== ====== ====== ======
19 20 SCHEDULE 6 MATURITIES AND AVERAGE YIELDS ON SECURITIES ON DECEMBER 31, 1998
TOTAL WITHIN AFTER ONE AFTER FIVE SECURITIES ONE YEAR BUT WITHIN BUT WITHIN AFTER ----------------- ---------------- FIVE YEARS TEN YEARS TEN YEARS ----------------- --------------- ----------- (AMOUNTS IN MILLIONS) AMOUNT YIELD* AMOUNT YIELD* AMOUNT YIELD* AMOUNT YIELD* AMOUNT YIELD* ------ ------ ------- ------- ------ ------ ------ ------ ------ ------ HELD TO MATURITY: U.S. TREASURY SECURITIES $ 62 6.0% $ 61 6.0% $ 1 6.3% $ -- $ -- U. S. GOVERNMENT AGENCIES AND CORPORATIONS: SMALL BUSINESS ADMINISTRATION LOAN- BACKED SECURITIES 358 6.5% 75 6.5% 157 6.4% 83 6.5% 43 6.6% OTHER AGENCY SECURITIES 941 6.3% 42 5.8% 337 6.5% 530 6.2% 32 7.7% STATES AND POLITICAL SUBDIVISIONS 285 7.8% 41 7.4% 129 7.8% 64 7.9% 51 7.6% MORTGAGE-BACKED SECURITIES 1,159 6.4% 393 6.4% 606 6.4% 135 6.4% 25 6.4% ------ ------ ------ ------ ------ 2,805 6.5% 612 6.4% 1,230 6.6% 812 6.4% 151 7.1% ------ ------ ------ ------ ------ AVAILABLE FOR SALE: U.S. TREASURY SECURITIES 46 6.1% 29 6.0% 17 6.2% -- -- U. S. GOVERNMENT AGENCIES AND CORPORATIONS: SMALL BUSINESS ADMINISTRATION ORIGINATOR FEES CERTIFICATES** 85 3.6% 13 3.6% 37 3.6% 22 3.6% 13 3.6% OTHER AGENCY SECURITIES 113 6.1% 12 5.8% 92 6.1% 8 6.3% 1 5.3% STATES AND POLITICAL SUBDIVISIONS 15 7.2% 2 5.8% 7 7.6% 6 7.1% -- MORTGAGE- AND OTHER ASSET- BACKED SECURITIES 179 6.0% 39 5.7% 79 6.0% 28 6.0% 33 6.3% ------ ------ ------ ------ ------ 438 6.7% 95 6.3% 232 6.6% 64 7.3% 47 7.1% ------ ------ ------ ------ ------ EQUITY SECURITIES: MUTUAL FUNDS: ACCESSOR FUNDS, INC 117 4.7% -- -- -- 117 4.7% STOCK: FEDERAL HOME LOAN BANK 101 7.5% -- -- -- 101 7.5% OTHER 36 9.5% -- -- -- 36 9.5% ------ ------ ------ ------ ------ 254 6.5% -- -- -- 254 6.5% ------ ------ ------ ------ ------ 692 6.6% 95 6.3% 232 6.6% 64 7.3% 301 6.6% ------ ------ ------ ------ ------ TOTAL $3,497 6.5% $ 707 6.4% $1,462 6.6% $ 876 6.4% $ 452 6.8% ====== ====== ====== ====== ======
* TAXABLE-EQUIVALENT RATES USED WHERE APPLICABLE. ** RATES DETERMINED USING A 16% CONSTANT PREPAYMENT RATE. 20 21 LOAN PORTFOLIO During 1998, the Company consummated securitized loan sales of automobile loans, credit card receivables, home equity credit lines, Small Business Administration and Federal Agricultural Mortgage Corporation ("Farmer Mac") loans totaling $895 million. The Company also sold $1,238 million of long-term residential mortgage loans, SBA loans, Farmer Mac loans and student loans classified as held for sale. After these sales, loans and leases on December 31, 1998 totaled $10,685 million, an increase of 110.9% compared to $5,065 million on December 31, 1997. Included in this increase are loans from acquisitions totaling $4,564 million. Excluding the acquired loans the increase for 1998 compared to 1997 was 20.9%. Schedule 7 sets forth the amount of loans outstanding by type on December 31 for the years indicated and the maturity distribution and sensitivity to changes in interest rates of the portfolio on December 31, 1998. SCHEDULE 7 LOAN PORTFOLIO BY TYPE
December 31, 1998 --------------------------------------- ONE ONE YEAR OVER DECEMBER 31, YEAR THROUGH FIVE --------------------------------------- (Amounts in millions) OR LESS FIVE YEARS YEARS TOTAL 1997 1996 1995 1994 -------- ---------- ----- --------- ------- ------- ------- ------ Loans held for sale $ 232 $ -- $ -- $ 232 $ 179 $ 151 $ 126 $ 109 Commercial, financial and agricultural 1,609 756 327 2,692 1,287 843 745 540 Real estate: Construction 667 191 9 867 491 329 271 219 Other: Home equity credit line 78 42 102 222 154 179 99 45 1-4 family residential 233 306 1,648 2,187 726 546 432 464 Other real estate-secured 554 1,060 2,013 3,627 1,501 1,068 770 576 ------- ------- ------- ------- ------- ------- ------- ------- 1,532 1,599 3,772 6,903 2,872 2,122 1,572 1,304 ------- ------- ------- ------- ------- ------- ------- ------- Consumer: Bankcard 34 52 1 87 61 38 53 43 Other 144 252 56 452 397 271 293 358 ------- ------- ------- ------- ------- ------- ------- ------- 178 304 57 539 458 309 346 401 ------- ------- ------- ------- ------- ------- ------- ------- Lease financing 9 153 51 213 176 160 133 130 Foreign loans 21 7 16 44 -- -- -- -- Other receivables 36 21 5 62 93 38 31 30 ------- ------- ------- ------- ------- ------- ------- ------- Total loans $ 3,617 $ 2,840 $ 4,228 $10,685 $ 5,065 $ 3,623 $ 2,953 $ 2,514 ======= ======= ======= ======= ======= ======= ======= ======= Loans maturing in more than one year: With fixed interest rates $ 1,489 $ 2,467 $ 3,956 With variable interest rates 1,351 1,761 3,112 ------- ------- ------- Total $ 2,840 $ 4,228 $ 7,068 ======= ======= =======
21 22 SOLD LOANS BEING SERVICED On December 31, 1998, long-term first mortgage real estate loans serviced for others amounted to $1,995 million compared to $1,897 million on December 31, 1997, and $1,542 million on December 31, 1996. Consumer and other loan securitizations serviced, which relate primarily to loans sold under revolving securitization structures, totaled $1,057 million on December 31, 1998, $1,050 million on December 31, 1997, and $868 million on December 31, 1996. The Company's activity in its sold loans being serviced portfolio (excluding long-term first mortgage real estate loans) is summarized as follows: SCHEDULE 8 SOLD LOANS BEING SERVICED
1998 1997 1996 -------------------------------------------------------------------------------------- OUTSTANDING Outstanding Outstanding (Amounts in millions) SALES AT YEAR END Sales at year end Sales at year end ----- ----------- ----- ----------- ----- ----------- Auto loans $ 198 $ 345 $ 201 $ 389 $ 284 $ 434 Home equity credit lines 261 261 342 327 180 220 Bankcard receivables 283 134 232 79 238 85 Home refinance loans -- 23 -- 45 -- 68 SBA 504 loans 4 100 115 131 -- 31 SBA 7(a) loans 39 90 38 56 41 30 Farmer Mac 110 104 23 23 -- -- ------ ------ ------ ------ ------ ------ Total $ 895 $1,057 $ 951 $1,050 $ 743 $ 868 ====== ====== ====== ====== ====== ======
22 23 DEPOSITS AND BORROWED FUNDS As derived from Schedule 1, total average deposits increased 71.5% to $9,431 million in 1998 from $5,500 million in 1997. Average noninterest-bearing deposits increased 76.7%, average savings and NOW deposits increased 60.3%, average money market and super NOW deposits increased 51.8%, and average time deposits under $100,000 increased 92.9%. Average time deposits over $100,000 increased 195.4% over 1997 average balances and average foreign deposits increased 28.5% for 1998, as compared with 1997. Total deposits increased 87.9% to $13,321 million on December 31, 1998 as compared to $7,090 million on December 31, 1997. Included in this increase are deposits from acquisitions totaling $5,555 million. Without the acquired deposits the increase was 9.5%. Comparing December 31, 1998 to December 31, 1997, demand deposits increased 70.7%, savings and money market deposits increased 69.0%, time deposits under $100,000 increased 132.4%, while time deposits over $100,000 increased 242.1% and foreign deposits increased 11.6%. See Notes 9, 10 and 11 of Notes to Consolidated Financial Statements and the discussion under Liquidity Risk Management for information on borrowed funds. CAPITAL The Company's basic financial objective is to consistently produce superior risk-adjusted returns on its shareholders' capital. The Company believes that a strong capital position is vital to continued profitability and to promote depositor and investor confidence. The Company's goal is to steadily achieve a high return on shareholders' equity, while at the same time maintaining "risk-based capital" of not less than the "well-capitalized" threshold, as defined by federal banking regulators. Total shareholders' equity on December 31, 1998 was $1,385 million, an increase of 72.5% over the $803 million on December 31, 1997. The ratio of average equity to average assets for the year 1998 was 9.23%, compared to 7.03% for 1997. During 1998, 1997 and 1996, the Company repurchased and retired 591,009, 3,649,018 and 1,306,041 shares of its common stock at a cost of $25.7 million, $121.3 million and $25.1 million, respectively. On December 31, 1998, the Company's Tier 1 leverage ratio was 5.86%, as compared to 6.96% on December 31, 1997. On December 31, 1998, the Company's Tier 1 risk-based capital ratio was 8.34%, as compared to 12.17% on December 31, 1997. On December 31, 1998 the Company's total risk-based capital ratio was 11.38%, as compared to 14.11% on December 31, 1997. Regulatory minimum capital adequacy ratios for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital are 3%, 4% and 8%, respectively Ratios to be considered well capitalized are 5%, 6% and 10%, respectively. The decreases in regulatory capital ratios from 1997 are primarily related to the acquisition of The Sumitomo Bank of California. See Note 17 of Notes to Consolidated Financial Statements for additional information on risk-based capital. 23 24 DIVIDENDS Dividends per share were $.54 in 1998, an increase of 14.9% over $.47 in 1997, which were up 10.6% over $.425 in 1996. The Company's quarterly dividend rate was $.1025 for the first and second quarters of 1996, increasing to $.11 per share for the third and fourth quarters of 1996 and the first quarter of 1997, increasing to $.12 per share for the second, third and fourth quarters of 1997 and the first quarter of 1998, increasing to $.14 per share for the second, third and fourth quarters of 1998. RISK ELEMENTS CREDIT RISK MANAGEMENT Management of credit risk is essential in maintaining a safe and sound institution. The Company has structured its organization to separate the lending function from the credit administration function to strengthen the control and independent evaluation of credit activities. Loan policies and procedures provide the Company with a framework for consistent underwriting and a basis for sound credit decisions. In addition, the Company has well-defined standards for grading its loan portfolio, and management utilizes a comprehensive loan grading system to determine risk potential in the portfolio. A separate internal credit examination department periodically conducts examinations of the quality, documentation and administration of the Company's lending departments, and submits reports thereon to a committee of the board of directors. Emphasis is placed on early detection of potential problem credits so that action plans can be developed on a timely basis to mitigate losses. Another aspect of the Company's credit risk management strategy is the diversification of the loan portfolio. At year end, the Company had 2% of its portfolio in loans held for sale, 25% in commercial loans, 65% in real estate loans, 5% in consumer loans, 2% in lease financing and 1% in other loans. The Company's real estate portfolio is also diversified. Of the total portfolio, 12% is in real estate construction loans, 3% is in home equity credit lines, 32% is in 1-4 family residential loans and 53% is in commercial loans secured by real estate. The Company's commercial real estate concentration is in part mitigated by its emphasis of lending programs sponsored by the Small Business Administration, which carries the preponderance of credit risk on these types of loans. The Company also focuses on the provision of commercial real estate credit to borrowers that occupy the facility. In addition, the Company attempts to avoid the risk of an undue concentration of credits in a particular industry or trade group. See Note 5 of Notes to Consolidated Financial Statements for further information on concentrations of credit risk. The Company has no significant exposure to highly leveraged transactions. Most of the Company's business activity is with customers located within the states of Utah, Idaho, California, Colorado, Arizona, Nevada and Washington. Also, the Company does not have significant exposure to any individual customer or counterparty. 24 25 NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans, restructured loans and other real estate owned. Loans are generally placed on nonaccrual status when the loan is 90 days or more past due as to principal or interest, unless the loan is in the process of collection and well-secured. Consumer loans are not placed on a nonaccrual status, inasmuch as they are generally charged off when they become 120 days past due. Loans are restructured to provide a reduction or deferral of interest or principal payments when the financial condition of the borrower deteriorates and requires that the borrower be given temporary or permanent relief from the original contractual terms of the credit. Other real estate owned is primarily acquired through or in lieu of foreclosure on credits secured by real estate. The Company's nonperforming assets were $64 million on December 31, 1998, up from $16 million on December 31, 1997. Such nonperforming assets as a percentage of net loans and leases, other real estate owned and other nonperforming assets were .60% on December 31, 1998, as compared to .32% on December 31, 1997. Included in nonperforming assets on December 31, 1998 are $23 million in nonaccrual loans and $4 million in restructured loans acquired in The Sumitomo Bank of California acquisition. Accruing loans past due 90 days or more totaled $26 million on December 31, 1998, up from $10 million on December 31, 1997. These loans equaled .24% of net loans and leases on December 31, 1998, as compared to .20% on December 31, 1997. No loans were considered potential problem loans on December 31, 1998 or 1997. Potential problem loans are defined as loans presently on accrual and not contractually past due 90 days or more and not restructured, but about which management has serious doubt as to the future ability of the borrower to comply with present repayment terms and which may result in the reporting of the loans as nonperforming assets in the future. The Company's total recorded investment in impaired loans included in nonaccrual loans and leases amounted to $41 million and $7.1 million on December 31, 1998 and 1997, respectively. The Company considers a loan to be impaired when the accrual of interest has been discontinued and meets other criteria under the statements. The amount of the impairment is measured based on the present value of expected cash flows, the observable market price of the loan, or the fair value of the collateral. Impairment losses are included in the allowance for loan losses through a provision for loan losses. Included in the allowance for loan losses on December 31, 1998 and 1997, is an allowance of $5 million and $46 thousand, respectively, on $11.6 million and $.3 million, respectively, of the recorded investment in impaired loans. Included in the 1998 totals are $23 million investment in impaired loans and a reserve of $4 million for these loans acquired in the Sumitomo acquisition. 25 26 SCHEDULE 9 NONPERFORMING ASSETS
December 31, ---------------------------------------------------------------- (Amounts in millions) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Nonaccrual loans: Commercial, financial and agricultural $11 $ 4 $ 5 $ 3 $ 6 Real estate 39 7 5 3 6 Consumer 1 -- 1 1 1 Lease financing 3 1 1 1 1 Other -- -- -- -- -- --- --- --- --- --- Total 54 12 12 8 14 --- --- --- --- --- Restructured loans: Real estate 5 1 1 -- 1 --- --- --- --- --- Other real estate owned: Commercial, financial and agricultural: Improved -- 2 -- -- 1 Unimproved -- -- -- -- 1 Residential: 1-4 Family 2 1 -- 1 -- Multi-family -- -- -- -- -- Other 3 -- -- -- -- --- --- --- --- --- Total 5 3 -- 1 2 Other nonperforming assets -- -- -- 1 3 --- --- --- --- --- Total 5 3 -- 2 5 --- --- --- --- --- Total $64 $16 $13 $10 $20 === === === === === % of Net loans* and leases, other real estate owned and other nonperforming assets .60% .32% .35% .33% .79% Accruing loans past due 90 days or more: Commercial, financial and agricultural $ 5 $ 2 $ 1 $ 1 $-- Real estate 20 7 2 3 2 Consumer 1 1 1 1 1 --- --- --- --- --- Total $26 $10 $ 4 $ 5 $ 3 === === === === === % of Net loans* and leases .24% .20% .10% .18% .12%
*Includes loans held for sale. 26 27 ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was 1.93% of net loans and leases on December 31, 1998 compared to 1.65% on December 31, 1997. Net charge-offs in 1998 were $15 million, or .21% of average loans and leases, compared to net charge-offs of $8 million, or .20% of average net loans and leases in 1997 and net charge-offs of $4 million, or .11% of average net loans and leases in 1996. The allowance, as a percentage of nonaccrual loans and restructured loans, was 347.86% on December 31, 1998, compared to 657.64% on December 31, 1997 and 574.57% on December 31, 1996. The allowance, as a percentage of nonaccrual loans and accruing loans past due 90 days or more was 258.04% on December 31, 1998, compared to 379.15% on December 31, 1997, and 472.89% on December 31, 1996. On December 31, 1998, 1997 and 1996, the allowance for loan losses includes an allocation of $20 million, $9 million and $6 million respectively, related to commitments to extend credit on loans and standby letters of credit. Commitments to extend credit on loans and standby letters of credit on December 31, 1998, 1997 and 1996, totaled $4,758 million, $2,534 million, and $1,907 million, respectively. The Company's actual future credit exposure is much lower than the contractual amounts of the commitments because a significant portion of the commitments is expected to expire without being drawn upon. In analyzing the adequacy of the allowance for loan and lease losses, management utilizes a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of independent internal and external credit review. To determine the adequacy of the allowance, the Company's loan and lease portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and conditions, are used in determining the required allowance for each segment. Historical loss factors are evaluated and updated using migration analysis techniques and other considerations based on the makeup of the specific portfolio segment. Other considerations such as volumes and trends of delinquencies, nonaccruals, repossessions and bankruptcies, criticized and classified loan trends, current and anticipated foreclosure losses, new products and policies, economic conditions, concentrations of credit risk, and experience and abilities of lending personnel are also considered in establishing the loss factors. All loans graded substandard in the amount of $1 million or more and all credits graded doubtful in the amount of $100 thousand or more are individually evaluated based on facts and circumstances of the loan and a specific allowance amount designated. Specific allowances may also be established for loans in amounts below the specified thresholds when it is determined that the risk differs significantly from factor amounts established for the category. Although management has allocated a portion of the allowance to specific loan categories using the methods described, the adequacy of the allowance must be considered in its entirety. To mitigate the imprecision in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated portion of the allowance includes management's judgmental determination of the amounts necessary for subjective factors such as economic uncertainties and concentration risks. Accordingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Schedule 10 provides a breakdown of the allowance for loan losses by loan category and Schedule 11 summarizes loan loss experience. The increases in the allocated allowance at year-end 1998 compared to year-end 1997 for commercial, financial and agricultural and real estate loans are a result of the acquisition of The Sumitomo Bank of California. 27 28 SCHEDULE 10 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1998 1997 1996 ---- ---- ---- (Amounts in millions) % OF ALLOCATION % OF ALLOCATION % OF ALLOCATION TOTAL OF TOTAL OF TOTAL OF LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE ----- --------- ----- --------- ----- --------- Type of loan Loans held for sale 2.2% $ -- 3.5% $ -- 4.2 $ -- Commercial, financial and agricultural 25.3% 81 25.4% 15 23.3% 14 Real estate 64.8% 47 56.8% 24 58.5% 25 Consumer 5.1% 12 9.0% 10 8.5% 8 Lease financing 2.0% 6 3.5% 2 4.4% 2 Other receivables 0.6% -- 1.8% -- 1.1% -- Total loans 100.0% 100.0% 100.0% Off-balance sheet unused commit- ments and standby letters of credit 20 9 6 ---- ---- ---- Total allocated 166 60 55 Unallocated 40 23 17 ---- ---- ---- Total allowance for loan losses $206 $ 83 $ 72 ==== ==== ====
1995 1994 ---- ---- (Amounts in millions) % OF ALLOCATION % OF ALLOCATION TOTAL OF TOTAL OF LOANS ALLOWANCE LOANS ALLOWANCE ----- --------- ----- --------- Type of loan Loans held for sale 4.3% $ -- 4.3% $ -- Commercial, financial and agricultural 25.2% 10 21.5% 9 Real estate 53.3% 16 51.9% 12 Consumer 11.7% 11 15.9% 11 Lease financing 4.5% 2 5.2% 2 Other receivables 1.0% -- 1.2% -- Total loans 100.0% 100.0% Off-balance sheet unused commit- ments and standby letters of credit 8 5 ----- ---- Total allocated 47 39 Unallocated 22 30 ----- ---- Total allowance for loan losses $ 69 $ 69 ===== ====
28 29 SCHEDULE 11 SUMMARY OF LOAN LOSS EXPERIENCE
(Amounts in millions) 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Loans* and leases outstanding on December 31 (net of unearned income) $ 10,636 $ 5,023 $ 3,585 $ 2,922 $ 2,489 ======== ======== ======== ======== ======== Average loans* and leases outstanding (net of unearned income) $ 7,121 $ 4,156 $ 3,249 $ 2,705 $ 2,666 ======== ======== ======== ======== ======== Allowance for loan losses: Balance at beginning of year $ 83 $ 72 $ 69 $ 69 $ 70 Allowance of companies acquired 126 14 3 -- 1 Provision charged against earnings 12 5 4 3 2 Loans and leases charged off: Commercial, financial and agricultural (8) (5) (1) (1) (5) Real estate (6) (1) (1) (1) -- Consumer (9) (8) (8) (7) (5) Lease financing (1) -- -- -- (1) -------- -------- -------- -------- -------- Total (24) (14) (10) (9) (11) -------- -------- -------- -------- -------- Recoveries: Commercial, financial and agricultural 3 2 2 3 2 Real estate 3 2 1 -- 1 Consumer 3 2 2 3 4 Lease financing -- -- 1 -- -- -------- -------- -------- -------- -------- Total 9 6 6 6 7 -------- -------- -------- -------- -------- Net loan and lease charge-offs (15) (8) (4) (3) (4) -------- -------- -------- -------- -------- Balance at end of year $ 206 $ 83 $ 72 $ 69 $ 69 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans and leases .21% .20% .11% .10% .19% Ratio of allowance for loan losses to loans and leases outstanding on December 31 1.93% 1.65% 2.01% 2.37% 2.76% Ratio of allowance for loan losses to nonperforming loans on December 31 347.86% 657.64% 574.57% 863.44% 457.12% Ratio of allowance for loan losses to nonaccrual loans and accruing loans past due 90 days or more on December 31 258.04% 379.15% 472.89% 527.32% 392.42%
*Includes loans held for sale. 29 30 MARKET RISK MANAGEMENT Market risk is the possibility that changes in interest rates or equity securities prices will impair the fair value of the Company's financial instruments. The Asset/Liability Committee (ALCOM) measures and reviews the market risk of the Company and establishes policies and procedures to limit its exposure to changes in interest rates. These policies are reviewed and approved by the Boards of Directors of the Company's subsidiary banks. ALCOM objectives are summarized as follows: ensure the safety and soundness of bank deposits, while providing an appropriate return to shareholders; provide the basis for integrated balance sheet, net interest income and liquidity management; calculate the duration, dollar duration, and convexity of each class of assets, liabilities, and net equity given defined interest rate scenarios; manage the Company's exposure to changes in net interest income and market value of equity due to interest rate fluctuations; quantify the effect of hedging instruments on the market value of equity and net interest income under defined interest rate scenarios; and identify and report any risk exposures that exceed limitations approved by the Board of Directors. Interest rate risk is the most significant market risk regularly undertaken by the Company. This risk is monitored through the use of two complementary measurement methods: equity duration and income simulation. Equity duration is derived by first calculating the dollar duration of all assets, liabilities and off-balance sheet investments. Dollar duration is determined by calculating the market value of each instrument assuming interest rates sustain immediate and parallel movements up 1% and down 1%. The average of these two changes in market value is the dollar duration, which incorporates the value of embedded and explicit options within each instrument. Subtracting the dollar duration of liabilities from the dollar duration of assets and adding the net dollar duration of off-balance sheet items results in the dollar duration of equity. Duration of equity is computed by dividing the dollar duration of equity by the market value of equity. Income simulation is an estimate of the net interest income which would be recognized under different rate environments. Net interest income is measured under several parallel and non-parallel interest rate environments and considers the possible exercise of options within the portfolio. At year-end, the Company's duration of equity was estimated to be approximately 2.1 years. A 200 basis point immediate increase in rates was estimated to increase the duration of equity to 4.5 years. Conversely, an immediate decrease in rates of similar magnitude was estimated to decrease the duration of equity to .5 years. Company policy requires that all three of these measures be between 0 and 7 years. For income simulation, Company policy requires that net interest income not be expected to decline by more than 10% during one year if rates were to immediately rise or fall by 200 basis points. At year-end, net interest income was expected to decline 4.3% if interest rates were to sustain an immediate increase of 200 basis points. If interest rates were to similarly decline 200 basis points, net interest income would be expected to increase 2.4%. These estimates include management's assumptions regarding loan and deposit pricing, security and loan prepayments, and changing relationships to market rates. 30 31 Management exercises its best judgment in making assumptions regarding loan and security prepayments, early deposit withdrawals, and other non-controllable events in managing the Company's exposure to changes in interest rates. The interest rate risk position is actively managed and changes daily as the interest rate environment changes; therefore, positions at the end of any period may not be reflective of the Company's position in any subsequent period. At year-end the one-year gap for the Company was negative $335 million: i.e., the $9,478 million of assets that mature or reprice during 1999 was less than the sum of $9,019 million of liabilities and the $794 million net effect of off-balance sheet swaps that mature or reprice during the same period. This gap represented 2.0% of total assets. Detail of the repricing characteristics of the balance sheet as of year-end are presented in Schedule 12. The Company does not have policy limits regarding its gap position. 31 32 SCHEDULE 12 MATURITIES AND INTEREST RATE SENSITIVITY ON DECEMBER 31, 1998
Rate Sensitive --------------------------------------------------- After Three After one Within Months year but three But within within After five Not rate (Amounts in millions) months One year five years Years Sensitive Total --------- ----------- ---------- ---------- ---------- ----- USES OF FUNDS Earning Assets: Interest-bearing deposits $ 12 $ 6 $ 12 $ 30 Federal funds sold 199 199 Security resell agreements 382 382 Securities: Held to maturity 960 907 433 $ 505 2,805 Available for sale 307 49 237 92 685 Trading account 192 192 Loans and leases 5,316 1,148 2,342 1,830 10,636 Nonearning assets $ 2,091 2,091 -------- -------- -------- -------- -------- -------- Total uses of funds $ 7,368 $ 2,110 $ 3,024 $ 2,427 $ 2,091 $ 17,020 -------- -------- -------- -------- -------- -------- SOURCES OF FUNDS Interest-bearing deposits and liabilities: Savings and money market deposits $ 2,028 $ 1,215 $ 2,025 $ 810 $ 6,078 Time deposits under $100,000 1,221 741 378 1 2,341 Time deposits $100,000 or more 802 599 127 1,528 Foreign 204 204 Securities sold, not yet purchased 30 30 Federal funds purchased 337 337 Security repurchase agreements 933 933 Commercial paper 43 6 49 FHLB advances and other borrowings: Less than one year 75 26 101 Over one year 2 29 26 57 Long-term debt 142 2 71 239 454 Noninterest-bearing deposits 613 $ 2,557 3,170 Other liabilities 318 318 Minority interest 35 35 Shareholders' equity 1,385 1,385 -------- -------- -------- -------- -------- -------- Total sources of funds $ 6,428 $ 2,591 $ 2,630 $ 1,076 $ 4,295 $ 17,020 -------- -------- -------- -------- -------- -------- Off-balance sheet items affecting interest rate sensitivity $ (1,029) $ 235 $ 751 $ 43 Interest rate sensitivity gap $ (89) $ (248) $ 1,144 $ 1,394 $ (2,201) Percent of total assets (.5)% (1.5)% 6.9% 8.4% (13.3)% Cumulative interest rate sensitivity gap $ (89) $ (337) $ 807 $ 2,201 Cumulative as a % of total assets (.5)% (2.0)% 4.9% 13.3%
The Company, through the management of maturities and repricing of its assets and liabilities and the use of off-balance sheet arrangements, including interest rate caps, floors, futures, options and exchange agreements, attempts to manage the effect on net interest income of changes in interest rates. The prime lending rate is the primary basis used for pricing the Company's loans and the 91-day Treasury bill rate is the index used for pricing many of the Company's deposits. The Company, however, is unable to economically hedge the prime/T-bill spread risk through the use of derivative financial instruments. Interest rate swap maturities and average rates are presented in Schedule 13. For additional information regarding off-balance sheet financial contracts, refer to Notes 1, 12 and 19 of Notes to Consolidated Financial Statements. 32 33 SCHEDULE 13 INTEREST RATE SWAP MATURITIES AND AVERAGE RATES
(Amounts in millions) 1999 2000 2001 2002 THEREAFTER TOTAL ---------- ----------- ---------- --------- ---------- --------- Receive fixed rate: Notional amount $ 300 $ 221 $ 206 $ 236 $ 244 $ 1,207 Weighted average rate received 6.19% 6.28% 6.23% 6.39% 6.20% 6.25% Weighted average rate paid 5.48% 5.50% 5.28% 5.34% 5.45% 5.42% Receive floating rate: Notional amount $ 45 $ 67 $ 40 $ 6 $ 158 Weighted average rate received 5.64% 5.25% 5.24% 5.25% 5.36% Weighted average rate paid 5.90% 4.75% 7.00% 7.98% 5.77%
LIQUIDITY RISK MANAGEMENT The Company manages its liquidity to provide adequate funds to meet its financial obligations, including withdrawals by depositors and debt service requirements as well as to fund customers' demand for credit. Liquidity is primarily provided by the regularly scheduled maturities of the Company's investment and loan portfolios. Management of the maturities of these portfolios is an important source of medium- to long-term liquidity. The Company's ability to raise funds in the capital markets through the securitization process allows it to take advantage of market opportunities to meet funding needs at a reasonable cost. To meet the Company's short-term liquidity needs, on December 31, 1998 the Company had cash, money market investments, and liquid securities net of short-term or "purchased" liabilities and foreign deposits, of $1.7 billion or 14.5% of core deposits. The Company's core deposits, consisting of demand, savings, money market, and time deposits under $100,000, constituted 87.0% of total deposits at year-end. The Parent Company's cash requirements consist primarily of debt service, dividends to shareholders, operating expenses, income taxes and share repurchases. The Parent's cash needs are routinely met through dividends from subsidiaries, proportionate shares of current income taxes, management and other fees, unaffiliated bank lines and debt issuance. At December 31, 1998, $32.4 million of dividend capacity was available from subsidiaries to pay to the Parent without having to obtain regulatory approval. During 1998, dividends from subsidiaries were $212.3 million. During 1998 the Company started a program to issue short-term commercial paper. At December 31, 1998 outstanding commercial paper was $49 million. At December 31, 1998 the Parent had revolving credit facilities with two banks totaling $65 million. On that date, the balance outstanding on these bank lines was $37 million. YEAR 2000 A number of electronic systems utilize a two-digit field for year references, e.g., 98 for 1998. Such systems may compute that the year 2000, if represented as 00, to be 99 years ago rather than one year hence. If these systems are not corrected prior to December 31, 1999, many processing failures could result. This section describes the status of the Company's efforts to correct these system deficiencies. 33 34 STATE OF READINESS The Company is well underway with its Year 2000 Program efforts and has segmented the remediation process into phases. The organizational awareness phase was substantially completed in the second quarter of 1998, but is considered ongoing throughout 1999. The assessment and detailed planning phase was completed by the end of third quarter 1998. The renovation phase for mission critical components was substantially completed by December 31, 1998, except for the conversion of recently acquired small Colorado banks, the last of which is scheduled to be converted to Zion's systems by June 30, 1999. Renovation of non-mission critical components is expected to be complete during the second quarter of 1999. The validation phase for mission critical components will be completed in the first quarter 1999 and for non-critical components by the end of second quarter 1999. The Company uses third party servicers for some of its information and data processing needs and is monitoring the progress of these entities in addressing the Year 2000 issue. It expects that all of these companies will be compliant by March 31, 1999. Validation of these third-party provided systems is expected to be completed during the second quarter of 1999. The Company is also assessing the operability of other devices after 1999, including vaults, fax machines, stand-alone personal computers, security systems and elevators. Although the Company does not believe that the failure of these systems would have a material adverse effect on the financial condition of the enterprise, it is addressing deficiencies in these systems and expects compliance to be achieved by September 30, 1999. COSTS In order to achieve and confirm Year 2000 readiness, significant costs are being incurred to test and modify or replace computer software and hardware, as well as a variety of other items, e.g., ATMs. The Company believes that its remediation costs have been mitigated since it replaced the large majority of its core banking systems during the past five years with Year 2000 compliant software in the ordinary course of business. However, the considerable effort required to implement new software and sufficiently test its compliance is consuming a substantial portion of the Company's internal information technology resources. This diversion of resources to the Year 2000 project has resulted in delays in implementing enhancements to a number of the Company's systems and products. The Company does not believe, however, that these delays have had or will have a significant effect on its revenue or expense growth. The aggregate increase in operating expense to achieve Yea 2000 readiness is estimated to be $3 million of which $2.1 million has been incurred through December 31, 1998. In addition, a significant portion of the Company's ATMs and personal computers are expected to be replaced to achieve Year 2000 compliance. The capital outlay to replace these assets is estimated to be between $2 to $4 million, a portion of which would have been incurred in the ordinary course of business without regard to Year 2000 issues. RISKS If the Company's mission-critical applications are not compliant by 2000, it may not be able to correctly process transactions in a reasonable period of time. This scenario could result in a wide variety of claims against the Company for improper handling of its assets and deposits and other borrowings from its customers. The Company is also at risk if the credit worthiness of a few of its large borrowers, or a significant number of its small borrowers, were to deteriorate quickly and severely as a result of their inability to conduct business operations after December 31, 1999, for whatever reason. The Company has surveyed and reviewed the Year 2000 plans of a number of its credit customers to ascertain the sufficiency of their remediation efforts and the implications of their actions on their credit worthiness. From this review, the Company believes that the increased credit risk that the Company may experience as a result of the Year 2000 issue will not materially adversely effect its financial condition. The Company explicitly disclaims however, any obligation or liability for the completeness, or lack thereof, of its customers' Year 2000 remediation plans or actions. 34 35 CONTINGENCY PLANS The Company has developed business resumption plans for each significant business unit in the event that unforeseen events beyond the bank's control adversely impact our ability to provide financial services to our customers. In the event of such a failure, these plans outline the steps that will be taken to minimize the effect on customers and losses to the Company. Although the Company believes that its Year 2000 remediation plan sufficiently addresses this issue, there can be no assurance that Year 2000 events will not materially adversely effect the Company's financial condition. Failure of other companies and vendors to be compliant could result in disruption of important services by the Company to its customers. Such failures could include, but are not limited to, telecommunication services, electrical power, and information processing. FORWARD-LOOKING INFORMATION Statements in Management's Discussion and Analysis that are not based on historical data are forward-looking, including, for example, the projected performance of Zions and its operations. These statements constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from the projections discussed in Management's Discussion and Analysis since such projections involve significant risks and uncertainties. Factors that might cause such differences include, but are not limited to: competitive pressures among financial institutions increasing significantly; economic conditions, either nationally or locally in areas in which Zions conducts its operations, being less favorable than expected; legislation or regulatory changes which adversely affect the Company's operations or business; the cost and effort required to correct Year 2000 processing deficiencies being more difficult than expected due to the difficulty of attracting and retaining qualified systems personnel or vendor-supplied software releases being delayed or not functioning properly. Zions disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments. 35 36 CONSOLIDATED CONDENSED STATEMENTS OF INCOME The following consolidated condensed statements of income present earnings and operating cash earnings information as restated (see Note 22 of Notes to Consolidated Financial Statements). The Company has restated prior year financial information for a significant acquisition accounted for as a pooling of interests. See Note 2 of Notes to Consolidated Financial Statements for further information on the acquisition.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME ------------------------------------------------------------------- (Amounts in millions) 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Net interest income $ 533.8 $ 335.7 $ 270.6 $ 236.0 $ 205.8 Noninterest income 199.9 140.7 112.1 89.5 74.1 ------- ------- ------- ------- ------- Total revenue 733.7 476.4 382.7 325.5 279.9 Provision for loan losses 11.9 4.6 3.8 3.1 2.3 Noninterest expense(1) 456.8 281.4 218.2 194.1 178.0 ------- ------- ------- ------- ------- Pretax cash earnings 265.0 190.4 160.7 128.3 99.6 Income tax expense 83.5 63.6 53.8 42.3 32.1 Minority interest 0.4 -- -- -- -- ------- ------- ------- ------- ------- Cash earnings(1) 181.1 126.8 106.9 86.0 67.5 Amortization of goodwill and core deposit 31.7 7.1 2.3 2.5 2.0 intangibles Merger expense 38.1 0.7 -- -- -- Income tax benefit (18.8) (0.9) (0.1) (0.3) (0.3) ------- ------- ------- ------- ------- Net income $ 130.1 $ 119.9 $ 104.7 $ 83.8 $ 65.8 ======= ======= ======= ======= ======= Operating cash earnings per share (diluted) (1) $ 2.37 $ 2.02 $ 1.75 $ 1.42 $ 1.12 ======= ======= ======= ======= ======= Net income per share (diluted) $ 1.70 $ 1.91 $ 1.72 $ 1.36 $ 1.08 ======= ======= ======= ======= =======
(1) Before amortization of goodwill and core deposit intangible assets and merger expense. 36 37 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Zions Bancorporation: We have audited the accompanying consolidated balance sheets of Zions Bancorporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows, and changes in shareholders' equity and comprehensive income for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zions Bancorporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in note 22, the accompanying consolidated financial statements have been restated. /s/ KPMG LLP Salt Lake City, Utah February 7, 2000 37 38 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (In thousands, except share amounts)
(as restated - See note 22) -------------------------- ASSETS 1998 1997 ------------ --------- Cash and due from banks $ 864,446 643,493 Money market investments: Interest-bearing deposits 30,484 61,986 Federal funds sold 199,446 442,179 Security resell agreements 382,275 349,338 Investment securities: Held to maturity, at cost (approximate market value $2,821,535 and $2,189,672) 2,804,654 2,170,602 Available for sale, at market 684,581 544,819 Trading account, at market 191,855 83,681 Loans: Loans held for sale 232,253 178,642 Loans, leases, and other receivables 10,452,246 4,886,763 ------------ --------- 10,684,499 5,065,405 Less: Unearned income and fees, net of related costs 48,123 42,854 Allowance for loan losses 205,553 82,849 ------------ --------- Net loans 10,430,823 4,939,702 Premises and equipment, net 231,847 137,030 Goodwill and core deposit intangibles 663,606 294,925 Other real estate owned 5,270 3,371 Other assets 530,944 272,321 ------------ --------- $ 17,020,231 9,943,447 ============ ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 3,170,436 1,856,881 Interest-bearing: Savings and money market 6,077,556 3,596,442 Time: Under $100,000 2,340,598 1,007,165 Over $100,000 1,528,329 446,701 Foreign 204,244 183,044 ------------ --------- 13,321,163 7,090,233 Securities sold, not yet purchased 29,702 45,067 Federal funds purchased 337,283 294,109 Security repurchase agreements 932,560 1,013,332 Accrued liabilities 319,278 169,027 Commercial paper 49,217 -- Federal Home Loan Bank advances and other borrowings: Less than one year 100,750 59,883 Over one year 56,796 210,681 Long-term debt 453,735 258,566 ------------ --------- Total liabilities 15,600,484 9,140,898 ------------ --------- Minority interest 34,670 -- Shareholders' equity: Capital stock: Preferred stock, without par value; authorized 3,000,000 shares; issued and outstanding, none -- -- Common stock, without par value; authorized 200,000,000 shares; issued and outstanding, 78,636,083 shares and 65,621,175 shares 752,845 270,359 Accumulated other comprehensive income (loss) (4,432) 3,077 Retained earnings 636,664 529,113 ------------ --------- Total shareholders' equity 1,385,077 802,549 ------------ --------- $ 17,020,231 9,943,447 ============ =========
See accompanying notes to consolidated financial statements. 38 39 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1998, 1997, and 1996 (In thousands, except per share amounts)
(as restated - See note 22) ------------------------------- 1998 1997 1996 -------- ------- -------- Interest income: Interest and fees on loans $644,750 383,547 296,410 Interest on loans held for sale 14,256 11,874 11,509 Interest on money market investments 88,448 84,780 51,471 Interest on securities: Held to maturity: Taxable 131,711 106,691 70,292 Nontaxable 14,472 11,551 14,645 Available for sale: Taxable 32,836 31,413 26,836 Nontaxable 836 2,112 2,287 Trading account 24,043 16,211 9,172 Lease financing 12,630 13,190 11,885 -------- ------- -------- Total interest income 963,982 661,369 494,507 -------- ------- -------- Interest expense: Interest on savings and money market deposits 156,370 109,487 90,134 Interest on time and foreign deposits 135,239 65,016 51,135 Interest on borrowed funds 138,553 151,192 82,659 -------- ------- -------- Total interest expense 430,162 325,695 223,928 -------- ------- -------- Net interest income 533,820 335,674 270,579 Provision for loan losses 11,909 4,630 3,810 -------- ------- -------- Net interest income after provision for loan losses 521,911 331,044 266,769 -------- ------- -------- Noninterest income: Service charges on deposit accounts 57,853 41,587 33,073 Other service charges, commissions, and fees 54,437 38,407 28,872 Trust income 9,415 6,757 5,195 Investment securities gain, net 2,039 777 123 Underwriting and trading income 9,239 5,716 2,721 Loan sales and servicing income 50,365 38,734 35,098 Other 16,598 8,746 7,042 -------- ------- -------- Total noninterest income 199,946 140,724 112,124 -------- ------- -------- Noninterest expense: Salaries and employee benefits 247,648 153,837 121,884 Occupancy, net 29,725 15,357 11,588 Furniture and equipment 35,952 22,717 15,992 Other real estate expense (income) 656 301 (240) Legal and professional services 15,249 7,496 4,756 Supplies 11,267 7,926 6,356 Postage 10,194 6,610 5,392 Advertising 11,819 6,804 5,296 FDIC premiums 1,441 708 11 Merger expense 38,128 815 -- Amortization of goodwill and core deposit intangibles 31,641 7,069 2,300 Amortization of mortgage servicing assets 5,484 2,152 1,299 Other 87,493 57,406 45,880 -------- ------- -------- Total noninterest expense 526,697 289,198 220,514 -------- ------- -------- Income before income taxes and minority interest 195,160 182,570 158,379 Income taxes 64,678 62,711 53,687 -------- ------- -------- Net income before minority interest 130,482 119,859 104,692 Minority interest 420 -- -- -------- ------- -------- Net income $130,062 119,859 104,692 ======== ======= ======== Weighted-average common and common-equivalent shares outstanding during the year 76,527 62,895 60,976 ======== ======= ======== Net income per common share: Basic $ 1.72 1.93 1.74 ======== ======= ======== Diluted $ 1.70 1.91 1.72 ======== ======= ========
See accompanying notes to consolidated financial statements. 39 40 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996 (In thousands)
(as restated - See note 22) ---------------------------------------------- 1998 1997 1996 ------------- ------------ ----------- Cash flows from operating activities: Net income $ 130,062 119,859 104,692 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 11,909 4,630 3,810 Depreciation of premises and equipment 27,560 16,973 13,023 Amortization 49,994 14,919 9,220 Accretion of unearned income and fees, net of related costs (5,695) 1,545 6,607 Proceeds from sales of trading account securities 175,432,243 119,209,754 80,374,843 Increase in trading account securities (175,540,070) (119,259,359) (80,345,212) Investment securities gain, net (2,039) (777) (123) Proceeds from loans held-for-sale 1,237,514 742,244 664,327 Increase in loans held-for-sale (1,296,803) (764,066) (671,343) Net gain on sales of loans, leases and other assets (43,264) (27,914) (26,803) Change in accrued income taxes 22,916 677 5,077 Change in accrued interest receivable 2,270 (19,319) (6,673) Change in accrued interest payable (1,147) 4,162 (675) Other, net (85,416) (25,335) 24,566 ------------- ------------ ----------- Net cash provided by (used in) operating activities (59,966) 17,993 155,336 ------------- ------------ ----------- Cash flows from investing activities: Net decrease (increase) in money market investments 838,130 (190,635) 101,576 Proceeds from maturities of investment securities held to maturity 3,461,649 952,544 339,335 Purchases of investment securities held to maturity (3,509,343) (1,594,927) (596,277) Proceeds from sales of investment securities available for sale 512,283 288,423 134,116 Proceeds from maturities of investment securities available for sale 250,250 104,619 116,424 Purchases of investment securities available for sale (645,793) (332,611) (332,630) Proceeds from sales of loans and leases 918,948 968,717 757,516 Net increase in loans and leases (1,889,571) (1,450,619) (1,307,068) Principal collections on leveraged leases 3,840 5,748 -- Payments on leveraged leases (3,840) (5,748) -- Proceeds from sales of premises and equipment 5,370 2,736 746 Purchases of premises and equipment (63,702) (36,867) (20,765) Proceeds from sales of mortgage-servicing rights 6,654 1,771 1,339 Purchases of mortgage-servicing rights (5,149) (3,123) (1,625) Proceeds from sales of other assets 7,624 3,578 2,367 Purchases of other assets -- -- (27,401) Cash paid for acquisitions, net of cash received (246,485) 37,304 3,540 ------------- ------------ ----------- Net cash used in investing activities (359,135) (1,249,090) (828,807) ------------- ------------ ----------- Cash flows from financing activities: Net increase in deposits 622,356 1,110,515 381,826 Net change in short-term funds borrowed (97,655) 356,985 151,117 Proceeds from FHLB advances over one year 4,665 180,000 4,201 Payments on FHLB advances over one year (167,886) (47,980) (16,714) Proceeds from issuance of long-term debt 195,041 -- 200,000 Payments on long-term debt (20,556) (554) (4,969) Net change in minority interest 34,670 -- -- Proceeds from issuance of common stock 136,751 3,368 2,965 Payments to redeem common stock (25,732) (121,389) (25,148) Dividends paid (41,600) (29,040) (25,033) ------------- ------------ ----------- Net cash provided by financing activities 640,054 1,451,905 668,245 ------------- ------------ ----------- Net increase (decrease) in cash and due from banks 220,953 220,808 (5,226) Cash and due from banks at beginning of year 643,493 422,685 427,911 ------------- ------------ ----------- Cash and due from banks at end of year $ 864,446 643,493 422,685 ============= ============ ===========
See accompanying notes to consolidated financial statements. 40 41 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income Years ended December 31, 1998, 1997, and 1996 (In thousands, except share amounts)
(as restated - See note 22) Accumu- lated other compre- Total Common stock Compre- hensive share- ---------------------- hensive income Retained holders' Shares Amount income (loss) earnings equity ----------- --------- ---------- --------- --------- --------- BALANCE, DECEMBER 31, 1995 59,854,033 $ 86,188 1,980 358,635 446,803 Net income -- -- 104,692 -- 104,692 104,692 Other comprehensive loss, net of tax: Realized and unrealized holding loss arising during the year, net of tax benefit of $2,421 -- -- (3,867) -- -- -- Reclassification for realized gain recorded in the income statement, net of tax expense of $48 -- -- (76) -- -- -- -------- Other comprehensive loss -- -- (3,943) (3,943) -- (3,943) -------- Total comprehensive income -- -- $ 100,749 -- -- -- ========= Cash dividends: Common, $.425 per share -- -- -- (25,033) (25,033) Issuance of common shares for acquisitions 1,454,792 26,200 -- -- 26,200 Stock redeemed and retired (1,306,041) (25,149) -- -- (25,149) Stock options exercised, net of shares tendered and retired 582,373 4,182 -- -- 4,182 ---------- --------- --------- -------- -------- BALANCE, DECEMBER 31, 1996 60,585,157 91,421 (1,963) 438,294 527,752 Net income -- -- 119,859 -- 119,859 119,859 Other comprehensive income, net of tax: Realized and unrealized holding gain arising during the year, net of tax expense of $3,203 -- -- 5,117 -- -- -- Reclassification for realized gain recorded in the income statement, net of tax expense of $48 -- -- (77) -- -- -- -------- Other comprehensive income -- -- 5,040 5,040 -- 5,040 -------- Total comprehensive income -- -- $ 124,899 -- -- -- ========= Cash dividends: Common, $.47 per share -- -- -- (28,428) (28,428) Preferred dividends of acquired companies prior to merger -- -- -- -- (612) (612) Issuance of common shares for acquisitions 8,374,833 295,564 -- -- 295,564 Stock redeemed and retired (3,649,018) (121,389) -- -- (121,389) Stock options exercised, net of shares tendered and retired 310,203 4,763 -- -- 4,763 ---------- --------- --------- -------- -------- BALANCE, DECEMBER 31, 1997 65,621,175 270,359 3,077 529,113 802,549
41 42 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (continued) Years ended December 31, 1998, 1997, and 1996 (In thousands, except share amounts)
(as restated - See note 22) Accumu- lated other compre- Total Common stock Compre- hensive share- ---------------------- hensive income Retained holders' Shares Amount income (loss) earnings equity ---------- --------- -------- ---------- ---------- --------- Net income -- $ -- 130,062 -- 130,062 130,062 Other comprehensive loss, net of tax: Realized and unrealized holding loss arising during the year, net of tax benefit of $3,916 -- -- (6,618) -- -- -- Reclassification for realized gain recorded in the income statement, net of tax expense of $785 -- (1,254) -- -- -- ---------- Other comprehensive loss -- -- (7,872) (7,872) -- (7,872) ---------- Total comprehensive income -- -- $ 122,190 -- -- -- ========== Cash dividends: Common, $.54 per share -- -- -- (40,715) (40,715) Preferred dividends of acquired companies prior to merger -- -- -- -- (887) (887) Net proceeds from stock offering 2,760,000 129,832 -- -- 129,832 Issuance of common shares for acquisitions 10,041,306 368,259 363 19,091 387,713 Exercise of acquired company warrants prior to acquisition 257,056 1,852 -- -- 1,852 Stock redeemed and retired (591,009) (25,696) -- -- (25,696) Stock options exercised, net of shares tendered and retired 547,555 8,239 -- -- 8,239 ---------- --------- ---------- ---------- --------- BALANCE, DECEMBER 31, 1998 78,636,083 $ 752,845 (4,432) 636,664 1,385,077 ========== ========= ========== ========== =========
See accompanying notes to consolidated financial statements. 42 43 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Zions Bancorporation (the Parent) is a multibank holding company organized under the laws of Utah in 1955, which provides a full range of banking and related services through its subsidiaries operating primarily in Utah, Idaho, California, Colorado, Arizona, Nevada, and Washington. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of Zions Bancorporation and its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the 1998 presentation. Prior year amounts have also been restated for one significant acquisition accounted for under the pooling-of-interest method. (see note 2) The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. SECURITY RESELL AGREEMENTS Security resell agreements represent overnight and term agreements, the majority maturing within 30 days. Either the Company or, in some instances, third parties on behalf of the Company take possession of underlying securities. The market value of such securities is monitored throughout the contract term to ensure that asset value remains sufficient to protect against counterparty default. Security resell agreements averaged approximately $1,260,646,000 during 1998, and the maximum amount outstanding at any month-end during 1998 was $1,636,078,000. INVESTMENT SECURITIES The Company classifies its investment securities in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. Trading securities (including futures and options used to hedge trading positions against interest rate risk) and available for sale securities are recorded at fair value. Held to maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in net income. Unrealized holding gains and losses, net of related tax effect, on available for sale securities are excluded from net income and are reported as a separate component of shareholders' equity until realized. A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. 43 44 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Premiums and discounts are amortized or accreted over the life of the related held to maturity security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale and held to maturity are included in net income and are derived using the specific-identification method of determining the cost of securities sold. LOANS Loans are reported at the principal amount outstanding, net of unearned income. Unearned income, which includes deferred fees net of deferred direct incremental loan origination costs, is amortized to interest income generally over the life of the loan using an interest method or the straight-line method if it is not materially different. Loans identified as held for sale are carried at the lower of cost or market value. Nonrefundable fees, related direct loan origination costs, and related hedging gains or losses, if any, are deferred and recognized as a component of the gain or loss on sale recorded in noninterest income. LOAN FEES Nonrefundable fees and related direct costs associated with the origination of loans are deferred. The net deferred fees and costs are recognized in interest income over the loan term using methods that generally produce a level yield on the unpaid loan balance. Other nonrefundable fees related to lending activities other than direct loan origination are recognized as other operating income over the period the related service is provided. Bankcard discounts and fees charged to merchants for processing transactions through the Company are shown net of interchange discounts and fees expense and are included in other service charges, commissions, and fees. ALLOWANCE FOR LOAN LOSSES In analyzing the adequacy of the allowance for loan and lease losses, management utilizes a comprehensive loan grading system to determine risk potential in the potential in the portfolio, and considers the results of independent internal and external credit review. To determine the adequacy of the allowance, the Company's loan and lease portfolio is broken into segments based on loan type. Historical loss experience factors by segment, adjusted for changes in trends and conditions, are used in determining the required allowance for each segment. Historical loss factors are evaluated and updated using migration analysis techniques and other considerations based on the makeup of the specific portfolio segment. Other considerations such as volumes and trends of delinquencies, nonaccruals, repossessions and bankruptcies, criticized and classified loan trends, current and anticipated foreclosure losses, new products and policies, economic conditions, concentrations of credit risk, and experience and abilities of lending personnel are also considered in establishing the loss factors. 44 45 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) All loans graded substandard in the amount of $1 million or more and all credits graded doubtful in the amount of $100 thousand or more are individually evaluated based on facts and circumstances of the loan and a specific allowance amount designated. Specific allowances may also be established for loans in amounts below the specific thresholds when it is determined that the risk differs significantly from factor amounts established for the category. Although management has allocated a portion of the allowance to specific loan categories using the methods described, the adequacy of the allowance must be considered in its entirety. To mitigate the imprecision in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated portion of the allowance includes management's judgmental determination of the amounts necessary for subjective factors such as economic uncertainties and concentration risks. Accordingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. IMPAIRED LOANS The Company considers a loan to be impaired when the accrual of interest has been discontinued and the loan meets other criteria established by the Company. The amount of the impairment is measured based on the present value of expected cash flows, the observable market price of the loan, or the fair value of the collateral. An allowance for impairment losses is included in the allowance for loan losses through a provision for loan losses. The Company primarily uses a cost recovery accounting method to recognize interest income on impaired loans. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation, computed on the straight-line method, is charged to operations over the estimated useful lives of the properties. Leasehold improvements are amortized over the terms of respective leases or the estimated useful lives of the improvements, whichever is shorter. NONPERFORMING ASSETS Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, loans for which the terms have been renegotiated to less than market rates due to a weakening of the borrower's financial condition (restructured loans), and other real estate acquired primarily through foreclosure that is awaiting disposition. Loans are generally placed on a nonaccrual status when principal or interest is past due 90 days or more unless the loan is both well-secured and in the process of collection, or when in the opinion of management, full collection of principal or interest is unlikely. Generally, consumer loans are not placed on a nonaccrual status, inasmuch as they are generally charged off when they become 120 days past due. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well-secured and in the process of collection. 45 46 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) GOODWILL AND CORE DEPOSIT INTANGIBLES The Company assesses the recoverability of these intangible assets by determining whether the amortization of the balance over its remaining life can be recovered through future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected future operating cash flows using a discount rate reflecting the Company's average cost of funds. Goodwill and core deposit intangibles are generally amortized using the straight-line method over 25 and 10 year periods, respectively. MORTGAGE SERVICING RIGHTS The Company recognizes as separate assets the rights to service mortgage loans for others, whether the servicing rights are acquired through purchases or loan originations. The fair value of capitalized mortgage servicing rights is based upon the present value of estimated future cash flows. Based upon current fair values capitalized mortgage servicing rights are periodically assessed for impairment, which is recognized in the statement of income during the period in which impairment occurs. For purposes of performing its impairment evaluation, the Company stratifies its portfolio on the basis of certain risk characteristics including loan type and note rate. Capitalized mortgage servicing rights are amortized over the period of estimated net servicing income and take into account appropriate prepayment assumptions. Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standard (Statement) No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement requires that after a transfer of financial assets, the Company must recognize the financial and servicing assets controlled and liabilities incurred, and derecognize financial assets and liabilities in which control is surrendered or debt is extinguished. In such cases, servicing assets are determined based on estimated future revenues from contractually specified servicing fees and other ancillary revenues that are expected to compensate the Company for performing the servicing. The adoption of Statement No. 125 has not had a material effect on the Company's consolidated financial statements. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. The credit risk associated with these commitments is considered in management's determination of the allowance for possible losses. 46 47 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INTEREST RATE EXCHANGE CONTRACTS AND CAP AND FLOOR AGREEMENTS The Company enters into interest rate exchange contracts (swaps) and cap and floor agreements as part of its overall asset and liability duration and interest rate risk management strategy. The objective of these financial instruments is to match estimated repricing periods of interest-sensitive assets and liabilities in order to reduce interest rate exposure and or manage desired asset and liability duration. With the exception of interest rate caps and floors, these instruments are used to hedge asset and liability portfolios and, therefore, are not marked to market. Fees associated with these financial instruments are accreted into interest income or amortized to interest expense on a straight-line basis over the lives of the contracts and agreements. Gains or losses on early termination of a swap are amortized on the remaining term of the contract when the underlying assets or liabilities still exist. Otherwise, such gains or losses are fully recorded as income or expense at the termination of the contract. The net interest received or paid on these contracts is reflected on a current basis in the interest income or expense related to the hedged obligation or asset. STATEMENTS OF CASH FLOWS The Company paid interest of $431.1 million, $356.9 million, and $224.1 million, respectively, and income taxes of $49.4 million, $62.9 million, and $41.9 million, respectively, for the years ended December 31, 1998, 1997, and 1996. Loans transferred to other real estate owned totaled $5.1 million, $8.4 million, and $0.4 million, respectively, for the years ended December 31, 1998, 1997, and 1996. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The exercise of stock options under the Company's nonqualified stock option plan, resulted in tax benefits reducing the Company's current income tax payable and increasing common stock in the amounts of $3.4 million, $1.2 million, and $0.6 million in 1998, 1997, and 1996, respectively. NET INCOME PER COMMON SHARE Diluted net income per common share is based on the weighted-average outstanding common shares during each year, including common stock equivalents. Basic net income per common share is based on the weighted-average outstanding common shares during each year. STOCK SPLIT On April 25, 1997, the Company's Board of Directors approved a four-for-one split of the common stock. This action was effective on May 14, 1997 for shareholders of record as of May 9, 1997. A total of 43,347,903 shares of common stock were issued. All references to the number of common shares and per common share amounts have been restated to reflect the split. 47 48 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 130, Reporting Comprehensive Income. Statement No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statement of changes in shareholders' equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of Statement No. 130. ACCOUNTING STANDARDS NOT ADOPTED In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Statement No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for gains and losses of a derivative depends on the intended use of the derivative and the resulting designation. Under this statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. The original effective date of this statement, as amended by Statement No. 137, has been delayed and is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and should not be applied retroactively to financial statements of prior periods. The Company is currently studying the statement to determine its future effects. In October 1998, the FASB issued Statement No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This statement amends FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities, to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. This statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise. This statement shall be effective for the first fiscal quarter beginning after December 15, 1998. It is anticipated that the adoption of Statement No. 134 will not have a significant impact on the Company's financial position or results of operations. 48 49 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 2. MERGERS AND ACQUISITIONS During 1998, the Company acquired Vectra Banking Corporation and its subsidiary, Vectra Bank (Vectra) located in Denver, Colorado, and FP Bancorp, Inc. and its banking subsidiary, First Pacific National Bank (FP) located in Escondido, California. Both acquisitions were consummated with the issuance of common stock by the Company and have been accounted for using the purchase method of accounting. Accordingly, the cost of acquisition has been allocated to assets acquired and liabilities assumed based upon their estimated fair market values at the dates of acquisition. Goodwill resulting from these acquisitions is being amortized on a straight-line basis over 25 years.
Vectra FP ----------------- ----------------- Common stock issued 4,018,222 shares 1,914,731 shares Approximate cost of acquisition $174.1 million $89.8 million Excess of acquisition cost over fair value of net identifiable assets acquired (goodwill) $128.7 million $56.9 million Results of operations included in the Company's income statement from: January 1, 1998 April 1, 1998
During 1998, the Company also acquired four additional banking organizations in Colorado, namely Sky Valley Bank Corp., Tri-State Finance Corporation, Routt County National Bank Corporation, and SBT Bankshares (the Banks) for 2,393,079 shares of common stock. A total purchase price of approximately $105.4 million was paid for the acquisitions consisting of Bank stock, Bank merger costs, and the fair value of stock options assumed by the Bank. The acquisitions were accounted for using the purchase method of accounting. The acquisition costs have been allocated to assets acquired and liabilities assumed based upon their estimated fair market values at the dates of acquisitions. The excess cost of acquisition over the fair value of the net identifiable assets acquired of approximately $69.0 million has been recorded as goodwill and is being amortized on a straight-line basis over twenty-five years. The results of operations of the Banks have been included with those of the Company from the effective date of each transaction through December 31, 1998. 49 50 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 2. MERGERS AND ACQUISITIONS (continued) Further, in 1998, the Company acquired The Sumitomo Bank of California (Sumitomo), located in San Francisco, California. Cash consideration of approximately $546 million was paid for the acquisition. Sumitomo had total assets of approximately $4.5 billion at the date of acquisition. Sumitomo, as well as FP Bancorp, Inc., was merged with Grossmont Bank and the name changed to California Bank & Trust. The Company sold a minority interest in California Bank & Trust to a limited partnership and a Director of the Company for its cost basis of approximately $33 million. The acquisition was accounted for as a purchase transaction. The major components of management's plan for the combined company include the restructuring of operational functions and the consolidation of administrative facilities. Total goodwill arising from the transaction was approximately $106.7 million, which will be amortized over a period of 25 years using the straight-line method. The Company recorded an $18 million liability in the purchase business combination and included such costs in the allocation of the purchase price. This liability included approximately $6.0 million of salaries and benefits for Sumitomo executives and staff who were terminated in relation to the acquisition. All of these individuals were identified prior to the consummation of the merger, and the majority were notified of the termination in early October 1998. In addition, a liability for approximately $1.4 million was recorded in the combination for data service employees terminated in relation to a system conversion. These employees were identified and notified that the termination is anticipated as of February 1999. 50 51 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 2. MERGERS AND ACQUISITIONS (continued) Merger expenses in the accompanying consolidated statements of income are summarized as follows:
1998 1997 ------- ------- Sumitomo acquisition: Severance and related employee benefits $ 5,290 -- Real property lease terminations 7,773 -- Integration of business operations 5,834 -- Integration of information systems 1,668 -- Other acquisition: Incremental personnel-related costs 6,452 -- Professional fees 5,957 940 Conversion and other miscellaneous charges 5,154 1,767 ------- ------- $38,128 2,707 ======= =======
The amounts set forth above for severance and related employee benefits and real property lease terminations are included in accrued liabilities in the accompanying consolidated balance sheets as of December 31, 1998. The severance and related employee benefits costs of approximately $5.3 million are associated with the termination of 250 branch employees of the acquired operation. In December 1998, the decision to terminate these employees was made by management, and a formal severance plan was adopted which outlined the amount of severance and type of benefits to be received upon termination. This plan was communicated to all Sumitomo employees at that time. Additionally, the real property lease terminations costs of approximately $7.8 million represent the remaining noncancellable obligation with respect to operating leases for several former Sumitomo branches and production facilities. It is anticipated that the remaining liability balance will be paid by the end of 1999, except for amounts related to long-term real property leases. The $7,502,000 costs for integration of business operations and information systems primarily represent charges associated with the conversion of Sumitomo's computer and networking systems, bonus payments, and relocation and recruiting fees paid to hire new management. The following unaudited amounts represent the Company combined with the 1998 acquisitions as if the acquisitions had occurred at January 1, 1998 and 1997, respectively (in thousands):
1998 acquisitions 1998 1997 --------------------------------------------------------- -------------- ------------- Total revenue $1,451,107 1,323,480 Net income 126,155 137,729 Diluted net income per common share 1.58 1.85
Pro forma information relating to 1997 acquisitions accounted for as purchase transactions has not been provided as the acquisitions were not considered significant in relation to the Company's financial position or results of operations. On September 8, 1998, the Company acquired The Commerce Bancorporation, and its banking subsidiary The Commerce Bank of Washington, N.A. for 1,938,590 shares of common stock. The Commerce Bancorporation had total assets of approximately $300 million on the date of acquisition. The Commerce Bancorporation's total interest and noninterest income and net loss for the period January 1 through June 30, 1998 were $11.8 million and $3.2 million, respectively. The acquisition of Commerce Bancorporation was accounted for as a pooling of interests and considered a significant business combination. Prior year amounts have been restated. A reconciliation between revenue and net income previously reported by the Company for the year ended December 31, 1997, with restated amounts presented in the accompanying financial statements follows:
Company Effects of previously restatement The Commerce Company reported (note 22) Bancorporation restated ------------- -------------- ----------------- ---------------- Total revenue $ 825,463 (44,147) 20,777 802,093 Net income 122,362 (6,961) 4,458 119,859
51 52 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 2. MERGERS AND ACQUISITIONS (continued) During 1998, the Company issued a total of 1,715,274 shares of common stock to acquire four additional banking organizations in Colorado, namely Kersey Bancorp., N.A., Eagle Holding Company, Citizens Banco, Inc., and Mountain Financial Holding Company. Each of these acquisitions was accounted for as a pooling of interests and was not significant to the consolidated financial statements. 3. INVESTMENT SECURITIES Investment securities as of December 31, 1998, are summarized as follows (in thousands):
Held to maturity ----------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- ---------- U.S. Treasury securities $ 62,412 155 -- 62,567 U.S. government agencies and corporations: Small Business Administration loan-backed 358,161 1,065 3,110 356,116 securities Other agency securities 940,059 5,753 1,984 943,828 States and political subdivisions 285,212 7,552 71 292,693 Mortgage-backed securities 1,158,810 7,787 266 1,166,331 ---------- ---------- ---------- ---------- $2,804,654 22,312 5,431 2,821,535 ========== ========== ========== ==========
Available for sale -------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- --------- U.S. Treasury securities $ 45,738 1,002 4 46,736 U.S. government agencies and corporations: Small Business Administration originator fees certificates 84,933 -- 16,283 68,650 Other agencies 112,551 1,141 46 113,646 States and political subdivisions 15,198 497 3 15,692 Mortgage- and other asset-backed securities 179,389 1,248 401 180,236 -------- -------- -------- -------- 437,809 3,888 16,737 424,960 Equity securities: Mutual funds: Accessor Funds, Inc. 116,566 1,865 10 118,421 Federal Home Loan Bank stock 100,579 -- -- 100,579 Other stock 36,804 3,817 -- 40,621 -------- -------- -------- -------- $691,758 9,570 16,747 684,581 ======== ======== ======== ========
52 53 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 3. INVESTMENT SECURITIES (continued) Investment securities as of December 31, 1997, are summarized as follows (in thousands):
Held to maturity ----------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- --------- U.S. Treasury securities $ 4,004 45 1 4,048 U.S. government agencies and corporations: Small Business Administration loan-backed securities 440,615 8,728 476 448,867 Other agency securities 1,422,324 5,757 1,099 1,426,982 States and political subdivisions 221,553 5,654 809 226,398 Mortgage-backed securities 82,106 1,323 52 83,377 ---------- ---------- ---------- ---------- $2,170,602 21,507 2,437 2,189,672 ========== ========== ========== ==========
Available for sale ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- ------- U.S. Treasury securities $ 37,332 414 -- 37,746 U.S. government agencies and corporations: Small Business Administration originator fees certificates 75,371 -- 3,154 72,217 Other agencies 145,497 677 212 145,962 States and political subdivisions 26,397 1,085 8 27,474 Mortgage- and other asset-backed securities 27,815 468 35 28,248 -------- -------- -------- -------- 312,412 2,644 3,409 311,647 Equity securities: Mutual funds: Accessor Funds, Inc. 109,530 1,456 28 110,958 Federal Home Loan Bank stock 90,537 -- -- 90,537 Other stock 27,404 4,309 36 31,677 -------- -------- -------- -------- $539,883 8,409 3,473 544,819 ======== ======== ======== ========
The amortized cost and estimated market value of investment securities as of December 31, 1998, by contractual maturity, excluding equity securities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
Held to maturity Available for sale ------------------------ ------------------------ Estimated Estimated Amortized market Amortized market cost value cost value --------- --------- --------- --------- Due in one year or less $ 611,170 613,383 94,467 92,423 Due after one year through five years 1,230,347 1,242,212 232,227 227,727 Due after five years through ten years 811,749 814,078 63,843 60,013 Due after ten years 151,388 151,862 47,272 44,797 ---------- --------- ------- ------- $2,804,654 2,821,535 437,809 424,960 ========== ========= ======= =======
53 54 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 3. INVESTMENT SECURITIES (continued) Gross gains of $7,407,000, $8,996,000, and $355,000 and gross losses of $5,368,000, $8,219,000, and $232,000 were recognized on sales and write downs of investment securities for the years ended December 31, 1998, 1997, and 1996, respectively. As of December 31, 1998 and 1997, securities with an amortized cost of $1,107,743,000 and $802,039,000, respectively, were pledged to secure public and trust deposits, advances, and for other purposes as required by law. 4. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are summarized as follows (in thousands):
1998 1997 ----------- ----------- Loans held for sale $ 232,253 178,642 Commercial, financial, and agricultural 2,691,915 1,287,430 Real estate: Construction 866,548 490,610 Other 6,034,979 2,380,838 Consumer 539,349 458,162 Lease financing 213,410 176,419 Foreign 44,368 -- Other receivables 61,677 93,304 ----------- ----------- $10,684,499 5,065,405 =========== ===========
As of December 31, 1998 and 1997, loans with a carrying value of $63,125,000 and $183,417,000, respectively, were pledged as security for Federal Home Loan Bank advances. During 1998, 1997, and 1996, sales of loans held for sale totaled $1,238 million, $733 million, and $654 million, respectively. Consumer and other loan securitizations totaled $884 million in 1998, $951 million in 1997, and $746 million in 1996, and relate primarily to loans sold under revolving securitization structures. Gain on the sales, excluding servicing, of both loans held for sale and loan securitizations amounted to $36.2 million in 1998, $28.3 million in 1997, and $25.8 million in 1996. The allowance for loan losses is summarized as follows (in thousands):
1998 1997 1996 --------- --------- --------- Balance at beginning of year $ 82,849 72,040 69,369 Allowance for loan losses of companies acquired 125,690 14,316 2,566 Additions: Provision for loan losses 11,909 4,630 3,810 Recoveries 9,326 5,888 5,727 Deductions: Loan charge-offs (24,221) (14,025) (9,432) --------- --------- --------- Balance at end of year $ 205,553 82,849 72,040 ========= ========= =========
At December 31, 1998, 1997, and 1996, the allowance for loan losses includes an allocation of $20 million, $9 million, and $6 million, respectively, related to commitments to extend credit and standby letters of credit. 54 55 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (continued) The Company's total recorded investment in impaired loans amounted to $41,000,000 and $7,100,000 as of December 31, 1998 and 1997, respectively. Included in the allowance for loan losses as of December 31, 1998 and 1997, is a required allowance of $5,000,000 and $46,000, respectively, on $11,600,000 and $300,000, respectively, of the recorded investment in impaired loans. Contractual interest due and interest foregone on impaired loans totaled $3,797,000 and $2,051,000, respectively, for 1998, $554,000 and $204,000, respectively, for 1997, and $1,377,000 and $657,000, respectively, for 1996. The average recorded investment in impaired loans amounted to $16,944,000 in 1998, $6,421,000 in 1997, and $5,605,000 in 1996. 5. CONCENTRATIONS OF CREDIT RISK Credit risk represents the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have significant exposure to any individual customer or counterparty. Most of the Company's business activity is with customers located within the states of Utah, Idaho, California, Colorado, Arizona, Nevada, and Washington. The commercial loan portfolio is well diversified, consisting of 11 major industry classification groupings. As of December 31, 1998, the larger concentrations of risk in the commercial loan and leasing portfolio are represented by the real estate, construction, business services and transportation industry groupings. The Company has minimal credit exposure from lending transactions with highly leveraged entities. The majority of foreign loans are supported by domestic real estate or letters of credit. 6. PREMISES AND EQUIPMENT The following table presents comparative data for premises and equipment (in thousands):
1998 1997 -------- -------- Land $ 46,809 27,773 Buildings 132,308 72,781 Furniture and equipment 212,498 122,063 Leasehold improvements 44,596 13,809 -------- -------- Total 436,211 236,426 Less accumulated depreciation and amortization 204,364 99,396 -------- -------- Net book value $231,847 137,030 ======== ========
55 56 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 7. MORTGAGE SERVICING RIGHTS Mortgage servicing rights, included in other assets in the accompanying balance sheets, are summarized as follows (in thousands):
1998 1997 -------- ------ Balance at beginning of year $ 10,595 5,447 Additions 9,231 7,300 Obtained through acquisition 1,595 -- Amortization (5,484) (2,152) Sales (623) -- -------- ------ Balance at end of year $ 15,314 10,595 ======== ======
At December 31, 1998 and 1997, the aggregate fair value of mortgage servicing rights was $20.4 million and $14.2 million, respectively. Fair values are determined by discounted anticipated future net cash flows from mortgage servicing activities considering market consensus loan prepayment predictions, interest rates, servicing costs, and other economic factors. 8. DEPOSITS At December 31, 1998, the scheduled maturities of all time deposits are as follows (in thousands): 1999 $3,300,783 2000 345,551 2001 93,665 2002 56,258 2003 and thereafter 72,670 ---------- $3,868,927 ==========
The aggregate amount of time deposits with a denomination of $100,000 or more was $1,528,329,000 and $446,701,000 at December 31, 1998 and 1997, respectively. At December 31, 1998, the contractual maturities of these deposits were as follows: $780,318,000 in 3 months or less, $330,816,000 over 3 months through 6 months, $288,441,000 over 6 months through 12 months and $128,754,000 over 12 months. Deposit overdrafts that have been reclassified as loan balances were $23.2 million and $39.5 million at December 31, 1998 and 1997, respectively. 56 57 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 9. SHORT-TERM BORROWINGS Short-term borrowings generally mature in less than 30 days. The following table shows selected information for these borrowings (in thousands):
1998 1997 1996 ---------- --------- --------- Federal funds purchased: Average amount outstanding $ 401,412 297,399 205,329 Weighted average rate 4.61% 5.46% 5.44% Highest month-end balance 594,503 487,098 454,857 Year-end balance 337,283 294,129 155,407 Weighted average rate on outstandings at year-end 4.58% 5.83% 6.26% Security repurchase agreements: Average amount outstanding $1,442,260 1,873,019 1,131,791 Weighted average rate 4.77% 5.17% 4.93% Highest month-end balance 1,710,676 2,250,488 1,343,824 Year-end balance 932,560 1,013,332 801,100 Weighted average rate on outstandings at year-end 4.40% 5.74% 4.76%
The Company participates in overnight and term security repurchase agreements. Most of the overnight agreements are performed with sweep accounts in conjunction with a master repurchase agreement. In this case, securities under the Company's control are pledged for and interest is paid on the collected balance of the customers' accounts. For term repurchase agreements, securities are transferred to the applicable counterparty. 10. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS The following table presents comparative data for FHLB advances and other borrowings over one year (in thousands):
1998 1997 -------- ------- Medium-term note payable by parent, 6.03% $ -- 50,000 FHLB advances payable by subsidiaries, 5.46%-7.30% 44,696 153,681 Notes payable, 5.60%-8.32% 12,100 7,000 -------- ------- $ 56,796 210,681 ======== ========
Federal Home Loan Bank advances as of December 31, 1998 are borrowed by Zions First National Bank (ZFNB), a wholly-owned subsidiary, under its line of credit with the Federal Home Loan Bank of Seattle. The line of credit provides for borrowing of amounts up to ten percent of total assets. The line of credit is secured under a blanket pledge whereby ZFNB maintains unencumbered collateral with carrying amount, which has been adjusted using a pledge requirement percentage based upon the types of collateral pledged, equal to at least 100 percent of outstanding advances and Federal Home Loan Bank stock. Interest expense on FHLB advances and other borrowings over one year was $6,602,000, $8,206,000, and $740,000 for the years ended December 31, 1998, 1997, and 1996, respectively. 57 58 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 10. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (continued) Maturities of Federal Home Loan Bank advances and other borrowings over one year are as follows (in thousands): 1999 $ 15,393 2000 9,833 2001 3,320 2002 2,515 2003 2,862 Thereafter 22,873 --------- $ 56,796 =========
11. LONG-TERM DEBT Long-term debt is summarized as follows (in thousands):
1998 1997 -------- -------- Guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures $223,000 207,500 Subordinated notes: Floating rate subordinated notes, maturity 2005-2008 177,000 -- 8.625%-9.00% subordinated notes, maturity in 1998-2002 50,150 50,000 Capital leases and other notes payable 3,585 1,066 -------- -------- $453,735 258,566 ======== ========
The guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures include $200 million of 8.536 percent debentures issued by Zions Institutional Capital Trust A (ZICTA), $5.5 million of 10.25 percent debentures issued by GB Capital Trust (GBCT), and $17.5 million of 9.50 percent debentures issued by VBC Capital I Trust (VBCCIT). The ZICTA debentures are direct and unsecured obligations of ZFNB and are subordinate to the claims of depositors and general creditors. The Company has irrevocably and unconditionally guaranteed all of ZFNB's obligations under the debentures. The GBCT and VBCCIT debentures are direct and unsecured obligations of the Company through the acquisition of GB Bancorporation and Vectra Banking Corporation, and are subordinate to other indebtedness and general creditors of the Company. ZICTA, GBCT, and VBCCIT debentures have the right, with the approval of banking regulators, to early redemption in 2006, 2007, and 2002, respectively. ZICTA and GBCT debentures require semiannual interest payments and mature on December 15, 2026 and January 15, 2027, respectively. VBCCIT debentures require quarterly interest payments and mature on April 30, 2027. Floating-rate subordinated notes consist of $67 million callable in 2000 and $110 million callable in 2003. These notes require quarterly interest payments. Subordinated notes also include $50 million of 8.625 percent notes which are not redeemable prior to maturity and require semiannual interest payments. All subordinated notes are unsecured. Interest expense on long-term debt was $29,051,000, $22,399,000, and $10,156,000 for the years ended December 31, 1998, 1997, and 1996, respectively. 58 59 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 11. LONG-TERM DEBT (continued) Maturities and sinking fund requirements on long-term debt at December 31, 1998 for each of the succeeding five years are as follows (in thousands):
Consoli- Parent dated only ---------- -------- 1999 $ 609 -- 2000 485 -- 2001 424 -- 2002 50,427 50,000 2003 437 -- Thereafter 401,353 177,000 -------- -------- $453,735 227,000 ======== ========
12. COMMITMENTS AND CONTINGENT LIABILITIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates, and to make a market in U.S. government, agency, and municipal securities. These financial instruments involve, to varying degrees, elements of credit, liquidity, and interest rate risk in excess of the amount recognized in the balance sheets. Contractual amounts of the off-balance sheet financial instruments used to meet the financing needs of the Company's customers are as follows (in thousands):
1998 1997 ---------- --------- Commitments to extend credit $4,583,488 2,506,220 Standby letters of credit: Performance 69,648 86,886 Financial 104,530 27,903 Commercial letters of credit 25,294 9,336
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing properties. Establishing commitments to extend credit gives rise to credit risk. As of December 31, 1998, a significant portion of the Company's commitments is expected to expire without being drawn upon; commitments totaling $3,192,208,000 expire in 1999. As a result, the Company's actual future credit exposure or liquidity requirements will be lower than the contractual amounts of the commitments. The Company uses the same credit policies and procedures in making commitments to extend credit and conditional obligations as it does for on-balance sheet instruments. These policies and procedures include credit approvals, limits, and monitoring. 59 60 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 12. COMMITMENTS AND CONTINGENT LIABILITIES (continued) Standby and commercial letters of credit are conditional commitments issued by the Company generally to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Standby letters of credit include commitments in the amount of $145,395,000 expiring in 1999 and $28,783,000 expiring thereafter through 2012. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds marketable securities and cash equivalents as collateral supporting those commitments for which collateral is deemed necessary. Notional values of interest rate contracts are summarized as follows (in thousands):
1998 1997 ---------- ----------- Caps and floors - written $ 707,137 1,052,000 Swaps 1,364,584 701,331 Forwards 133,204 87,565 Options -- 3,000
The Company enters into interest rate cap, floor, exchange contract (swap), forward, and option agreements as part of its overall asset and liability duration and interest rate risk management strategy. These transactions enable the Company to manage asset and liability durations, and transfer, modify, or reduce its interest rate risk. With the exception of interest rate caps and floors, these instruments are used to hedge asset and liability portfolios and, therefore, are not marked to market. The notional amounts of the contracts are used to express volume, but the amounts potentially subject to credit risk are much smaller. Exposure to credit risk arises from the possibility of nonperformance by counterparties to the interest rate contracts. The Company controls this credit risk (except futures contracts and interest rate cap and floor contracts written, for which credit risk is de minimus) through credit approvals, limits, and monitoring procedures. As the Company generally enters into transactions only with high-quality counterparties, no losses associated with counterparty nonperformance on interest rate contracts have occurred. Nevertheless, the related credit risk is considered and provided for in the allowance for loan losses. Interest rate caps and floors obligate one of the parties to the contract to make payments to the other if an interest rate index exceeds a specified upper "capped" level or if the index falls below a specified "floor" level. The interest rate caps and floors to which the Company is a party at December 31, 1998, have remaining terms of three to twenty-three years. Interest rate swaps generally involve the exchange of fixed and variable rate interest payment obligations based on an underlying notional value, without the exchange of the notional value. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contract but also the interest rate risk associated with unmatched positions. Swaps to which the Company is a party at December 31, 1998, have remaining terms ranging from one to six years. Forwards are contracts for the delayed delivery of financial instruments in which the seller agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. As of December 31, 1998, the Company's forward contracts have remaining terms ranging from one to four months. An option contract is an agreement that conveys to the purchaser the right, but not the obligation, to buy or sell a quantity of a financial instrument or commodity at a predetermined rate or price on a specified future date. 60 61 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 12. COMMITMENTS AND CONTINGENT LIABILITIES (continued) As a market maker in U.S. government, agency, and municipal securities, the Company enters into agreements to purchase and sell such securities. As of December 31, 1998 and 1997, the Company had outstanding commitments to purchase securities of $532,749,000 and $76,870,000, respectively, and outstanding commitments to sell securities of $528,711,000 and $75,717,000, respectively. These agreements at December 31, 1998, have remaining terms of one month or less. The contract or notional amount of financial instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the actual level of risk. As of December 31, 1998 and 1997, the regulatory risk-weighted values assigned to all off-balance sheet financial instruments described herein totaled $895,337,000 and $301,385,000, respectively. The Company has a total of $65.0 million available in lines of credit from two separate institutions. At December 31, 1998, the Company had drawn $37.0 million on these lines, with interest rates ranging from 5.52 percent to 5.93 percent. There were no compensating balance arrangements on either of these lines of credit. At December 31, 1998, the Company was required to maintain a cash balance of $69.5 million with the Federal Reserve Banks to meet minimum balance requirements in accordance with Federal Reserve Board regulations. The Company is a defendant in various legal proceedings arising in the normal course of business. The Company does not believe that the outcome of any such proceedings will have a material adverse effect on its consolidated financial position, operations, or liquidity. The Company has commitments for leasing premises and equipment under the terms of noncancelable operating leases expiring from 1999 to 2031. Future aggregate minimum rental payments under existing noncancelable leases at December 31, 1998 are as follows (in thousands):
Capital Operating leases leases --------- ----------- 1999 $ 606 20,587 2000 521 17,973 2001 477 15,040 2002 479 13,574 2003 479 12,001 Thereafter 1,734 38,212 --------- ----------- $ 4,296 117,387 ========= ===========
Future aggregate minimum rental payments have been reduced by noncancelable subleases as follows: 1999, $532,646; 2000, $491,742; 2001, $387,747; 2002, $301,368; 2003, $196,706; and thereafter $5,973,921. Aggregate rental expense on operating leases amounted to $31,256,000, $16,879,000, and $7,499,000 for the years ended December 31, 1998, 1997, and 1996, respectively. 61 62 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 13. STOCK OPTIONS The Company adopted a qualified stock option plan in 1981, under which stock options may be granted to key employees; and a nonqualified plan under which options may be granted to nonemployee directors. Under the qualified plan and nonqualified plan, respectively, 3,244,000 and 400,000 shares of common stock were reserved. No compensation expense was recorded for the qualified and nonqualified option plans, as the exercise price was equal to the quoted market price of the stock at the time of grant. Options granted are generally exercisable in increments from one to four years after the date of grant and expire six years after the date of grant. Under the nonqualified plan, options expire five to ten years from the date of grant. At December 31, 1998, there were 83,962 and 295,000 additional shares available for grant under the qualified and nonqualified plan, respectively. During 1998, the Company adopted a broad-based employee stock option plan in substitution of an employee profit-sharing plan, which assets were comprised of Company common stock. Substantially all participants of the employee profit-sharing plan are eligible to participate in the employee stock option plan. The Company bases participation in the employee stock option plan upon employment for a full year prior to the option grant date with service of 20 hours a week or more. Stock options will be granted to eligible employees based on an internal job grade structure. All options vest at a rate of one third each year with expiration at four years after grant date. At December 31, 1998, there were 300,000 options authorized with 163,908 options outstanding. The plan is noncompensatory and results in no expense to the Company, as the exercise price of the options is equal to the quoted market price of the stock at the option grant date. The per share weighted-average fair value of stock options granted during 1998, 1997, and 1996 was $7.22, $10.56, and $5.73, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1998 1997 1996 ---------- --------- --------- Expected dividend yield 1.39% 1.55% 2.26% Risk-free interest rate 5.31% 6.52% 6.00% Expected volatility 33.96% 22.17% 23.19% Expected life 5.5 years 5.5 years 5.5 years
Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 --------- --------- --------- Net income (in thousands): As reported $ 130,062 119,859 104,692 Pro forma 128,192 118,619 104,187 Earnings per share: As reported: Basic $ 1.72 1.93 1.74 Diluted 1.70 1.91 1.72 Pro forma: Basic 1.70 1.91 1.73 Diluted 1.68 1.89 1.71
62 63 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 13. STOCK OPTIONS (continued) Pro forma amounts reflect only stock-based compensation grants made after 1994. The full impact of calculating compensation cost for stock options under Statement No. 123 is not reflected in the pro forma amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost of options granted prior to January 1, 1995 is not considered. The following table is a summary of the Company's stock option activity and related information for the three years ended December 31, 1998:
Weighted- Number average of exercise shares price ----------- ---------- Balance at December 31, 1995 1,830,194 $ 8.49 Granted 396,700 18.27 Exercised (641,145) 6.39 Forfeited (74,312) 2.89 Expired (10,000) 6.03 --------- Balance at December 31, 1996 1,501,437 12.27 Acquired 184,991 12.54 Granted 581,182 28.87 Exercised (338,756) 9.03 Forfeited (47,767) 13.25 --------- Balance at December 31, 1997 1,881,087 17.98 Acquired 430,998 11.35 Granted 1,005,383 47.21 Exercised (577,734) 12.38 Forfeited (25,964) 32.82 --------- Balance at December 31, 1998 2,713,770 28.81 ========= Outstanding options exercisable as of: December 31, 1998 1,116,087 14.90 December 31, 1997 589,899 10.83 December 31, 1996 480,434 7.19
Selected information on stock options as of December 31, 1998 follows:
Outstanding options Exercisable options ---------------------------------------- ---------------------------- Weighted- Weighted- average average remaining Weighted- Exercise price Number of exercise contractual Number of average range shares price life shares exercise price -------------- --------- --------- ----------- --------- -------------- $2.38 to $3.81 104,509 $ 3.11 2.71 86,509 $ 3.14 $4.06 to $6.09 41,875 4.94 8.82 41,875 4.94 $6.42 to $9.63 132,780 7.91 4.45 132,780 7.91 $9.73 to $13.96 469,734 11.47 3.68 404,250 11.60 $14.73 to $18.98 376,281 17.90 4.49 202,205 17.68 $21.89 to $31.00 593,108 29.11 5.40 237,468 26.50 $39.13 to $43.50 231,408 42.42 4.33 -- -- $46.38 to $56.00 764,075 48.76 5.52 11,000 49.20 --------- --------- 2,713,770 $28.81 4.83 1,116,087 $ 14.90 ========= =========
63 64 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 14. NET INCOME PER COMMON SHARE Basic and diluted net income per common share, based on the weighted-average outstanding shares, are summarized as follows (in thousands, except per share amounts):
1998 1997 1996 -------- -------- -------- Basic: Net income $130,062 119,859 104,692 Less preferred dividends 46 41 36 -------- -------- -------- Net income applicable to common stock $130,016 119,818 104,656 ======== ======== ======== Average common shares outstanding 75,407 62,011 60,303 ======== ======== ======== Net income per common share - basic $ 1.72 1.93 1.74 ======== ======== ======== Diluted: Net income applicable to common stock $130,016 119,818 104,656 ======== ======== ======== Average common shares outstanding 75,407 62,011 60,303 Stock option adjustment 1,120 884 673 -------- -------- -------- Average common shares outstanding - 76,527 62,895 60,976 diluted ======== ======== ======== Net income per common share - diluted $ 1.70 1.91 1.72 ======== ======== ========
15. SHAREHOLDER RIGHTS PROTECTION PLAN The Company has in place a Shareholder Rights Protection Plan. The Shareholder Rights Protection Plan contains provisions intended to protect shareholders in the event of unsolicited offers or attempts to acquire the Company, including offers that do not treat all shareholders equally, acquisitions in the open market of shares constituting control without offering fair value to all shareholders, and other coercive or unfair takeover tactics that could impair the Board of Directors' ability to represent shareholders' interests fully. The Shareholder Rights Protection Plan provides that attached to each share of common stock is one right (a "Right") to purchase one one-hundredth of a share of participating preferred stock for an exercise price of $90, subject to adjustment. The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person that attempts to acquire the Company without the approval of the Board of Directors. The Rights, however, should not affect offers for all outstanding shares of common stock at a fair price and, otherwise, in the best interests of the Company and its shareholders as determined by the Board of Directors. The Board of Directors may, at its option, redeem all, but not fewer than all, of the then outstanding Rights at any time until the 10th business day following a public announcement that a person or a group had acquired beneficial ownership of 10 percent or more of the Company's outstanding common stock or total voting power. 64 65 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 16. INCOME TAXES Income taxes are summarized as follows (in thousands):
1998 1997 1996 -------- ------ ------ Federal: Current $ 59,119 56,458 41,348 Deferred (4,196) (1,278) 5,192 State 9,755 7,531 7,147 -------- ------ ------ $ 64,678 62,711 53,687 ======== ====== ======
A reconciliation between income tax expense computed using the statutory federal income tax rate of 35 percent and actual income tax expense is as follows (in thousands):
1998 1997 1996 -------- -------- -------- Income tax expense at statutory federal rate $ 68,306 63,900 55,433 State income taxes, net 6,341 4,895 4,645 Nondeductible expenses 8,643 2,738 1,611 Nontaxable interest (7,926) (5,871) (5,982) Tax credits and other taxes (1,877) (1,826) (1,597) Corporate reorganization (6,117) -- -- Decrease in valuation allowance (1,992) (761) -- Other items (700) (364) (423) -------- -------- -------- Income tax expense $ 64,678 62,711 53,687 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1998 and 1997, are presented below (in thousands):
1998 1997 -------- -------- Gross deferred tax assets: Book loan loss deduction in excess of tax $ 75,913 32,087 Postretirement benefits 9,258 2,517 Deferred compensation 7,993 6,289 Deferred loan fees 5,059 1,233 Deferred agreements 3,046 3,427 Capital leases 3,268 -- Acquired net operating losses 3,536 4,730 Other real estate owned 4,890 463 Accrued severance costs 3,361 -- Other 15,133 9,623 -------- -------- Total deferred tax assets 131,457 60,369 Less valuation allowance -- 1,992 -------- -------- Total deferred tax assets net of valuation allowance 131,457 58,377
65 66 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 16. INCOME TAXES (CONTINUED)
1998 1997 -------- -------- Gross deferred tax liabilities: Premises and equipment, due to differences in depreciation $ (7,568) (5,185) Core deposits (23,719) (12,182) FHLB stock dividends (18,100) (15,536) Leasing operations (28,267) (21,396) Prepaid pension reserves (1,405) (818) Mortgage servicing (2,176) (1,513) Other (6,281) (3,065) -------- -------- Total deferred tax liabilities (87,516) (59,695) -------- -------- Statement No. 115 market equity adjustment 2,745 (1,859) -------- -------- Net deferred tax assets (liabilities) $ 46,686 (3,177) ======== ========
The Company has determined that it is not required to establish a valuation reserve for the net deferred tax assets since it is "more likely than not" that such net assets will be principally realized through future taxable income and tax planning strategies. The Company's conclusion that it is "more likely than not" that the net deferred tax assets will be realized is based on history of growth in earnings and the prospects for continued growth and profitability. The Company has net operating loss carryforwards totaling $15,726,000 that expire yearly through the year 2010. 17. REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the Company's capital ratios significantly exceeded the minimum capital levels and is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the Company's category. 66 67 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 17. REGULATORY MATTERS (continued) The actual capital amounts and ratios of the Company and significant banking subsidiaries are as follows (in thousands):
For capital adequacy Actual purposes To be well capitalized -------------------- ------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1998: Total capital (to risk-weighted assets) The Company $1,337,226 11.38% $ 939,917 8.00% $1,174,897 10.00% Zions First National Bank 619,784 15.15 327,213 8.00 409,016 10.00 California Bank & Trust 461,981 10.43 354,427 8.00 443,034 10.00 Tier I capital (to risk-weighted assets) The Company 980,087 8.34 469,959 4.00 704,938 6.00 Zions First National Bank 369,900 9.04 163,607 4.00 245,410 6.00 California Bank & Trust 297,294 6.71 177,213 4.00 265,820 6.00 Tier I capital (to average assets) The Company 980,087 5.86 501,393 3.00 835,654 5.00 Zions First National Bank 369,900 5.56 199,729 3.00 332,881 5.00 California Bank & Trust 297,294 5.14 173,527 3.00 289,212 5.00
For capital adequacy Actual purposes To be well capitalized -------------------- ------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1997: Total capital (to risk- weighted assets) The Company $813,783 14.11% $461,298 8.00% $576,623 10.00% Zions First National Bank 604,517 18.22 205,459 8.00 331,824 10.00 Tier I capital (to risk- weighted assets) The Company 701,572 12.17 230,649 4.00 345,974 6.00 Zions First National Bank 362,988 10.94 132,730 4.00 199,094 6.00 Tier I capital (to average assets) The Company 701,572 6.96 302,466 3.00 504,110 5.00 Zions First National Bank 362,988 5.66 192,429 3.00 320,715 5.00
Dividends declared by the Company's national banking subsidiaries in any calendar year may not, without the approval of the appropriate federal regulator, exceed their net earnings for that year combined with their net earnings less dividends paid for the preceding two years. At December 31, 1998, the Company's subsidiaries had approximately $32.4 million available for the payment of dividends under the foregoing restrictions. 67 68 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 18. RETIREMENT PLANS The Company has a noncontributory defined benefit pension plan for eligible employees. Plan benefits are based on years of service and employees' compensation levels. Benefits vest under the plan upon completion of five years of service. Plan assets consist principally of corporate equity and debt securities and cash investments. Effective January 1, 1997, the plan was amended such that plan benefits are now defined as a lump-sum cash value or an annuity at age 65. The 1997 income from curtailment resulted from the merger of Grossmont Bank plan participants into the Company's plan at December 31, 1997. On January 1, 1998, the Company adopted the provisions of Statement No. 132. Statement No. 132 revises employer's disclosures about pension and other postretirement benefit plans. Statement No. 132 does not change the method of accounting for such plans. The following table presents the change in the plan's benefit obligation for the years ended December 31, 1998 and 1997, as follows (in thousands):
1998 1997 --------- --------- Benefit obligation at beginning of year $ 66,267 55,709 Service cost 5,587 3,042 Interest cost 5,192 4,066 Acquisitions 41,626 6,337 Curtailments -- -- Actuarial gain (5,536) (27) Benefits paid (4,163) (2,860) --------- --------- Benefit obligation at end of year $ 108,973 66,267 ========= =========
Plan assets included 86,760 shares of Company common stock as of December 31, 1998 and 1997. The following table presents the change in plan assets for the years ended December 31, 1998 and 1997, as follows (in thousands):
1998 1997 --------- --------- Fair value of plan assets at beginning of year $ 72,966 54,173 Actual return on plan assets 10,534 14,727 Acquisitions 27,831 6,786 Employer contributions 77 140 Benefits paid (4,163) (2,860) --------- --------- Fair value of plan assets at end of year $ 107,245 72,966 ========= =========
The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1998 and 1997, as follows (in thousands):
1998 1997 -------- -------- Funded status $(1,728) 6,699 Unrecognized net actuarial loss 2,372 3,309 Unrecognized net transition asset (431) (1,056) Unrecognized prior service cost (3,031) (3,416) ------- ------- Net prepaid cost (accrued liability) $(2,818) 5,536 ======= =======
68 69 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 18. RETIREMENT PLANS (continued) The ending net accrued liability and net prepaid benefit cost at December 31, 1998 and 1997, respectively, is fully recognized in the Company's respective consolidated balance sheets. Net periodic benefit cost recognized for the years ended December 31, 1998, 1997, and 1996, includes the following components (in thousands):
1998 1997 1996 ------- ------- ------- Service cost $ 5,587 3,042 3,311 Interest cost 5,192 4,066 3,791 Expected return on plan assets (6,851) (5,076) (4,270) Amortization of prior service cost (385) (384) (83) Amortization of transitional asset (625) (625) (625) Recognized actuarial loss 39 260 838 ------- ------- ------- Net periodic benefit cost recognized $ 2,957 1,283 2,962 ======= ======= =======
The weighted average discount rate used in determining the pension benefit obligation was 6.75% and 7.00% in 1998 and 1997, respectively. The rate of compensation increase and the expected long-term rate of return were 5.00% and 9.00%, respectively, for both 1998 and 1997. Any net transition asset or obligation and any unrecognized prior service cost are being amortized on a straight-line basis. Unrecognized gains and losses are amortized using the minimum recognition method described in paragraph 32 of Statement of Financial Accounting Standards No. 87. The Company also sponsors three unfunded, nonqualified supplemental executive retirement plans, which restore pension benefits limited by federal tax law. At December 31, 1998 and 1997, the Company's liability included in accrued expenses totaled $5.4 million and $2.7 million, respectively. In addition to the Company's defined benefit pension plan, the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time employees hired before January 1, 1993, who meet minimum age and service requirements. The plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. Plan coverage is provided by self-funding or health maintenance organizations (HMOs) options. Reductions in the Company's obligations to provide benefits resulting from cost sharing changes have been applied to reduce the plan's unrecognized transition obligation. The Company's retiree premium contribution rate is frozen at 50 percent of 1996 dollar amounts. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. The following table presents the change in the plan's benefit obligation for the years ended December 31, 1998 and 1997, as follows (in thousands):
1998 1997 ------- ------- Benefit obligation at beginning of year $ 3,817 3,747 Service cost 114 111 Interest cost 230 270 Actuarial gain (434) -- Benefits paid 254 311 ------- ------- Benefit obligation at end of year $ 3,473 3,817 ======= =======
69 70 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 18. RETIREMENT PLANS (continued) The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1998 and 1997, as follows (in thousands):
1998 1997 ------- ------- Benefit obligation at end of year $ 3,473 3,817 Unrecognized net actuarial gain (1,821) (1,947) ------- ------- Accrued benefit cost $ 5,294 5,764 ======= =======
Net periodic benefit cost recognized for the years ended December 31, 1998, 1997, and 1996, includes the following components (in thousands):
1998 1997 1996 ----- ----- ----- Service cost $ 114 111 195 Interest cost 230 270 414 Recognized net gain (515) (487) -- ----- ----- ----- Net periodic benefit cost $(171) (106) 609 ===== ===== =====
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0 percent at December 31, 1998 and 7.5 percent at December 31, 1997. The actuarial assumed health care cost trend rate is 7.0 percent for 1999, decreasing to an ultimate level of 5 percent for the years 2003 and thereafter. The effect of a one-percentage point increase and decrease in the assumed health care cost trend rate at December 31, 1998 would be a $352,000 increase and a $341,000 decrease, respectively, to the aggregate service and interest cost components of the net periodic postretirement health care benefit cost and a $3,503,000 increase and a $3,444,000 decrease, respectively, to the accumulated postretirement benefit obligation for health care benefits. The Company has an Employee Stock Savings Plan and an Employee Investment Savings Plan (PAYSHELTER). Under PAYSHELTER, employees select from a nontax-deferred or tax-deferred plan and several investment alternatives. Employees can contribute from 1 to 15 percent of compensation, which is matched up to 50 percent by the Company for contributions up to 5 percent and 25 percent for contributions greater than 5 percent up to 10 percent. The Company's contributions to the plans amounted to $3,546,930, $2,209,353, and $1,781,825 for the years ended December 31, 1998, 1997, and 1996, respectively. 70 71 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 19. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying value and estimated fair value of principal financial instruments are summarized as follows (in thousands):
December 31, 1998 December 31, 1997 ------------------------------- ------------------------------- Carrying Estimated fair Carrying Estimated value value value fair value ------------ -------------- ------------ ------------ Financial assets: Cash and due from banks $ 864,446 864,446 643,493 643,493 Money market investments 612,205 612,205 853,503 853,503 Investment securities 3,681,090 3,697,971 2,799,102 2,818,172 Loans, net 10,430,823 10,662,279 4,939,702 4,981,933 ------------ ------------ ------------ ------------ Total financial assets $ 15,588,564 15,836,901 9,235,800 9,297,101 ============ ============ ============ ============ Financial liabilities: Demand, savings, and money market deposits $ 9,247,992 9,247,992 5,453,323 5,453,323 Time deposits 3,868,927 3,898,832 1,453,866 1,450,692 Foreign deposits 204,244 205,812 183,044 183,156 Securities sold, not yet purchased 29,702 29,702 45,067 45,067 Federal funds purchased and security repurchase agreements 1,269,843 1,269,843 1,307,441 1,307,441 FHLB advances and other borrowings 206,763 209,797 270,564 278,375 Long-term debt 453,735 460,104 258,566 268,181 ------------ ------------ ------------ ------------ Total financial liabilities $ 15,281,206 15,322,082 8,971,871 8,986,235 ============ ============ ============ ============ Off-balance sheet instruments: Caps and floors: Written $ (3,123) (3,123) (1,099) (1,099) Purchased -- -- -- -- Swaps -- 7,103 -- 4,642 Forwards -- (331) -- (442) ------------ ------------ ------------ ------------ Total off-balance sheet instruments $ (3,123) 3,649 (1,099) 3,101 ============ ============ ============ ============
Financial assets and financial liabilities other than investment securities of the Company are not traded in active markets. The above estimates of fair value require subjective judgments and are approximate. Changes in the following methodologies and assumptions could significantly affect the estimates. Financial Assets - The estimated fair value approximates the carrying value of cash and due from banks and money market investments. For securities, the fair value is based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or a discounted cash flow model based on established market rates. The fair value of fixed-rate loans is estimated by discounting future cash flows using the London Interbank Offered Rate (LIBOR) yield curve adjusted by a factor which reflects the credit and interest rate risk inherent in the loan. Variable-rate loans reprice with changes in market rates. As such their carrying amounts are deemed to approximate fair value. The fair value of the allowance for loan losses of $205,553,000 and $82,849,000 at December 31, 1998 and 1997, respectively, is the present value of estimated net charge-offs. 71 72 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Financial Liabilities - The estimated fair value of demand and savings deposits, securities sold not yet purchased, and federal funds purchased and security repurchase agreements approximates the carrying value. The fair value of time and foreign deposits is estimated by discounting future cash flows using generally the LIBOR yield curve. Substantially all FHLB advances reprice with changes in market interest rates or have short terms to maturity. The carrying value of such indebtedness is deemed to approximate market value. Other borrowings are not significant. The estimated fair value of the subordinated notes is based on a quoted market price. The remaining long-term debt is not significant. Off-Balance Sheet Financial Instruments - The fair value of the caps, floors, and swaps reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date based upon pricing or valuation models applied to current market information, thereby taking into account the current unrealized gains or losses of open contracts. The carrying amounts include unamortized fees paid or received and deferred gains or losses. The fair value of commitments to extend credit and letters of credit, based on fees currently charged for similar commitments, is not significant. 20. OPERATING SEGMENT INFORMATION As of December 31, 1998, the Company adopted Statement No. 131, Financial Reporting for Segments of a Business Enterprise. This statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. According to the statement, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company evaluates segment performance internally based on geography, and thus the operating segments are so defined. All segments, except for the segment defined as "other," are based on commercial banking operations. The operating segment defined as "other" includes the Parent company, smaller nonbank operating units, and eliminations of transactions between segments. The accounting policies of the individual operating segments are the same as those of the Company described in note 1. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations. Expenses for centrally provided services are allocated based on the estimated usage of those services. 72 73 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 20. OPERATING SEGMENT INFORMATION (continued) The following is a summary of selected operating segment information for the years ended December 31, 1998, 1997, and 1996 (in thousands):
Zions First Nevada National California Vectra National State Bank and Bank & Bank Bank of Bank and Subsidiaries Trust Colorado Arizona Subsidiary ------------ ---------- ---------- ---------- ---------- 1998: Net interest income $ 222,044 112,726 73,447 70,687 50,397 Provision for loan losses 23,000 (18,717) 4,588 1,800 1,560 ---------- ---------- ---------- --------- --------- Net interest income after provision for loan losses 199,044 131,443 68,859 68,887 48,837 Noninterest income 142,654 14,284 14,844 9,312 15,047 Merger expense and amortization of goodwill and core deposit intangibles 2,717 37,363 17,076 1,867 1,490 Other noninterest expense 216,405 78,596 57,310 40,131 41,854 ---------- ---------- ---------- --------- --------- Income before income taxes and minority interest 122,576 29,768 9,317 36,201 20,540 Income taxes 35,477 13,360 5,745 14,013 6,881 Minority interest -- -- -- -- -- ---------- ---------- ---------- --------- --------- Net income $ 87,099 16,408 3,572 22,188 13,659 ========== ========== ========== ========= ========= Assets $6,047,071 6,183,044 2,151,029 1,451,866 1,120,703 Net loans and leases 3,509,319 4,180,999 1,216,359 1,012,038 550,570 Deposits 3,933,823 5,348,694 1,688,719 1,225,796 929,370 Shareholders' equity 383,350 606,195 388,506 116,262 84,976 1997: Net interest income $ 206,009 11,727 12,980 61,577 37,076 Provision for loan losses -- 615 (70) 2,400 1,560 ---------- ---------- ---------- --------- --------- Net interest income after provision for loan losses 206,009 11,112 13,050 59,177 35,516 Noninterest income 113,756 1,775 1,668 6,272 11,884 Merger expense and amortization of goodwill and core deposit intangibles 1,270 1,511 1,556 1,568 450 Other noninterest expense 184,772 5,300 8,928 34,168 31,400 ---------- ---------- ---------- --------- --------- Income before income taxes 133,723 6,076 4,234 29,713 15,550 Income taxes 45,273 2,756 2,046 11,896 4,863 ---------- ---------- ---------- --------- --------- Net income $ 88,450 3,320 2,188 17,817 10,687 ========== ========== ========== ========= ========= Assets $5,899,333 976,930 501,197 1,351,876 988,010 Net loans and leases 2,780,986 493,936 304,270 797,620 488,659 Deposits 3,665,705 776,177 395,341 1,191,774 833,644 Shareholders' equity 426,660 184,525 97,070 105,099 86,170 1996: Net interest income $ 187,900 -- -- 50,485 25,694 Provision for loan losses -- -- -- 2,300 1,240 ---------- ---------- ---------- --------- --------- Net interest income after provision for loan losses 187,900 -- -- 48,185 24,454 Noninterest income 93,737 -- -- 3,575 8,807 Merger expense and amortization of goodwill and core deposit intangibles 502 -- -- 1,096 103 Other noninterest expense 156,535 -- -- 26,284 22,813 ---------- ---------- ---------- --------- --------- Income before income taxes 124,600 -- -- 24,380 10,345 Income taxes 41,460 -- -- 9,715 3,094 ---------- ---------- ---------- --------- --------- Net income $ 83,140 -- -- 14,665 7,251 ========== ========== ========== ========= ========= Assets $4,862,570 -- -- 1,023,915 570,927 Net loans and leases 2,476,218 -- -- 704,432 268,333 Deposits 3,167,894 -- -- 900,432 500,498 Shareholders' equity 374,432 -- -- 109,304 46,703
73 74
The Commerce Consoli- Bank of dated Washington Other Company ---------- -------- ---------- 1998: Net interest income 13,939 (9,420) 533,820 Provision for loan losses 78 (400) 11,909 -------- -------- ---------- Net interest income after provision for loan losses 13,861 (9,020) 521,911 Noninterest income 1,702 2,103 199,946 Merger expense and amortization of goodwill and core deposit intangibles 7,702 1,554 69,769 Other noninterest expense 7,453 15,179 456,928 -------- -------- ---------- Income before income taxes and minority interest 408 (23,650) 195,160 Income taxes 346 (11,144) 64,678 Minority interest -- 420 420 -------- -------- ---------- Net income 62 (12,926) 130,062 ======== ======== ========== Assets 337,351 (270,833) 17,020,231 Net loans and leases 154,892 12,199 10,636,376 Deposits 221,403 (26,642) 13,321,163 Shareholders' equity 23,159 (217,371) 1,385,077 1997: Net interest income 12,596 (6,291) 335,674 Provision for loan losses 300 (175) 4,630 -------- -------- ---------- Net interest income after provision for loan losses 12,296 (6,116) 331,044 Noninterest income 1,303 4,066 140,724 Merger expense and amortization of goodwill and core deposit intangibles -- 1,422 7,777 Other noninterest expense 7,059 9,794 281,421 -------- -------- ---------- Income before income taxes 6,540 (13,266) 182,570 Income taxes 2,082 (6,205) 62,711 -------- -------- ---------- Net income 4,458 (7,061) 119,859 ======== ======== ========== Assets 298,478 (72,377) 9,943,447 Net loans and leases 153,765 3,315 5,022,551 Deposits 235,771 (8,179) 7,090,233 Shareholders' equity 23,890 (120,865) 802,549 1996: Net interest income 10,106 (3,606) 270,579 Provision for loan losses 270 -- 3,810 -------- -------- ---------- Net interest income after provision for loan losses 9,836 (3,606) 266,769 Noninterest income 1,233 4,772 112,124 Merger expense and amortization of goodwill and core deposit intangibles -- 599 2,300 Other noninterest expense 6,182 6,400 218,214 -------- -------- ---------- Income before income taxes 4,887 (5,833) 158,379 Income taxes 1,545 (2,127) 53,687 -------- -------- ---------- Net income 3,342 (3,706) 104,692 ======== ======== ========== Assets 237,517 27,552 6,722,481 Net loans and leases 132,102 3,560 3,584,645 Deposits 185,740 (16,807) 4,737,757 Shareholders' equity 20,300 (22,987) 527,752
74 75 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Financial information by quarter for the three years ended December 31, 1998, is as follows (in thousands, except per share amounts):
Income before Diluted income net taxes income Gross Net Non- Provision Non- and per interest interest interest for loan interest minority Net common income income income losses expense interest income share --------- --------- -------- --------- --------- --------- -------- ---------- 1998: First quarter $ 205,893 110,179 44,039 3,285 99,846 51,087 35,030 0.48 Second quarter 217,651 120,495 47,752 3,264 119,696 45,287 30,900 0.41 Third quarter 233,348 129,580 49,607 2,485 118,473 58,229 37,311 0.47 Fourth quarter 307,090 173,566 58,548 2,875 188,682 40,557 26,821 0.34 ----------- ------- ------- ----- ------- ------- ------- $ 963,982 533,820 199,946 11,909 526,697 195,160 130,062 1.70 =========== ======= ======= ===== ======= ======= ======= 1997: First quarter $ 141,253 70,453 32,043 1,065 59,369 42,062 27,619 0.45 Second quarter 160,353 79,158 32,383 895 65,801 44,845 29,057 0.47 Third quarter 168,497 85,015 36,829 1,170 73,915 46,759 30,700 0.49 Fourth quarter 191,266 101,048 39,469 1,500 90,113 48,904 32,483 0.47 ----------- ------- ------- ----- ------- ------- ------- $ 661,369 335,674 140,724 4,630 289,198 182,570 119,859 1.91 =========== ======= ======= ===== ======= ======= =======
75 76 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 22. RESTATEMENT As a result of a recent interpretation by the Securities and Exchange Commission Staff regarding the treatment of share repurchases under Staff Accounting Bulletin 96, the Company has decided to restate the presentation of 8 of 13 business combinations, consummated during 1998 and 1997, as purchases rather than as poolings of interests as previously reported. As a result of the foregoing, the Company's 1996, 1997, and 1998 consolidated financial statements have been restated from amounts previously reported. The principal effects of the restatement on the accompanying consolidated financial statements are set forth below:
(In thousands, except per share amounts) Condensed Consolidated Balance Sheets ----------------------------------------------- As of December 31, 1998 1997 ---------------------- ----------------------- As previ- As previ- ously ously ASSETS As restated reported As restated reported ------------- ---------- ----------- ---------- Cash and due from banks $ 864,446 864,446 643,493 710,171 Money market investments 612,205 612,205 853,503 853,518 Investment securities 3,681,090 3,680,339 2,799,102 3,090,509 Loans, net 10,430,823 10,427,939 4,939,702 5,577,331 Premises and equipment, net 231,847 231,066 137,030 155,648 Goodwill and core deposit intangibles 663,606 271,578 294,925 174,433 Other real estate owned 5,270 5,270 3,371 5,738 Other assets 530,944 556,078 272,321 301,856 ------------- ---------- --------- ---------- $ 17,020,231 16,648,921 9,943,447 10,869,204 ============= ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 13,321,163 13,321,163 7,090,233 7,956,234 Securities sold, not yet purchased 29,702 29,702 45,067 45,067 Federal funds purchased 337,283 337,283 294,109 350,109 Security repurchase agreements 932,560 932,560 1,013,332 1,042,156 Accrued liabilities 319,278 319,278 169,027 173,331 Commercial paper 49,217 49,217 -- -- Federal Home Loan Bank advances and other borrowings 157,546 157,546 270,564 279,614 Long-term debt 453,735 453,735 258,566 280,641 ------------- ---------- --------- ---------- Total liabilities 15,600,484 15,600,484 9,140,898 10,127,152 ------------- ---------- --------- ---------- Minority interest 34,670 34,781 -- -- Shareholders' equity: Common stock 752,845 324,099 270,359 190,039 Accumulated other comprehensive income (loss) (4,432) (4,280) 3,077 1,902 Retained earnings 636,664 693,837 529,113 550,111 ------------- ---------- --------- ---------- Total stockholders' equity 1,385,077 1,013,656 802,549 742,052 ------------- ---------- --------- ---------- $ 17,020,231 16,648,921 9,943,447 10,869,204 ============= ========== ========= ==========
76 77 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 22. RESTATEMENT (continued)
(In thousands, except per share amounts) Condensed Consolidated Statements of Income ----------------------------------------------------------------------------- Years ended December 31, 1998 1997 1996 --------------------- ----------------------- --------------------- As As As As previously As previously As previously restated reported restated reported restated reported -------- -------- -------- -------- -------- -------- Interest income $963,982 976,044 661,369 779,531 494,507 594,740 Interest expense 430,162 432,281 325,695 367,000 223,928 257,015 -------- -------- -------- -------- -------- -------- Net interest income 533,820 543,763 335,674 412,531 270,579 337,725 Provision for loan losses 11,909 12,179 4,630 7,758 3,810 6,526 -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses 521,911 531,584 331,044 404,773 266,769 331,199 Noninterest income 199,946 200,713 140,724 146,374 112,124 122,007 Noninterest expense 526,697 514,057 289,198 344,629 220,514 273,124 -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest 195,160 218,240 182,570 206,518 158,379 180,082 Income taxes 64,678 70,862 62,711 72,218 53,687 59,664 -------- -------- -------- -------- -------- -------- Net income before minority interest 130,482 147,378 119,859 134,300 104,692 120,418 Minority interest 420 531 -- -- -- -- -------- -------- -------- -------- -------- -------- Net income $130,062 146,847 119,859 134,300 104,692 120,418 ======== ======== ======== ======== ======== ======== Net income per common share: Basic $ 1.72 1.93 1.93 1.88 1.74 1.69 Diluted $ 1.70 1.91 1.91 1.84 1.72 1.66
77 78 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements ZIONS BANCORPORATION Condensed Balance Sheets December 31, 1998 and 1997 (In thousands) 23. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information of Zions Bancorporation (parent only) follows:
1998 1997 ----------- ----------- ASSETS Cash and due from banks $ 155 1,370 Interest-bearing deposits 19,637 2,241 Investment securities 9,950 10,494 Loans and lease financing receivables 14,797 1,680 Loans and advances to subsidiaries: Commercial banks and bank holding company 110,000 -- Other 2,865 2,945 Investments in subsidiaries: Commercial banks and bank holding company 1,567,946 933,756 Other 25,711 5,828 Other assets 32,737 19,170 ----------- ----------- $ 1,783,798 977,484 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accrued liabilities $ 36,731 23,203 Commercial paper and other short-term borrowings 111,217 44,000 Borrowings over one year -- 50,000 Subordinated debt to subsidiaries 23,773 7,732 Long-term debt 227,000 50,000 ----------- ----------- Total liabilities 398,721 174,935 ----------- ----------- Shareholders' equity: Common stock 752,845 270,359 Accumulated other comprehensive income (loss) (4,432) 3,077 Retained earnings 636,664 529,113 ----------- ----------- Total shareholders' equity 1,385,077 802,549 ----------- ----------- $ 1,783,798 977,484 =========== ===========
78 79 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements ZIONS BANCORPORATION Condensed Statements of Income Years ended December 31, 1998, 1997, and 1996 (In thousands) 23. PARENT COMPANY FINANCIAL INFORMATION (continued)
1998 1997 1996 --------- --------- --------- Interest income - interest and fees on loans and securities $ 7,023 932 890 Interest expense - interest on borrowed funds 17,307 6,674 4,769 --------- --------- --------- Net interest loss (10,284) (5,742) (3,879) Provision for loan losses -- -- -- Net interest income after provision for loan losses (10,284) (5,742) (3,879) --------- --------- --------- Other income: Dividends from consolidated subsidiaries: Commercial banks and bank holding company 210,890 98,234 44,970 Other 1,430 500 1,000 Other income 7,064 5,381 3,990 --------- --------- --------- Total other income 219,384 104,115 49,960 --------- --------- --------- Expenses: Salaries and employee benefits 5,449 7,768 6,472 Other operating expenses 8,367 4,041 1,754 --------- --------- --------- Total expenses 13,816 11,809 8,226 --------- --------- --------- Income before income tax benefit and undistributed income of subsidiaries 195,284 86,564 37,855 Income tax benefit 8,254 5,654 (2,762) --------- --------- --------- Income before equity in undistributed income of consolidated subsidiaries 203,538 92,218 40,617 --------- --------- --------- Equity in undistributed income (losses) of subsidiaries: Commercial banks and bank holding company (68,704) 27,992 63,449 Other (4,772) (351) 626 --------- --------- --------- (73,476) 27,641 64,075 --------- --------- --------- Net income $ 130,062 119,859 104,692 ========= ========= =========
79 80 ZIONS BANCORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements ZIONS BANCORPORATION Condensed Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996 (In thousands) 23. PARENT COMPANY FINANCIAL INFORMATION (continued)
1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income $ 130,062 119,859 104,692 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net (income) losses of consolidated subsidiaries 73,476 (27,641) (64,075) Depreciation of premises and equipment 160 161 440 Amortization of intangibles 644 644 599 Other 16,304 (7,530) 9,992 --------- --------- --------- Net cash provided by operating activities 220,646 85,493 51,648 --------- --------- --------- Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits (17,396) 1,287 12,975 Collection of advances to subsidiaries 8,054 1,911 986 Advances to subsidiaries (118,261) (4,226) (1,745) Increase of investment in subsidiaries (335,340) (31,430) (30) Purchases of other assets -- -- (12,000) Other (18,344) (1,354) (961) --------- --------- --------- Net cash used in investing activities (481,287) (33,812) (775) --------- --------- --------- Cash flows from financing activities: Net change in commercial paper and other borrowings under one year 38,167 44,000 -- Proceeds from borrowings over one year -- 50,000 -- Payments on borrowings over one year (25,000) -- -- Proceeds from issuance of long-term debt 177,267 232 -- Payments on long-term debt (2,000) (5) (4,715) Proceeds from issuance of common stock 139,333 3,754 2,965 Payments to redeem common and preferred stock (26,741) (121,389) (25,148) Dividends paid (41,600) (28,999) (24,997) --------- --------- --------- Net cash provided by (used in) financing activities 259,426 (52,407) (51,895) --------- --------- --------- Net decrease in cash and due from banks (1,215) (726) (1,022) Cash and due from banks at beginning of year 1,370 2,096 3,118 --------- --------- --------- Cash and due from banks at end of year $ 155 1,370 2,096 ========= ========= =========
The parent company paid interest of $16,427,000, $8,287,000, and $5,856,000 for the years ended December 31, 1998, 1997, and 1996, respectively. 80 EX-21 4 LIST OF SUBSIDIARIES FOR ZIONS BANCORPORATION 1 EXHIBIT 21 ZIONS BANCORPORATION AND SUBSIDIARIES AT DECEMBER 31, 1998
SUBSIDIARY STATE ---------- ----- Zions First National Bank Federally chartered doing business in Utah and Idaho California Bank & Trust California Vectra Bank Colorado Federally chartered doing business in Colorado and New Mexico National Bank of Arizona Federally chartered doing business in Arizona Nevada State Bank Nevada The Commerce Bank of Washington Federally chartered doing business in Washington Val Cor Bancorporation, Inc. Colorado Cash Access, Inc. Utah GB Capital Trust Delaware Great Western Financial Corporation Utah Lockhart Realty Company Utah VBC Capital I Delaware Zions Management Services Company Utah Zions Insurance Agency, Inc. Utah Zions Life Insurance Company Arizona
EX-23 5 CONSENT OF KPMG LLP, IND. CERTIFIED PUBLIC ACCTS. 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Zions Bancorporation: We consent to the incorporation by reference in Zions Bancorporation's (i) Registration Statement (Form S-3 No. 33-58801) and related Prospectus pertaining to the Zions Bancorporation Dividend Reinvestment and Common Stock Purchase Plan, (ii) Registration Statement (Form S-8 No. 333-36207) and related Prospectus pertaining to Zions Bancorporation Employee Stock Savings Plan, (iii) Registration Statement (Form S-8 No. 333-36205) and related Prospectus pertaining to Zions Bancorporation Employee Investment Savings Plan, (iv) Registration Statement (Form S-8 No. 333-68461) and related Prospectus pertaining to Aspen Bancshares, Inc. 1993 Non-Qualified Stock Option Plan for Directors, Aspen Bancshares, Inc. 1990 Incentive Stock Option Plan, Vectra Banking Corporation Employees' Equity Incentive Stock Option Plan, Vectra Banking Corporation Non-Employee Directors' Stock Option Plan, Vectra Banking Corporation 1989 Non-Statutory Stock Option Plan, Second Amended and Restated 1988 Stock Option Plan of FP Bancorp, Inc., SBT Bankshares, Inc. 1995 Non-Qualified Stock Option Agreement, The Commerce Bancorporation 1995 Restated Incentive Compensation Plan, and The Commerce Bancorporation 1987 Stock Option Plan, and (v) Registration Statement Form S-8 No. 333-74179) and the related Prospectus pertaining to Zions Bancorporation 1996 Non-Employee Directors Stock Option Plan, and Hemingway Stock Option Agreement, of our report dated February 7, 2000, relating to the consolidated balance sheets of Zions Bancorporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows, and changes in shareholders' equity and comprehensive income for each of the years in the three-year period ended December 31, 1998, which report appears in this annual report on Form 10-K/A for the year ended December 31, 1998. We also consent to the incorporation by reference in Zions Bancorporation's Registration Statement (Form S-8 No. 333-36207) of Zions Bancorporation Employee Stock Savings Plan of our report dated March 16, 1999, relating to the statements of net assets available for benefits of Zions Bancorporation Employee Stock Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, which report appears in the annual report on Form 11-K for the year ended December 31, 1998, which is included as an exhibit in this annual report on Form 10-K. We also consent to the incorporation by reference in Zions Bancorporation's Registration Statement (Form S-8 No. 333-36205) of Zions Bancorporation Employee Investment Savings Plan of our report dated March 16, 1999, relating to the statements of net assets available for benefits of Zions Bancorporation Employee Investment Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, which report appears in the annual report on Form 11-K for the year ended December 31, 1998, which is included as an exhibit in this annual report on Form 10-K. /s/ KPMG LLP Salt Lake City, Utah February 11, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE - YEAR ENDED 12/31/98
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 WHICH HAVE BEEN RESTATED AND INCLUDED IN THE COMPANY'S FORM 10-K/A DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000109380 ZIONS BANCORPORATION /UT/ 1,000 U.S. YEAR DEC-31-1998 DEC-31-1998 1 864,446 30,484 581,721 191,855 684,581 2,804,654 2,821,535 10,636,376 205,553 17,020,231 13,321,163 1,449,512 319,278 510,531 0 0 752,845 632,232 17,020,231 671,636 292,346 0 963,982 291,609 430,162 533,820 11,909 2,039 527,117 194,740 130,062 0 0 130,062 1.72 1.70 4.46 53,879 25,779 5,212 0 82,849 24,221 9,325 205,553 166,253 0 39,300
EX-27.2 7 FINANCIAL DATA SCHEDULE-YEAR ENDED 12/31/97
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 WHICH HAVE BEEN RESTATED AND INCLUDED IN THE COMPANY'S FORM 10-K/A DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000109380 ZIONS BANCORPORATION /UT/ 1,000 U.S. YEAR DEC-31-1997 DEC-31-1997 1 643,493 61,986 791,517 83,681 544,819 2,170,602 2,189,672 5,022,551 82,849 9,943,447 7,090,233 1,412,391 169,027 469,247 0 0 270,359 532,190 9,943,447 408,611 252,758 0 661,369 174,503 325,695 335,674 4,630 777 289,198 182,570 119,859 0 0 119,859 1.93 1.91 4.11 11,907 9,944 691 0 72,040 14,025 5,888 82,849 60,318 0 22,531
EX-27.3 8 FINANCIAL DATA SCHEDULE-YEAR ENDED 12/31/96
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 WHICH HAVE BEEN RESTATED. 0000109380 ZIONS BANCORPORATION /UT/ 1,000 U.S. YEAR DEC-31-1996 DEC-31-1996 1 422,685 47,854 572,883 34,076 507,508 1,345,613 1,354,759 3,584,645 72,040 6,722,481 4,737,757 1,046,871 84,820 325,281 0 0 91,421 436,331 6,722,481 319,804 174,703 0 494,507 141,269 223,928 270,579 3,810 123 220,514 158,379 104,692 0 0 104,692 1.74 1.72 4.47 11,681 3,553 857 0 69,369 9,432 5,727 72,040 55,394 0 16,646
EX-99.1 9 FORM 11-K ANNUAL REPORT EMP. STOCK SAVINGS PLAN 1 EXHIBIT 99.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) Of The Securities Exchange Act of 1934 For the Year Ended December 31, 1998 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN ZIONS BANCORPORATION One South Main, Suite 1380 Salt Lake City, Utah 84111 1 2 ITEM 1. CHANGES IN THE PLAN The Plan was completely amended and restated as of October 1, 1992, with certain provisions retroactively effective as of January 1, 1989. In 1994, the Plan was amended for the purpose of maintaining its qualification under the Internal Revenue Code pursuant to the Tax Reform Act of 1986 and, in order to conform the Plan to the requirements of the Unemployment Compensation Act of 1992 and the Omnibus Budget Reconciliation Act of 1993. No changes were made in the Plan during the year 1998. ITEM 2. CHANGES IN INVESTMENT POLICY No material changes were made during the fiscal year in the policy with respect to the kind of securities and other investments in which funds held under the plan may be invested. ITEM 3. CONTRIBUTIONS UNDER THE PLAN The Company's contributions are measured by reference to employee contributions and are not discretionary. ITEM 4. PARTICIPATING EMPLOYEES There were 4,155 participating employees in the Plan on December 31, 1998. ITEM 5. ADMINISTRATION OF THE PLAN (a) Zions Bancorporation is the Plan administrator. The Company's Board of Directors has appointed an Administrative Committee consisting of six persons. The Committee has full power and authority to administer the Plan and to interpret its provisions. The present members of the Committee and their positions held are:
Member Position - Company ------------------------------------ Clark B. Hinckley, Chairman Senior Vice President of Zions Bancorporation Harris H. Simmons President and Chief Executive Officer of Zions Bancorporation Dale M. Gibbons Executive Vice President of Zions Bancorporation W. David Hemingway Executive Vice President of Zions Bancorporation Richard G. Crandall Vice President of Zions First National Bank Russell W. Miller President of Zions Insurance Agency, Inc.
The address of each fiduciary listed above is One South Main, Suite 1380, Salt Lake City, Utah 84111. (b) No compensation is paid to the Committee members by the Plan. All expenses of the Plan and its administration are paid by the Company. 2 3 ITEM 6. CUSTODIAN OF INVESTMENTS (a) Zions First National Bank, One South Main, Salt Lake City, Utah 84111 is the custodian and trustee. (b) The custodian and trustee receives no compensation from the Plan. ITEM 7. REPORTS TO PARTICIPATING EMPLOYEES Participating employees are furnished an annual statement reflecting the status of their accounts as of the end of the fiscal year. ITEM 8. INVESTMENT OF FUNDS Substantially all of the assets of the Plan are invested in securities of the Company. ITEM 9. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements Page ----------- Independent Auditors' Report 4 Statements of Net Assets Available for Benefits - December 31, 1998 and 1997 5 Statements of Changes in Net Assets Available for Benefits - Years ended 6 December 31, 1998, 1997, and 1996 Notes to Financial Statements 7 Schedules - Schedules I, II, and III have been omitted for the reasons that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. (b) Exhibits - None
3 4 INDEPENDENT AUDITORS' REPORT The Trust Committee Zions Bancorporation Employee Stock Savings Plan: We have audited the accompanying statements of net assets available for benefits of Zions Bancorporation Employee Stock Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the plan administrator. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the plan administrator, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of Zions Bancorporation Employee Stock Savings Plan as of December 31, 1998 and 1997, and the changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions for the year ended December 31, 1998, are presented for purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic 1998 financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ KPMG LLP March 16, 1999 4 5 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Statement of Net Assets Available for Benefits December 31, 1998 and 1997
1998 1997 ----------- ----------- Assets: Cash and cash equivalents $ 51 173,627 Investments, at fair value: Zions Bancorporation common stock (approximate cost of $24,852,480 in 1998 and $18,067,701 in 1997) 90,567,426 63,033,316 Contributions receivable: Employee 266,162 50,449 Employer 136,643 25,224 Dividends receivable 203,273 166,700 Interest receivable 579 333 ----------- ----------- Total assets 91,174,134 63,449,649 ----------- ----------- Liabilities: Accounts payable -- 56,614 Excess contribution refunds 33,675 19,730 ----------- ----------- Total liabilities 33,675 76,344 ----------- ----------- Net assets available for benefits $91,140,459 63,373,305 =========== ===========
See accompanying notes to financial statements. 5 6 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Statement of Changes in Net Assets Available for Benefits Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ----------- ----------- ----------- Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments in Zions Bancorporation common stock $24,594,856 26,586,307 7,966,631 Dividends 771,268 793,341 389,789 Interest 7,562 4,113 3,979 ----------- ----------- ----------- 25,373,686 27,383,761 8,360,399 ----------- ----------- ----------- Contributions: Employee 5,349,824 3,331,020 2,674,067 Employer 2,691,189 1,645,785 1,295,816 ----------- ----------- ----------- 8,041,013 4,976,805 3,969,883 ----------- ----------- ----------- Rollover from nonaffiliated plan -- 89,279 -- ----------- ----------- ----------- Total additions 33,414,699 32,449,845 12,330,282 ----------- ----------- ----------- Deductions from net assets attributed to: Benefits paid directly to participants 5,647,545 3,590,944 2,109,580 Rollover to affiliated plan -- -- 183,050 ----------- ----------- ----------- 5,647,545 3,590,944 2,292,630 ----------- ----------- ----------- Total deductions 27,767,154 28,858,901 10,037,652 Net increase Net assets available for benefits: Beginning of year 63,373,305 34,514,404 24,476,752 ----------- ----------- ----------- End of year $91,140,459 63,373,305 34,514,404 =========== =========== ===========
See accompanying notes to financial statements. 6 7 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (1) PLAN DESCRIPTION The following description of the Zions Bancorporation Employee Stock Savings Plan (the Plan) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. (a) GENERAL The Plan is a single employer contributory plan that is designed to provide retirement benefits for eligible employees under either a pre-tax or post-tax salary reduction arrangement by offering employees an opportunity to acquire stock ownership in Zions Bancorporation (the Company). The Plan is subject to the provisions of the Employee Retirement Income Security Act (ERISA) of 1974. (b) ELIGIBILITY Participation in the Plan is voluntary. An employee is eligible to participate on January 1, or July 1, whichever coincides with, or immediately follows, the latter of the date on which the employee completes at least 1,000 hours of service during 12 continuous months and attains the age of 21. As of December 31, 1998 and 1997, there were 4,155 and 3,240 participants, respectively, in the Plan. (c) EMPLOYEE AND COMPANY CONTRIBUTIONS Each eligible employee who elects to participate makes contributions ranging from one to five percent of their total compensation. Company contributions are equal to 50 percent of the amount contributed by the employee. The maximum amount a participant may contribute to the Plan in a calendar year, in conjunction with the Employee Investment Savings Plan, is $10,000 for 1998. (d) ALLOCATION OF INCOME OR LOSS Investment income is allocated to each participant's account in proportion to the investment shares held in that participant's account to the total of investment shares held in the Plan. (e) VESTING AND PAYMENT OF BENEFITS Employee contributions and the employees' share of the Company contributions are 100 percent vested at all times. Benefits are paid upon death, disability, retirement, or earlier subject to certain restrictions. Benefits are paid in shares of stock. (continued) 7 8 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Notes to Financial Statements (f) PLAN TERMINATION Although the Company has not expressed intent to do so, it has the right under the Plan to discontinue contributions at any time and to terminate the Plan subject to provisions of ERISA. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Plan in the preparation of its financial statements: (a) BASIS OF PRESENTATION The Plan's financial statements are presented on the accrual basis of accounting. (b) COSTS OF ADMINISTRATION All costs of administration are currently being absorbed by the Company. (c) INVESTMENTS The investment in common stock of the Company is carried at its quoted market price in the accompanying financial statements. Purchases and sales of investments are recorded on a settlement-date basis which does not materially differ from using the trade-date basis required by generally accepted accounting principles. Net unrealized appreciation represents the difference between the book value and the market value of investments held at year-end. Book value is the market value at the end of the previous fiscal year, or cost if the investment was purchased during the year. The following investment represents five percent or more of the net assets available for plan benefits at December 31:
1998 1997 -------------- ----------- Zions Bancorporation common stock $ 90,567,426 63,033,316
(d) USE OF ESTIMATES The preparation the financial statements and supplemental schedules in conformity with generally accepted accounting principles requires the Plan administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statement of net assets available for benefits and supplemental schedules and the changes in net assets during the reporting period. Actual results could differ from those estimates. (continued) 8 9 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (e) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and short-term investments with maturity dates of 90 days or less. (f) RECLASSIFICATIONS Certain reclassifications have been made in the 1997 financial statements to conform with the 1998 presentation. (3) TAX STATUS The Plan obtained its latest determination letter on June 5, 1996, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code (IRC). The Plan has been amended since receiving the determination letter. However, the Plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. (4) ZIONS BANCORPORATION COMMON STOCK At December 31, 1998 and 1997, the investment in common stock of the Company consisted of 1,451,944 and 1,389,164 shares, respectively. 9 10 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Line 27a - Schedule of Assets Held for Investment Purposes December 31, 1998
(a) (e) Party in (b) (c) (d) Current interest Issuer Investment description Cost (1) value - ------------- ------------------- ----------------------------------------------- ---------------- --------------- Investments at fair value determined by quoted market prices: * Zions Bancorporation Zions Bancorporation common stock $24,852,480 90,567,426 Notes: * Party-in-interest There were no nonexempt party-in-interest transactions. There were no assets which were both acquired and disposed of during the year.
(1) Cost is determined using the average-cost method applied on a participant-by-participant basis. Line 27d - Schedule of Reportable Transactions Year ended December 31, 1998
(h) Current (a) value Identity of (c) (g) of asset party (b) Purchase (d) Cost of on trans (i) involved Description of asset price Selling price asset -action date Net gain - ---------------- -------------------- ---------------- ----------------- ------------- --------------- ------------ Zions Zions Bancorporation Bancorporation common stock $ 5,424,957 1,980,516 5,424,957 3,444,441 - Zions Bancorporation common stock 8,623,415 - - 8,623,415 -
10 EX-99.2 10 FORM 11-K ANNUAL REPORT EMP. INV. SAVINGS PLAN 1 EXHIBIT 99.2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) Of The Securities Exchange Act of 1934 For the Year Ended December 31, 1998 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN ZIONS BANCORPORATION One South Main, Suite 1380 Salt Lake City, Utah 84111 1 2 ITEM 1. CHANGES IN THE PLAN The Plan was completely amended and restated as of October 1, 1992, with certain provisions retroactively effective as of January 1, 1989. In 1994, the Plan was amended for the purpose of maintaining its qualification under Internal Revenue Code pursuant to the Tax Reform Act of 1986 and, in order to conform the Plan to the requirements of the Unemployment Compensation Act of 1992 and the Omnibus Budget Reconciliation Act of 1993 and to facilitate the merger of the National Bank of Arizona Savings and Retirement Plan and the Rio Salado Bancorp. Inc. Retirement Plan into the Plan. No changes were made in the Plan during the year 1998. ITEM 2. CHANGES IN INVESTMENT POLICY During 1997 the Plan increased the number of investment fund types it maintains from four to nine. The separate types of investment funds maintained by the Plan are as follows: (i) company securities, which consists of Company stock and short-term investments pending the acquisition of Company securities; (ii) Accessor Growth Portfolio, which seeks capital growth by investing primarily in companies and industries from the 500 U.S. issuers with the largest market capitalization and well-established records of growth in profits and earnings; (iii) Accessor Value and Income Portfolio, which seeks a high level of current income and capital growth by investing primarily in companies and industries from the 500 U.S. issuers with the largest market capitalization and attractive valuation levels; (iv) Accessor Small to Mid Cap Portfolio which seeks capital growth by investing primarily in equity securities of small-to-medium sized companies with high growth potential; (v) Accessor International Equity Portfolio which seeks the growth of capital by investing primarily in equity securities of companies domiciled in countries other than the United States; (vi) Accessor Intermediate Fixed-Income Portfolio which seeks the generation of current income by investing in fixed-income securities; (vii) Accessor Short-Intermediate Fixed-Income Portfolio which seeks preservation of capital and generation of current income by investing primarily in fixed-income securities, including government bonds, corporate bonds and mortgage-backed securities, (viii) Accessor Mortgage Securities Portfolio which seeks a high level of current income by investing in mortgage-related securities; and (ix) U.S. Government Money Portfolio which seeks maximum current income consistent with the preservation of principal and liquidity, investing primarily in short-term obligations issued by or guaranteed by the U.S. Government, its agencies or instrumentalities. No changes in investment policy were made during the year 1998. ITEM 3. CONTRIBUTIONS UNDER THE PLAN The Company's contributions are measured by reference to employee contributions and are not discretionary. ITEM 4. PARTICIPATING EMPLOYEES There were 3,893 participating employees in the Plan on December 31, 1998. 2 3 ITEM 5. ADMINISTRATION OF THE PLAN (a) Zions Bancorporation is the Plan administrator. The Company's Board of Directors has appointed an Administrative Committee consisting of six persons. The Committee has full power and authority to administer the Plan and to interpret its provisions. The present members of the Committee and their positions held are:
Member Position - Company ------ ------------------ Clark B. Hinckley, Chairman Senior Vice President of Zions Bancorporation Harris H. Simmons President and Chief Executive Officer of Zions Bancorporation Dale M. Gibbons Executive Vice President of Zions Bancorporation W. David Hemingway Executive Vice President of Zions Bancorporation Richard G. Crandall Vice President of Zions First National Bank Russell W. Miller President of Zions Insurance Agency, Inc.
The address of each fiduciary listed above is One South Main, Suite 1380, Salt Lake City, Utah 84111. (c) No compensation is paid to the Committee members by the Plan. All expenses of the Plan and its administration are paid by the Company. ITEM 6. CUSTODIAN OF INVESTMENTS (a) Zions First National Bank, One South Main Street, Salt Lake City, Utah 84111 is the custodian and trustee. (b) The custodian and trustee receives no compensation from the Plan. ITEM 7. REPORTS TO PARTICIPATING EMPLOYEES Participating employees are furnished an annual statement reflecting the status of their accounts as of the end of the fiscal year. ITEM 8. INVESTMENT OF FUNDS As elected by participants, approximately seventy seven percent of the assets of the Plan are invested in securities of the Company, and approximately twenty percent in Accessor Funds. 3 4 ITEM 9. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements Page ----------- Independent Auditors' Report 5 Statements of Net Assets Available for Benefits - December 31, 1998 and 1997 6 Statements of Changes in Net Assets Available for Benefits - Years ended 7 December 31, 1998, 1997, and 1996 Notes to Financial Statements 8 Schedules - Schedules I, II, and III have been omitted for the reasons that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. (c) Exhibits - None
4 5 INDEPENDENT AUDITORS' REPORT The Trust Committee Zions Bancorporation Employee Investment Savings Plan: We have audited the accompanying statements of net assets available for benefits of Zions Bancorporation Employee Investment Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the plan administrator. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the plan administrator, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of Zions Bancorporation Employee Investment Savings Plan as of December 31, 1998 and 1997, and the changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions for the year ended December 31, 1998, are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic 1998 financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ KPMG LLP 5 March 16, 1999 6 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Statements of Net Assets Available for Benefits December 31, 1998 and 1997
1998 1997 ------------ ------------ Assets: Cash and cash equivalents $ 28,747 136,111 Investments, at fair value: Zions Bancorporation common stock (approximate cost of $21,778,604 in 1998 and $17,287,725 in 1997 111,008,195 83,746,551 Accessor funds (approximate cost of $25,648,054 in 1998 and $19,168,929 in 1997) 28,257,934 19,380,190 Fidelity U.S. government reserves (approximate cost of $2,802,271 in 1998 and $2,406,968 in 1997) 2,802,271 2,406,968 Employee loans 1,469,143 1,581,233 ----------- ------------ 143,537,543 107,114,942 Contributions receivable: Employee 270,707 35,855 Employer 56,060 6,737 Dividends receivable 249,399 221,478 Interest receivable 1,319 3,227 Wires receivable -- 10,679 ----------- ------------ Total assets 144,143,775 107,529,029 ----------- ------------ Liabilities - accounts payable -- 40,483 ----------- ------------ Net assets available for benefits $144,143,775 107,488,546 ============ ============
See accompanying notes to financial statements. 6 7 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Statements of Changes in Net Assets Available for Benefits Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments $ 34,672,299 36,818,202 12,105,270 Dividends 1,402,606 3,053,076 732,045 Interest 156,435 279,067 361,768 ------------ ------------ ------------ 36,231,340 40,150,345 13,199,083 ------------ ------------ ------------ Contributions: Employee 4,893,777 2,715,037 2,049,269 Employer 991,783 543,577 430,015 Plan rollovers: Nonaffiliated plans 3,248,154 4,132,145 342,799 Affiliated plan -- -- 183,050 ------------ ------------ ------------ 9,133,714 7,390,759 3,005,133 ------------ ------------ ----------- 45,365,054 47,541,104 16,204,216 ------------ ------------ ----------- Total additions Deductions from net assets - benefits paid directly to participants 8,709,825 4,550,690 3,337,348 ------------ ------------ ------------ 36,644,229 42,990,414 12,866,868 Net increase Net assets available for benefits: Beginning of year 107,488,546 64,498,132 51,631,264 ------------ ------------ ------------ End of year $144,143,775 107,488,546 64,498,132 ============ ============ ============
See accompanying notes to financial statements. 7 8 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (1) PLAN DESCRIPTION The following description of the Zions Bancorporation Employee Investment Savings Plan (the Plan) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. (a) GENERAL The Plan is a single employer contributory plan that is designed to provide retirement benefits for eligible employees under a pretax salary reduction (deferral) arrangement and, if employees so elect, an opportunity to acquire stock ownership in Zions Bancorporation (the Company). The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. (b) ELIGIBILITY Participation in the Plan is voluntary. An employee is eligible to become a participant on January 1 or July 1, whichever coincides with, or immediately follows, the latter of the date on which the employee completes at least 1,000 hours of service during 12 continuous months and attains the age of 21. At December 31, 1998 and 1997, there were 3,893 and 3,240 participants, respectively, in the Plan. (c) EMPLOYEE AND COMPANY CONTRIBUTIONS Participants may elect to contribute one to fifteen percent of their compensation to the Employee Investment Savings Plan, limited by participant contributions made to the Zions Bancorporation Employee Stock Savings Plan. The Company contributes an amount equal to 25 percent of the contribution made by each participant up to ten percent of their compensation with no match made on contributions in excess thereof. The maximum amount a participant may contribute to the Plan in a calendar year is the lesser of fifteen percent of their compensation, or $10,000 for 1998. (d) ALLOCATION OF INCOME OR LOSS Investment income is allocated to each participant's account in proportion to the investment shares held in that participant's account to the total investment shares held in the Plan. (e) VESTING AND PAYMENT OF BENEFITS Employee contributions and the employees' share of the Company contributions are 100 percent vested at all times. Benefits are paid upon death, disability, retirement, or earlier, subject to certain restrictions. Benefits are paid in shares of stock and/or cash pursuant to the nature of the investment vehicle selected by the participant. (continued) 8 9 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (f) INVESTMENT OPTIONS As of December 31, 1998, the Plan maintains three separate types of investment funds: (i) Company securities, which consist of Company stock; (ii) Accessor funds, consisting of seven investment options (Accessor growth fund adv class, Accessor value and income adv class, Accessor small to mid-cap adv class, Accessor international equity adv class, Accessor intermediate fixed income adv class, Accessor mortgage securities adv class, Accessor short-term intermediate fixed income adv class); and (iii) Fidelity U.S. government reserves. (g) PARTICIPANT LOANS Beginning October 1, 1992, a participant who is an active employee may apply for and obtain a loan of up to 50 percent of the eligible amounts in their account. Loans are secured by the participant's account. Loan repayment is made through payroll deduction. (h) PLAN TERMINATION Although the Company has not expressed any intent to do so, it has the right under the Plan to discontinue contributions at any time and to terminate the Plan subject to provisions of ERISA. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Plan in the preparation of its financial statements: (a) BASIS OF PRESENTATION The Plan's financial statements are presented on the accrual basis of accounting. (b) INVESTMENTS Quoted market prices have been used to determine the fair value of investments. Purchases and sales of investments are recorded on a settlement-date basis, which does not materially differ from using the trade-date basis required by generally accepted accounting principles. Net unrealized appreciation represents the difference between the book value and the market value of investments held at year-end. Book value is the market value at the end of the previous fiscal year, or cost if the investment was purchased during the year. 9 10 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 The following investments represent five percent or more of the net assets available for plan benefits at December 31:
1998 1997 ---------------- --------------- Zions Bancorporation common stock $ 111,008,195 83,746,551 Accessor growth fund adv class 8,495,197 --
(c) COST OF ADMINISTRATION All costs of administration are currently being absorbed by the Company. (d) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and short-term investments with maturity dates of 90 days or less. (e) RECLASSIFICATIONS Certain reclassifications have been made in the 1997 financial statements to conform with the 1998 presentation. (f) USE OF ESTIMATES The preparation of the financial statements and supplemental schedules in conformity with generally accepted accounting principles requires the plan administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and supplemental schedules and the reported amounts of changes in net assets during the reporting period. Actual results could differ from those estimates. (3) TAX STATUS The Plan obtained its latest determination letter on June 5, 1996, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code (IRC). The Plan has been amended since receiving the determination letter. However, the plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. (4) ZIONS BANCORPORATION COMMON STOCK At December 31, 1998 and 1997, the investment in common stock of the Company consisted of 1,779,691 and 1,845,654 shares, respectively. 10 11 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (5) FINANCIAL INFORMATION BY FUND TYPE Financial information by fund type as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, are as follows: Statement of Net Assets Available for Benefits by Fund Type Year ended December 31, 1998
FIDELITY ZIONS U.S. BANCORP- GOVERN- ORATION COMMON ACCESSOR MENT EMPLOYEE STOCK FUNDS* RESERVES LOANS -------------- ------------ ------------ ------------ Assets: Cash and cash equivalents -- -- -- -- Investments, at fair value: Zions Bancorporation common stock $111,008,195 -- -- -- Accessor funds -- 28,257,934 -- -- Fidelity U.S. government reserves -- -- 2,802,271 -- Employee loans -- -- -- 1,469,143 ------------ ------------ ------------ ------------ 111,008,195 28,257,934 2,802,271 1,469,143 Contributions receivable: Employee -- -- -- -- Employer -- -- -- -- Dividends receivable -- -- -- -- Interest receivable -- -- -- -- ------------ ------------ ------------ ------------ Net assets available for benefits $111,008,195 28,257,934 2,802,271 1,469,143 ============ ============ ============ ============
OTHER TOTAL ------------ ------------ Assets: Cash and cash equivalents 28,747 28,747 Investments, at fair value: Zions Bancorporation common stock -- 111,008,195 Accessor funds -- 28,257,934 Fidelity U.S. government reserves -- 2,802,271 Employee loans -- 1,469,143 ------------ ------------ -- 143,537,543 Contributions receivable: Employee 270,707 270,707 Employer 56,060 56,060 Dividends receivable 249,399 249,399 Interest receivable 1,319 1,319 ------------ ------------ Net assets available for benefits 606,232 144,143,775 ============ ============
* Accessor funds shown in detail in note 6. 11 12 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (continued) Statement of Net Assets Available for Benefits by Fund Type Year ended December 31, 1997
ZIONS FIDELITY BANCORP- U.S. ORATION GOVERN- COMMON ACCESSOR MENT EMPLOYEE STOCK FUNDS* RESERVES LOANS TOTAL ----------- ----------- ----------- ----------- ----------- Assets: Cash and cash equivalents $ 34,561 54,545 -- 47,005 136,111 Investments, at fair value: Zions Bancorporation common stock 83,746,551 -- -- -- 83,746,551 Accessor funds -- 19,380,190 -- -- 19,380,190 Fidelity U.S. government reserves -- -- 2,406,968 -- 2,406,968 Employee loans -- -- -- 1,581,233 1,581,233 ----------- ----------- ----------- ----------- ----------- 83,746,551 19,380,190 2,406,968 1,581,233 107,114,942 Contributions receivable: Employee 15,626 17,999 2,230 -- 35,855 Employer 3,050 3,280 407 -- 6,737 Dividends receivable 221,478 -- -- -- 221,478 Interest receivable 818 -- -- 2,409 3,227 Wires receivable -- 9,502 1,177 -- 10,679 ----------- ----------- ----------- ----------- ----------- Total assets 84,022,084 19,465,516 2,410,782 1,630,647 107,529,029 Liabilities - accounts payable 21,847 16,266 560 1,810 40,483 ----------- ----------- ----------- ----------- ----------- Net assets available for benefits $84,000,237 19,449,250 2,410,222 1,628,837 107,488,546 =========== =========== =========== =========== ===========
* Accessor funds shown in detail in note 6. 12 13 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (continued) Statement of Changes in Net Assets Available for Benefits by Fund Type Year ended December 31, 1998
ZIONS FIDELITY BANCORP- U.S. ORATION GOVERN- COMMON ACCESSOR MENT EMPLOYEE STOCK FUNDS* RESERVES LOANS OTHER TOTAL ------------- ------------- ------------- ------------- ------------- ------------- Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments $ 30,451,745 4,181,224 39,330 -- -- 34,672,299 Dividends 723,420 313,486 116,269 -- 249,431 1,402,606 Interest 4,695 2,311 -- 148,110 1,319 156,435 ------------- ------------- ------------- ------------- ------------- ------------- 31,179,860 4,497,021 155,599 148,110 250,750 36,231,340 ------------- ------------- ------------- ------------- ------------- ------------- Contributions: Employee 1,935,542 2,488,565 198,963 -- 270,707 4,893,777 Employer 397,767 511,144 26,812 -- 56,060 991,783 Plan rollovers - nonaffiliated plan 1,309,368 1,840,568 98,218 -- -- 3,248,154 ------------- ------------- ------------- ------------- ------------- ------------- 3,642,677 4,840,277 323,993 -- 326,767 9,133,714 ------------- ------------- ------------- ------------- ------------- ------------- Principal loan payments 556,538 136,587 231,093 (952,933) 28,715 -- ------------- ------------- ------------- ------------- ------------- ------------- Total additions 35,379,075 9,473,885 710,685 (804,823) 606,232 45,365,054 Deductions from net assets attributed to: Benefits paid to participants 6,728,228 1,126,134 687,458 168,005 -- 8,709,825 Loans disbursed 476,395 316,966 19,773 (813,134) -- -- ------------- ------------- ------------- ------------- ------------- ------------- Total deductions 7,204,623 1,443,100 707,231 (645,129) -- 8,709,825 ------------- ------------- ------------- ------------- ------------- ------------- Interfund transfers (1,166,494) 777,899 388,595 -- -- -- ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) 27,007,958 8,808,684 392,049 (159,694) 606,232 36,655,229 Net assets available for benefits: Beginning of year 84,000,237 19,449,250 2,410,222 1,628,837 -- 107,488,546 ============= ============= ============= ============= ============= ============= End of year $ 111,008,195 28,257,934 2,802,271 1,469,143 606,232 144,143,775 ============= ============= ============= ============= ============= =============
* Accessor funds shown in detail in note 6. (continued) 13 14 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 Statement of Changes in Net Assets Available for Benefits by Fund Type Year ended December 31, 1997
Zions Bancorp- oration Fidelity Money Accessor common stock mutual fund market Fixed income funds* ------------ ------------ ------------ ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation (depreciation) in fair value of investments $ 35,955,118 2,009,330 -- 10,674 (1,190,747) Dividends 1,081,318 -- -- 39,451 1,911,698 Interest 6,377 665 137,608 721 1,380 ------------ ------------ ------------ ------------ ------------ 37,042,813 2,009,995 137,608 50,846 722,331 ------------ ------------ ------------ ------------ ------------ Contributions: Employee 1,209,640 597,263 137,829 65,191 627,369 Employer 256,049 129,112 12,726 11,954 118,990 Plan rollovers-nonaffiliated plan 1,559,859 102,668 38,611 39,018 2,090,624 ------------ ------------ ------------ ------------ ------------ 3,025,548 829,043 189,166 116,163 2,836,983 ------------ ------------ ------------ ------------ ------------ Principal loan payments 455,302 74,763 42,000 3,000 120,022 ------------ ------------ ------------ ------------ ------------ Total additions 40,523,663 2,913,801 368,774 170,009 3,679,336 Deductions from net assets attributed to: Benefits paid to participants 3,069,345 242,982 199,921 51,330 279,353 Loans disbursed 552,521 169,997 69,472 -- 127,725 ------------ ------------ ------------ ------------ ------------ Total deductions 3,621,866 412,979 269,393 51,330 407,078 ------------ ------------ ------------ ------------ ------------ Interfund transfers (1,346,059) (11,439,039) (4,779,540) (1,183,917) 16,176,992 ------------ ------------ ------------ ------------ ------------ Net increase (decrease) 35,555,738 (8,938,217) (4,680,159) (1,065,238) 19,449,250 Net assets available for benefits: Beginning of year 48,444,499 8,938,217 4,680,159 1,065,238 -- ========== =========== ============ ============ ============ End of year $84,000,237 -- -- -- 19,449,250 =========== =========== ============ ============ ============
Fidelity U.S. govern- ment Employee reserves loans Total ------------ ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation (depreciation) in fair value of investments 33,827 -- 36,818,202 Dividends 20,609 -- 3,053,076 Interest -- 132,316 279,067 ------------ ------------ ------------ 54,436 132,316 40,150,345 ------------ ------------ ------------ Contributions: Employee 77,745 -- 2,715,037 Employer 14,746 -- 543,577 Plan rollovers-nonaffiliated plan 301,365 -- 4,132,145 ------------ ------------ ------------ 393,856 -- 7,390,759 ------------ ------------ ------------ Principal loan payments 21,008 (716,095) -- ------------ ------------ ------------ Total additions 469,300 (583,779) 47,541,104 Deductions from net assets attributed to: Benefits paid to participants 608,285 99,474 4,550,690 Loans disbursed 22,356 (942,071) -- ------------ ------------ ------------ Total deductions 630,641 (842,597) 4,550,690 ------------ ------------ ------------ Interfund transfers 2,571,563 -- -- ------------ ------------ ------------ Net increase (decrease) 2,410,222 258,818 42,990,414 Net assets available for benefits: Beginning of year -- 1,370,019 64,498,132 ============ ============ =========== End of year 2,410,222 1,628,837 107,488,546 ============ ============ ===========
* Accessor funds shown in detail at note 6. 14 15 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 Statement of Changes in Net Assets Available for Benefits by Fund Type Year ended December 31, 1996
Zions Bancorp- oration Fidelity common mutual Money Fixed stock fund market income ------------ ------------ ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation (depreciation) in fair value of investments $ 11,090,943 1,039,045 -- (24,718) Dividends 581,303 75,331 -- 75,411 Interest 1,972 1,695 222,032 456 ------------ ------------ ------------ ------------ 11,674,218 1,116,071 222,032 51,149 ------------ ------------ ------------ ------------ Contributions: Employee 829,922 898,971 220,000 100,376 Employer 172,015 188,689 51,176 18,135 Plan rollovers 250,017 80,839 15,152 179,841 ------------ ------------ ------------ ------------ 1,251,954 1,168,499 286,328 298,352 ------------ ------------ ------------ ------------ Principal loan payments 462,897 119,887 131,170 25,426 ------------ ------------ ------------ ------------ Total additions 13,389,069 2,404,457 639,530 374,927 Deductions from net assets attributed to: Benefits paid to participants 2,332,669 453,309 317,861 137,634 Loans disbursed 465,087 179,736 81,083 11,244 ------------ ------------ ------------ ------------ Total deductions 2,797,756 633,045 398,944 148,878 ------------ ------------ ------------ ------------ Interfund transfers (313,598) 499,516 69,855 (255,773) ------------ ------------ ------------ ------------ Net increase (decrease) 10,277,715 2,270,928 310,441 (29,724) Net assets available for benefits: Beginning of year 38,166,784 6,667,289 4,369,718 1,094,962 ------------ ------------ ------------ ------------ End of year $ 48,444,499 8,938,217 4,680,159 1,065,238 ============ ============ ============ ============
Employee loans Total ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation (depreciation) in fair value of investments -- 12,105,270 Dividends -- 732,045 Interest 135,613 361,768 ------------ ------------ 135,613 13,199,083 ------------ ------------ Contributions: Employee 2,049,269 Employer -- 430,015 Plan rollovers -- 525,849 ----------- ------------ -- 3,005,133 ----------- ------------ Principal loan payments (739,380) -- ----------- ------------ Total additions (603,767) 16,204,216 Deductions from net assets attributed to: Benefits paid to participants 95,875 3,337,348 Loans disbursed (737,150) -- ------------ ------------ Total deductions (641,275) 3,337,348 ------------ ------------ Interfund transfers -- -- ------------ ------------ Net increase (decrease) 37,508 12,866,868 Net assets available for benefits: Beginning of year 1,332,511 51,631,264 ------------ ------------ End of year 1,370,019 64,498,132 ============ ============
(continued) 15 16 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (6) FINANCIAL INFORMATION BY ACCESSOR FUNDS INVESTMENT OPTION Statement of Changes in Accessor Funds Net Assets Available for Benefits by Investment Option Year ended December 31, 1998
Inter- Value Small Inter- mediate and to mid- national fixed Growth income cap equity income ---------- ---------- ---------- ---------- ---------- Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments $2,373,297 461,472 777,111 449,622 73,451 Dividends 9,849 52,715 -- -- 194,392 Interest 406 1,753 152 -- -- ---------- ---------- ---------- ---------- ---------- 2,383,552 515,940 777,263 449,622 267,843 ---------- ---------- ---------- ---------- ---------- Contributions: Employee 780,655 397,915 545,484 314,782 241,053 Employer 161,407 80,626 113,335 64,343 49,438 Plan rollovers - nonaffiliated plans 552,296 560,310 341,629 146,239 119,154 ---------- ---------- ---------- ---------- ---------- 1,494,358 1,038,851 1,000,448 525,364 409,645 ---------- ---------- ---------- ---------- ---------- Principal loan payments 34,309 21,084 27,025 18,054 16,845 ---------- ---------- ---------- ---------- ---------- Total additions 3,912,219 1,575,875 1,804,736 993,040 694,333 Deductions from net assets attributed to: Benefits paid to participants 235,970 225,348 239,349 178,271 167,032 Loans disbursed 81,064 61,133 55,110 26,614 76,988 ---------- ---------- ---------- ---------- ---------- Total deductions 317,034 286,481 294,459 204,885 244,020 ---------- ---------- ---------- ---------- ---------- Interfund transfers 619,581 190,387 284,625 (82,735) 252,196 ---------- ---------- ---------- ---------- ---------- Net increase (decrease) 4,214,766 1,479,781 1,794,902 705,420 702,509 Net assets available for benefits: Beginning of year 4,280,431 3,386,177 4,113,602 2,729,008 3,070,995 ========== ========== ========== ========== ========== End of year $8,495,197 4,865,958 5,908,504 3,434,428 3,773,504 ========== ========== ========== ========== ==========
Short- term inter- mediate Mortgage fixed securities income Total ---------- ---------- ---------- Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments 5,104 41,167 4,181,224 Dividends 48,551 7,979 313,486 Interest -- -- 2,311 ---------- ---------- ---------- 53,655 49,146 4,497,021 ---------- ---------- ---------- Contributions: Employee 123,519 85,157 2,488,565 Employer 24,533 17,462 511,144 Plan rollovers - nonaffiliated plans 78,169 42,771 1,840,568 ---------- ---------- ---------- 226,221 145,390 4,840,277 ---------- ---------- ---------- Principal loan payments 11,963 7,307 136,587 ---------- ---------- ---------- Total additions 291,839 201,843 9,473,885 Deductions from net assets attributed to: Benefits paid to participants 21,651 58,513 1,126,134 Loans disbursed 8,321 7,736 316,966 ---------- ---------- ---------- Total deductions 29,972 66,249 1,443,100 ---------- ---------- ---------- Interfund transfers 136,242 (622,397) 777,899 ---------- ---------- ---------- Net increase (decrease) 398,109 (486,803) 8,808,684 Net assets available for benefits: Beginning of year 641,784 1,227,253 19,449,250 ========== ========== ========== End of year 1,039,893 740,450 28,257,934 ========== ========== ==========
16 17 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (6) FINANCIAL INFORMATION BY ACCESSOR FUNDS INVESTMENT OPTION Statement of Changes in Accessor Funds Net Assets Available for Benefits by Investment Option Year ended December 31, 1997
Inter- Value Small Inter- mediate and to mid- national fixed Growth income cap equity income ---------- ---------- ---------- ---------- ---------- Additions to net assets attributed to: Investment income (loss) $ 118,302 220,511 394,169 (157,230) 110,284 Contributions 652,443 465,441 575,766 454,634 421,771 Principal loan payments 36,217 16,821 26,259 22,879 11,886 ---------- ---------- ---------- ---------- ---------- Total additions 806,962 702,773 996,194 320,283 543,941 Deductions from net assets attributed to: Benefits paid to participants 108,867 31,295 47,247 44,652 33,046 Loans disbursed 38,541 17,901 27,944 24,347 12,649 ---------- ---------- ---------- ---------- ---------- Total deductions 147,408 49,196 75,191 68,999 45,695 ---------- ---------- ---------- ---------- ---------- Interfund transfers 3,620,877 2,732,600 3,192,599 2,477,724 2,572,749 ---------- ---------- ---------- ---------- ---------- Net increase 4,280,431 3,386,177 4,113,602 2,729,008 3,070,995 Net assets available for benefits: Beginning of year -- -- -- -- -- ========== ========== ========== ========== ========== End of year $4,280,431 3,386,177 4,113,602 2,729,008 3,070,995 ========== ========== ========== ========== ==========
Short- term inter- mediate Mortgage fixed securities income Total ---------- ---------- ---------- Additions to net assets attributed to: Investment income (loss) 18,387 17,908 722,331 Contributions 91,294 175,634 2,836,983 Principal loan payments 2,411 3,549 120,022 ---------- ---------- ---------- Total additions 112,092 197,091 3,679,336 Deductions from net assets attributed to: Benefits paid to participants 730 13,516 279,353 Loans disbursed 2,566 3,777 127,725 ---------- ---------- ---------- Total deductions 3,296 17,293 407,078 ---------- ---------- ---------- Interfund transfers 532,988 1,047,455 16,176,992 ---------- ---------- ---------- Net increase 641,784 1,227,253 19,449,250 Net assets available for benefits: Beginning of year -- -- -- ========== ========== ========== End of year 641,784 1,227,253 19,449,250 ========== ========== ==========
17 18 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Line 27a - Schedule of Assets Held for Investment Purposes December 31, 1998
(a) (e) Party in (b) (c) (d) Current interest Issuer Investment description Cost (1) value - ----------- ---------- ------------------------------------------------- --------------- ------------ * Investments at fair value determined by quoted market prices: Zions Bancorporation Zions Bancorporation common stock $ 21,778,604 111,008,195 Accessor Accessor growth fund adv class 6,867,230 8,495,197 Accessor value and income adv class 4,797,594 4,865,958 Accessor small to mid-cap adv class 5,416,724 5,908,504 Accessor international equity adv class 3,026,980 3,434,428 Accessor intermediate fixed income adv class 3,745,727 3,773,504 Accessor mortgage securities adv class 1,048,810 1,039,893 Accessor short-term intermediate fixed income adv class 744,989 740,450 Fidelity Investments Institutional Brokerage Group Fidelity U.S. government reserves 2,802,271 2,802,271 Investments at fair value which is approximated by book value - participant loans (261) with interest between 7 and 10.5 percent and maturing by 2026 1,469,143 1,469,143 ------------ ------------ $51,698,072 143,537,543 ============ ===========
Notes: * Party-in-interest There were no nonexempt party-in-interest transactions. There were no assets which were both acquired and disposed of during the year. (1) Cost is determined using the average-cost method applied on a participant- by-participant basis. 18 19 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Line 27d - Schedule of Reportable Transactions Year ended December 31, 1998
(h) Current (a) value Identity of (c) (g) of asset party (b) Purchase (d) Cost of on trans- (i) involved Description of asset price Selling price asset action date Net gain - ------------- ----------------------- -------------- ------------- ------------ ------------- ------------ Zions Bancorp- Zions Bancorporation oration common stock $ -- 9,207,511 1,704,972 9,207,511 7,502,539 Zions Bancorporation common stock 6,219,975 -- -- 6,219,975 --
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