Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 

 

COMMISSION FILE NUMBER 0-2610

 

ZIONS BANCORPORATION

(Exact name of registrant as specified in its charter)

 

UTAH


  

87-0227400


(State or other jurisdiction

of incorporation or organization)

  

(I.R.S. Employer

Identification No.)

ONE SOUTH MAIN, SUITE 1134

SALT LAKE CITY, UTAH


  

84111


(Address of principal executive offices)    (Zip Code)

 

Registrant’s telephone number, including area code: (801) 524-4787

 

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):

 

Yes  ¨    No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, without par value, outstanding at October 25, 2005

   90,133,492 shares

 


 

 


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

INDEX

 

          Page

PART I.

   FINANCIAL INFORMATION     

      ITEM 1.

   Financial Statements (Unaudited)     
     Consolidated Balance Sheets    3
     Consolidated Statements of Income    4
     Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income    5
     Consolidated Statements of Cash Flows    6
     Notes to Consolidated Financial Statements    8

      ITEM 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    15

      ITEM 3.

   Quantitative and Qualitative Disclosures About Market Risk    38

      ITEM 4.

   Controls and Procedures    38

PART II.

   OTHER INFORMATION     

      ITEM 1.

   Legal Proceedings    38

      ITEM 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    38

      ITEM 6.

   Exhibits    39

SIGNATURES

   40

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS (Unaudited)

 

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share amounts)    September 30,
2005


   December 31,
2004


   September 30,
2004


     (Unaudited)         (Unaudited)

ASSETS

                    

Cash and due from banks

   $ 1,109,202     $ 850,998     $ 1,066,516 

Money market investments:

                    

Interest-bearing deposits

     13,350       1,251       2,893 

Federal funds sold

     460,167       130,086       106,957 

Security resell agreements

     528,763       461,750       698,569 

Investment securities:

                    

Held to maturity, at cost (approximate market value $641,264, $ 641,783 and $ 640,462)

     642,687       641,659       639,372 

Available for sale, at market

     3,997,593       4,189,486       3,986,046 

Trading account, at market (includes $141,535, $163,248 and $120,825 transferred as collateral under repurchase agreements)

     352,059       290,070       433,273 
    

  

  

       4,992,339       5,121,215       5,058,691 

Loans:

                    

Loans held for sale

     213,223       196,736       151,199 

Loans and leases

     23,823,715       22,535,344       21,459,920 
    

  

  

       24,036,938       22,732,080       21,611,119 

Less:

                    

Unearned income and fees, net of related costs

     106,921       104,959       104,076 

Allowance for loan losses

     287,237       271,117       269,413 
    

  

  

Loans and leases, net of allowance

     23,642,780       22,356,004       21,237,630 

Other noninterest-bearing investments

     708,368       665,198       666,214 

Premises and equipment, net

     410,800       409,210       404,226 

Goodwill

     639,120       642,645       642,645 

Core deposit and other intangibles

     47,670       55,440       57,665 

Other real estate owned

     15,176       11,877       14,222 

Other assets

     854,966       764,160       774,812 
    

  

  

     $ 33,422,701     $ 31,469,834     $ 30,731,040 
    

  

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

                    

Deposits:

                    

Noninterest-bearing demand

   $ 7,725,179     $ 6,821,528     $ 6,656,856 

Interest-bearing:

                    

Savings and money market

     13,442,012       13,349,347       13,446,840 

Time under $ 100,000

     1,554,064       1,387,784       1,388,649 

Time $100,000 and over

     1,892,210       1,294,109       1,281,280 

Foreign

     786,276       439,493       391,506 
    

  

  

       25,399,741       23,292,261       23,165,131 

 

Securities sold, not yet purchased

     331,891       309,893       376,150 

Federal funds purchased

     1,262,646       1,841,092       1,069,430 

Security repurchase agreements

     756,631       683,984       723,000 

Other liabilities

     571,583       429,129       539,694 

Commercial paper

     149,089       165,447       168,344 

Federal Home Loan Bank advances and other borrowings:

                    

One year or less

     13,063       15,949       18,106 

Over one year

     226,482       228,152       228,733 

Long-term debt

     1,685,683       1,690,589       1,693,710 
    

  

  

Total liabilities

     30,396,809       28,656,496       27,982,298 
    

  

  

Minority interest

     26,719       23,359       24,481 

 

Shareholders’ equity:

                    

Capital stock:

                    

Preferred stock, without par value; authorized 3,000,000 shares; issued and outstanding, none

     –         –         –   

Common stock, without par value; authorized 350,000,000 shares; issued and outstanding 90,067,016, 89,829,947 and 89,638,753 shares

     971,002       972,065       965,166 

Retained earnings

     2,084,439       1,830,064       1,753,934 

Accumulated other comprehensive income (loss)

     (52,088)      (7,932)      9,240 

Cost of shares held in trust for deferred compensation and other

     (4,180)      (4,218)      (4,079)
    

  

  

Total shareholders’ equity

     2,999,173       2,789,979       2,724,261 
    

  

  

     $ 33,422,701     $ 31,469,834     $ 30,731,040 
    

  

  

 

3


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

(In thousands, except per share amounts)

 

   Three Months Ended
September 30,


   Nine Months Ended
September 30,


   2005

   2004

   2005

   2004

Interest income:

                           

Interest and fees on loans

   $   406,319     $   311,927     $   1,137,487     $ 896,633 

Interest on loans held for sale

     2,462       932       6,683       3,595 

Lease financing

     3,980       4,213       12,069       12,652 

Interest on money market investments

     7,723       4,994       18,402       11,529 

Interest on securities:

                           

Held to maturity – taxable

     1,827       1,765       5,465       3,724 

Held to maturity – nontaxable

     6,066       6,000       18,057       12,770 

Available for sale – taxable

     49,339       39,784       145,361       114,822 

Available for sale – nontaxable

     808       897       2,498       8,197 

Trading account

     4,753       8,884       15,832       23,227 
    

  

  

  

Total interest income

     483,277       379,396       1,361,854       1,087,149 
    

  

  

  

Interest expense:

                           

Interest on savings and money market deposits

     59,539       33,048       149,511       85,988 

Interest on time and foreign deposits

     31,536       15,692       75,980       43,825 

Interest on borrowed funds

     51,550       39,541       149,832       105,902 
    

  

  

  

Total interest expense

     142,625       88,281       375,323       235,715 
    

  

  

  

Net interest income

     340,652       291,115       986,531       851,434 

Provision for loan losses

     12,107       9,363       32,907       30,908 
    

  

  

  

Net interest income after provision for loan losses

     328,545       281,752       953,624       820,526 
    

  

  

  

Noninterest income:

                           

Service charges and fees on deposit accounts

     32,233       33,486       94,421       99,660 

Loan sales and servicing income

     21,649       21,633       56,507       60,504 

Other service charges, commissions and fees

     28,983       27,137       83,903       78,675 

Trust and investment management income

     3,817       3,718       11,753       12,590 

Income from securities conduit

     8,553       9,104       25,989       26,682 

Dividends and other investment income

     6,954       7,157       22,398       23,797 

Market making, trading and nonhedge derivative income

     4,069       2,454       14,362       14,650 

Equity securities gains (losses), net

     1,089       4,277       (3,076)      (5,056)

Fixed income securities gains, net

     276       307       422       2,444 

Other

     3,626       3,883       14,118       18,648 
    

  

  

  

Total noninterest income

     111,249       113,156       320,797       332,594 
    

  

  

  

Noninterest expense:

                           

Salaries and employee benefits

     142,590       133,609       418,960       393,241 

Occupancy, net

     19,048       18,734       56,005       55,205 

Furniture and equipment

     16,979       16,612       49,158       49,328 

Legal and professional services

     8,575       6,568       24,792       23,675 

Postage and supplies

     6,510       6,290       19,796       19,247 

Advertising

     5,875       4,789       15,303       14,817 

Impairment losses on long-lived assets

     –         –         633       712 

Restructuring charges

     –         370       92       436 

Merger related expense

     207       –         207       –   

Amortization of core deposit and other intangibles

     3,684       3,682       10,813       10,686 

Provision for unfunded lending commitments

     435       932       3,148       (185)

Other

     44,569       41,227       131,566       117,965 
    

  

  

  

Total noninterest expense

     248,472       232,813       730,473       685,127 
    

  

  

  

Impairment loss on goodwill

     –         602       –         602 
    

  

  

  

Income before income taxes and minority interest

     191,322       161,493       543,948       467,391 

Income taxes

     68,200       58,140       194,279       167,485 

Minority interest

     152       858       (2,345)      (1,100)
    

  

  

  

Net income

   $ 122,970     $ 102,495     $ 352,014     $ 301,006 
    

  

  

  

Weighted average shares outstanding during the period:

                           

Basic shares

     89,980       89,617       89,901       89,643 

Diluted shares

     91,605       90,957       91,606       90,820 

 

Net income per common share:

                           

Basic

   $ 1.37     $ 1.14     $ 3.92     $ 3.36 

Diluted

     1.34       1.13       3.84       3.31 

 

4


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

 

    Nine Months Ended September 30, 2005

           

Accumulated Other Comprehensive

Income (Loss)


       

(In thousands)

 

  Common
Stock


  Retained
Earnings


 

Net
Unrealized
Gains
(Losses)

on
Investments,
Retained
Interests
and Other


 

Net
Unrealized
Losses

on
Derivative
Instruments


  Minimum
Pension
Liability


  Subtotal

 

Cost of

Shares Held
in Trust for
Deferred
Compensation
and Other


  Total
Shareholders’
Equity


Balance, December 31, 2004

  $   972,065    $   1,830,064    $ 19,774    $ (9,493)   $   (18,213)   $ (7,932)   $   (4,218)   $   2,789,979 

Comprehensive income:

                                               

Net income for the period

          352,014                                    352,014 

Other comprehensive income, net of tax:

                                               

Net realized and unrealized holding losses during the period, net of income tax benefit of $5,650

                (9,122)                 (9,122)            

Foreign currency translation

                (1,313)                 (1,313)            

Reclassification for net realized gains recorded in operations, net of income tax expense of $200

                (323)                 (323)            

Net unrealized losses on derivative instruments, net of reclassification to operations of $10,618 and income tax benefit of $20,991

                      (33,398)           (33,398)            
               

 

 

 

           

Other comprehensive loss

                  (10,758)     (33,398)     –        (44,156)           (44,156)
                                             

Total comprehensive income

                                              307,858 

Stock redeemed and retired

    (80,795)                                         (80,795)

Restricted stock issued (2,000 shares) and stock options exercised (1,395,250 shares), net of shares tendered and retired

    79,732                                          79,732 

Cash dividends – common, $1.08 per share

          (97,639)                                   (97,639)

Cost of shares held in trust for deferred compensation and other

                                        38      38 
   

 

 

 

 

 

 

 

Balance, September 30, 2005

  $ 971,002    $ 2,084,439    $ 9,016    $   (42,891)   $ (18,213)   $   (52,088)   $ (4,180)   $ 2,999,173 
   

 

 

 

 

 

 

 

    Nine Months Ended September 30, 2004

           

Accumulated Other Comprehensive

Income (Loss)


       

(In thousands)

 

  Common
Stock


  Retained
Earnings


 

Net
Unrealized
Gains
(Losses)

on
Investments,
Retained
Interests
and Other


 

Net
Unrealized
Gains
(Losses)

on
Derivative
Instruments


  Minimum
Pension
Liability


  Subtotal

 

Cost of

Shares Held
in Trust for
Deferred
Compensation


  Total
Shareholders’
Equity


Balance, December 31, 2003

  $ 985,904    $ 1,538,677    $ 24,015    $ 10,716    $ (15,690)   $ 19,041    $ (3,599)   $ 2,540,023 

Comprehensive income:

                                               

Net income for the period

          301,006                                    301,006 

Other comprehensive income, net of tax:

                                               

Net realized and unrealized holding gains during the period, net of income tax expense of $438

                473                  473             

Reclassification for net realized gains recorded in operations, net of income tax expense of $1,218

                (1,967)                 (1,967)            

Net unrealized losses on derivative instruments, net of reclassification to operations of $35,040 and income tax benefit of $5,093

                      (8,307)           (8,307)            
               

 

 

 

           

Other comprehensive loss

                (1,494)     (8,307)     –        (9,801)           (9,801)
                                             

Total comprehensive income

                                              291,205 

Stock redeemed and retired

    (79,881)                                         (79,881)

Stock options exercised (1,145,556 shares), net of shares tendered and retired

    59,143                                          59,143 

Cash dividends – common, $.94 per share

          (85,749)                                   (85,749)

Cost of shares held in trust for deferred compensation

                                        (480)     (480)
   

 

 

 

 

 

 

 

Balance, September 30, 2004

  $ 965,166    $ 1,753,934    $ 22,521    $ 2,409    $ (15,690)   $ 9,240    $ (4,079)   $ 2,724,261 
   

 

 

 

 

 

 

 

 

Total comprehensive income for the three months ended September 30, 2005 and 2004 was $83,787 and $125,973, respectively.

 

5


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In thousands)

 

   Three Months Ended
September 30,


  

Nine Months Ended

September 30,


   2005

   2004

   2005

   2004

CASH FLOWS FROM OPERATING ACTIVITIES:

                           

Net income

   $   122,970     $   102,495     $   352,014     $   301,006 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                           

Impairment losses on goodwill and long lived assets

     –         602       633       1,314 

Provision for loan losses

     12,107       9,363       32,907       30,908 

Depreciation of premises and equipment

     14,718       15,274       44,160       44,747 

Amortization

     10,061       10,230       27,116       29,990 

Deferred income tax benefit

     (9,155)      (7,889)      (28,830)      (18,074)

Gain (loss) allocated to minority interest

     152       858       (2,345)      (1,100)

Equity securities losses (gains), net

     (1,089)      (4,277)      3,076       5,056 

Fixed income securities gains, net

     (276)      (307)      (422)      (2,444)

Net decrease (increase) in trading securities

     (69,977)      168,310       (61,989)      102,268 

Principal payments on and proceeds from sales of loans held for sale

     233,122       219,443       703,106       431,718 

Additions to loans held for sale

     (224,648)      (197,235)      (684,140)      (368,497)

Net gains on sales of loans, leases and other assets

     (15,131)      (14,618)      (36,495)      (42,705)

Net increase in cash surrender value of bank owned life insurance

     (4,372)      (4,802)      (13,581)      (14,002)

Undistributed earnings of affiliates

     (1,702)      (1,614)      (6,169)      (6,260)

Change in accrued income taxes

     20,631       25,916       26,364       7,617 

Change in accrued interest receivable

     4,448       (1,178)      (202)      525 

Change in other assets

     (119,792)      218,444       (118,519)      137,741 

Change in other liabilities

     (745)      (111,760)      113,158       (111,776)

Change in accrued interest payable

     7,308       4,906       9,507       8,170 

Other, net

     6,922       (1,803)      924       7,798 
    

  

  

  

Net cash provided by (used in) operating activities

     (14,448)      430,358       360,273       544,000 
    

  

  

  

CASH FLOWS FROM INVESTING ACTIVITIES:

                           

Net decrease (increase) in money market investments

     (401,622)      22,602       (409,193)      (3,163)

Proceeds from maturities of investment securities held to maturity

     39,795       54,886       95,245       86,359 

Purchases of investment securities held to maturity

     (32,525)      (51,965)      (96,064)      (89,165)

Proceeds from sales of investment securities available for sale

     1,016,707       413,207       1,672,979       2,689,399 

Proceeds from maturities of investment securities available for sale

     162,697       166,219       1,129,569       569,534 

Purchases of investment securities available for sale

     (1,214,851)      (772,797)      (2,622,369)      (3,447,038)

Proceeds from sales of loans and leases

     880,965       684,773       1,100,060       912,946 

Net increase in loans and leases

     (1,001,829)      (829,207)      (2,435,084)      (2,713,987)

Net increase in other noninterest-bearing investments

     (2,815)      (12,484)      (3,808)      (38,644)

Proceeds from sales of premises and equipment

     1,170       1,380       3,158       8,893 

Purchases of premises and equipment

     (16,889)      (20,818)      (49,640)      (49,649)

Proceeds from sales of other real estate owned

     1,114       2,085       11,666       11,207 

Net cash received from (paid for) acquisitions

     (200)      –         (200)      1,076 

Net cash paid for net liabilities on branches sold

     –         (998)      (16,076)      (17,746)
    

  

  

  

Net cash used in investing activities

     (568,283)      (343,117)      (1,619,757)      (2,079,978)
    

  

  

  

 

6


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

 

    

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


(In thousands)    2005

   2004

   2005

   2004

 

CASH FLOWS FROM FINANCING ACTIVITIES:

                           

Net increase in deposits

   $   1,001,206     $   808,878     $ 2,131,330     $ 2,433,523 

Net change in short-term funds borrowed

     (516,755)      (848,473)      (503,045)      (894,012)

Payments on FHLB advances and other borrowings over one year

     (557)      (1,395)      (1,670)      (2,707)

Proceeds from issuance of long-term debt

     –         –         –         300,000 

Debt issuance costs

     –         (116)      –         (1,804)

Payments on long-term debt

     –         (65,001)      –         (240,004)

Proceeds from issuance of common stock

     8,795       14,351       69,507       53,777 

Payments to redeem common stock

     (737)      (25,000)      (80,795)      (79,881)

Dividends paid

     (32,546)      (28,801)      (97,639)      (85,749)
    

  

  

  

Net cash provided by (used in) financing activities

     459,406       (145,557)      1,517,688       1,483,143 
    

  

  

  

Net increase (decrease) in cash and due from banks

     (123,325)      (58,316)      258,204       (52,835)

Cash and due from banks at beginning of period

     1,232,527       1,124,832       850,998       1,119,351 
    

  

  

  

Cash and due from banks at end of period

   $   1,109,202     $   1,066,516     $   1,109,202     $   1,066,516 
    

  

  

  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                           

Cash paid for:

                           

Interest

   $ 133,205     $ 79,437     $ 361,239     $ 221,125 

Income taxes

     55,438       38,937       189,471       174,821 

Loans transferred to other real estate owned

     5,835       2,229       16,329       7,767 

Investment securities available for sale transferred to investment securities held to maturity

     –         –         –         636,494 

 

7


Table of Contents

 

ZIONS BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

September 30, 2005

 

1.    BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Zions Bancorporation (“the Parent”) and its majority-owned subsidiaries (collectively “the Company,” “we,” “our,” “us”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

Certain prior period amounts have been reclassified to conform to the current period presentation. This includes a reclassification of certain fees previously classified as interest and fees on loans in interest income to other service charges, commissions and fees in noninterest income. For the three- and nine-month periods ended September 30, 2004, the amounts reclassified were $3.7 million and $9.8 million, which had the effect of reducing the net interest margin from 4.25% to 4.20% and from 4.26% to 4.21% for the respective periods. There was no impact on net income.

 

Operating results for the three- and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected in future periods. The balance sheet at December 31, 2004 is from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Zions Bancorporation’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

2.    OTHER RECENT ACCOUNTING PRONOUNCEMENT

 

The American Institute of Certified Public Accountants has issued Statement of Position 03-3, (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 requires acquired loans, including debt securities, to be recorded at the amount of the purchaser’s initial investment and prohibits carrying over valuation allowances from the seller for those individually-evaluated loans that have evidence of deterioration in credit quality since origination, and it is probable all contractual cash flows on the loan will be unable to be collected. SOP 03-3 also requires the excess of all undiscounted cash flows expected to be collected at acquisition over the purchaser’s initial investment to be recognized as interest income on a level-yield basis over the life of the loan. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life, while subsequent decreases are recognized as impairment. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3. The guidance is effective for loans acquired in fiscal years beginning after December 15, 2004. Management has not yet determined the effect SOP 03-3 will have on the pending acquisition discussed in Note 7. However, acquired loans within the scope of SOP 03-3 will be recorded at their net fair value.

 

8


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

3.    SHARE-BASED COMPENSATION

 

The following disclosures are required for interim financial statements by Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, issued by the Financial Accounting Standards Board (“FASB”). SFAS 148 provides guidance to transition from the intrinsic value method of accounting for share-based compensation under Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, to the fair value method under SFAS No. 123, Accounting for Stock-Based Compensation.

 

The impact on net income and net income per common share if we had applied the provisions of SFAS 123 to share-based payments was as follows (in thousands, except per share amounts):

 

     Three Months Ended
September 30,


   Nine Months Ended
September 30,


     2005

   2004

   2005

   2004

Net income, as reported

   $   122,970     $   102,495     $   352,014     $   301,006 

Deduct: Total share-based compensation expense determined under fair value based method for all awards, net of related tax effects

     (3,002)      (3,152)      (7,456)      (8,836)
    

  

  

  

Pro forma net income

   $ 119,968     $ 99,343     $ 344,558     $ 292,170 
    

  

  

  

Net income per common share:

                           

Basic – as reported

   $ 1.37     $ 1.14     $ 3.92     $ 3.36 

Basic – pro forma

     1.33       1.11       3.83       3.26 

Diluted – as reported

     1.34       1.13       3.84       3.31 

Diluted – pro forma

     1.31       1.09       3.76       3.22 

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS 123. SFAS 123R supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R is effective for public companies for interim or annual periods beginning after June 15, 2005. On April 15, 2005, the Securities and Exchange Commission announced that it was amending Regulation S-X to provide up to a six-month delay for the adoption of SFAS 123R, or January 1, 2006 for calendar year public companies. The Company will adopt SFAS 123R beginning January 1, 2006.

 

SFAS 123R utilizes a “modified grant-date” approach in which the fair value of an equity award is estimated on the grant date without regard to service or performance vesting conditions. Generally, this approach is similar to that of SFAS 123. However, SFAS 123R would require all share-based awards to employees, including grants of employee stock options, to be recognized in the statement of income based on their fair values. The pro forma disclosure previously shown that is permitted by SFAS 123 will no longer be an alternative.

 

Our adoption of SFAS 123R will utilize the “modified prospective” method. Under this method, compensation cost is recognized beginning with the effective date based on the requirements of SFAS 123R for all share-based awards granted after the effective date, and based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.

 

As permitted by SFAS 123, we currently account for share-based awards to employees using APB 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options.

 

9


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

Accordingly, the adoption of SFAS 123R’s fair value method will have a significant impact on our reported results of operations, although it will have no impact on our overall financial position. The impact of adopting SFAS 123R cannot be predicted at this time because it will depend on levels of share-based awards granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as previously described in the disclosure of pro forma net income and net income per common share.

 

SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current accounting literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior years for such excess tax deductions has not been significant.

 

4.    GUARANTEES

 

The following are guarantees issued by the Company (in thousands):

 

     September 30,
2005


   December 31,
2004


Standby letters of credit:

             

Financial

   $   651,929    $   646,489

Performance

     176,936      136,660
    

  

     $ 828,865    $ 783,149
    

  

 

The Company’s Annual Report on Form 10-K for the year ended December 31, 2004 contains further information on the nature of these letters of credit along with their terms and collateral requirements. At September 30, 2005, the carrying value recorded by the Company as a liability for these guarantees was $3.9 million.

 

Certain mortgage loans sold have limited recourse provisions for periods ranging from 3 months to 1 year. The amount of losses resulting from the exercise of these provisions has been insignificant.

 

As of September 30, 2005, the Parent has guaranteed approximately $580.3 million of debt issued by a subsidiary and by affiliated trusts issuing trust preferred securities. The trusts and related trust preferred securities are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

Zions First National Bank (“ZFNB”) provides a liquidity facility (“Liquidity Facility”) for a fee to Lockhart Funding, LLC (“Lockhart”), a qualifying special-purpose entity securities conduit. Lockhart purchases floating rate U.S. Government and AAA-rated securities with funds from the issuance of commercial paper. ZFNB also provides interest rate hedging support and administrative and investment advisory services for a fee. Pursuant to the Liquidity Facility contract, ZFNB is required to purchase securities from Lockhart to provide funds for Lockhart to repay maturing commercial paper upon Lockhart’s inability to access the commercial paper market, or upon a commercial paper market disruption as specified in governing documents for Lockhart. Pursuant to the governing documents, including the liquidity agreement, if any security in Lockhart is downgraded below AA-, ZFNB may 1) place its letter of credit on the security, or 2) obtain credit enhancement from a third party, or 3) purchase the security from Lockhart at book value. At any given time, the maximum commitment of ZFNB is the book value of Lockhart’s securities portfolio, which

 

10


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

is not allowed to exceed the size of the Liquidity Facility commitment. At September 30, 2005, the book value of Lockhart’s securities portfolio was $5.5 billion, which approximated market value, and the size of the Liquidity Facility commitment was $6.12 billion. No amounts were outstanding under the Liquidity Facility at September 30, 2005.

 

The FASB has proposed various amendments to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, including an Exposure Draft issued in August 2005, Accounting for Transfer of Financial Assets, an amendment of FASB Statement No. 140. This new guidance, among other things, proposes to change the requirements that an entity must meet to be considered a qualifying special-purpose entity. Subject to the requirements of the final standard, Lockhart’s operations may need to be modified to preserve its off-balance sheet status as a qualifying special-purpose entity.

 

5.    RETIREMENT PLANS

 

The following disclosures are required for interim financial statements by SFAS No. 132R, Employers’ Disclosures about Pensions and Other Postretirement Benefits (in thousands):

 

              

Postretirement

Benefits


            

Postretirement

Benefits


     Pension Benefits

      Pension Benefits

  
     Three Months Ended September 30,

   Nine Months Ended September 30,

     2005

   2004

   2005

   2004

   2005

   2004

   2005

   2004

Service cost

   $ 373     $ 98     $ 29     $ 27     $ 659     $ 448     $ 89     $ 77 

Interest cost

     5,775       2,073       86       39       10,044       6,323       261       289 

Expected return on plan assets

     (6,833)      (2,388)      –         –         (12,041)      (7,238)      –         –   

Amortization of prior service cost

     –         –         –         14       –         –         –         64 

Amortization of net actuarial (gain) loss

     1,238       235       (86)      (234)      1,958       885       (261)      (384)
    

  

  

  

  

  

  

  

Net periodic benefit cost (credit)

   $ 553     $ 18     $ 29     $ (154)    $ 620     $ 418     $ 89     $ 46 
    

  

  

  

  

  

  

  

 

These disclosures include revisions made to the annual estimate of net periodic pension benefit cost by the Company’s actuary in the third quarters of 2005 and 2004.

 

As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, we expected to contribute $654 thousand in 2005 to meet estimated benefit payments to participants in our postretirement welfare plan. As of September 30, 2005, we have contributed $489 thousand of this amount and expect to contribute the remaining portion during the rest of 2005. We did not expect to make any contributions to the pension plan in 2005 and have not done so as of September 30, 2005. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, participation and benefit accruals for the pension plan were frozen effective January 1, 2003.

 

6.    GOODWILL

 

During the nine months ended September 30, 2005, goodwill relating to a banking subsidiary was reduced by $3.7 million. This reduction resulted from the recognition of a portion of acquired state net operating loss carryforward benefits. This accounting follows the guidance of SFAS No. 109, Accounting for Income Taxes. There was no impact on net income.

 

11


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

7.    SUBSEQUENT EVENTS

 

As previously disclosed, the Company and Amegy Bancorporation, Inc., headquartered in Houston, Texas, announced on July 6, 2005 that they had signed a definitive agreement under which the Company will acquire all of the outstanding common stock of Amegy. On October 11, 2005, the shareholders of Amegy approved the definitive agreement. Consideration valued as of September 30, 2005 would consist of approximately $600 million in cash and approximately 14.3 million shares of the Company’s common stock prior to the effect of any outstanding options, or a total estimated transaction value of approximately $1.7 billion. The acquisition is subject to approval by banking regulators and is expected to close during the fourth quarter of 2005. Upon completion of the transaction, Amegy will operate under its current name, charter and management as a separate banking subsidiary of the Company. At September 30, 2005, Amegy had assets of approximately $7.9 billion and shareholders’ equity of approximately $0.6 billion.

 

On October 26, 2005, the Company opened The Commerce Bank of Oregon in Portland, Oregon. The Company funded this new banking subsidiary in October 2005 with an initial capital contribution of $20 million. The new bank is not expected to have a material effect on the Company’s operations for several years.

 

8.    OPERATING SEGMENT INFORMATION

 

We manage our operations and prepare management reports and other information with a primary focus on geographical area. As of September 30, 2005, we operated six community/regional banks in distinct geographical areas. Performance assessment and resource allocation are based upon this geographical structure. Zions First National Bank (“ZFNB”) operates 110 branches in Utah and 23 in Idaho. California Bank & Trust (“CB&T”) operates 91 branches in California. Nevada State Bank (“NSB”) operates 69 branches in Nevada. National Bank of Arizona (“NBA”) operates 54 branches in Arizona. Vectra Bank Colorado (“Vectra”) operates 40 branches in Colorado and one branch in New Mexico. The Commerce Bank of Washington (“Commerce”) operates one branch in the state of Washington. The operating segment identified as “Other” includes the parent company, other 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. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations. Operating segments pay for centrally provided services based upon estimated or actual usage of those services. We also allocate income among participating banking subsidiaries to better match revenues from hedging strategies to the operating units that gave rise to the exposures being hedged.

 

12


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

The following table presents selected operating segment information for the three months ended September 30, 2005 and 2004:

 

(In millions)

 

  

Zions First

National Bank

and Subsidiaries


  

California

Bank & Trust


  

Nevada

State Bank


  

National
Bank of

Arizona


   2005

   2004

   2005

   2004

   2005

   2004

   2005

   2004

CONDENSED INCOME STATEMENT

                                                       

Net interest income excluding hedge income

   $ 104.2     $ 83.9     $ 113.3     $ 100.7    $ 44.7     $ 35.8    $ 48.3     $ 35.4

Hedge income recorded directly at subsidiary

     (0.3)      3.6       (0.5)      3.5      0.2       0.4      0.4       0.1

Allocated hedge income

     0.7       (2.9)      –         –        (0.1)      0.3      (0.2)      0.8
    

  

  

  

  

  

  

  

Net interest income

     104.6       84.6       112.8       104.2      44.8       36.5      48.5       36.3

Provision for loan losses

     6.0       4.1       4.5       3.0      (0.9)      1.1      1.9       1.0
    

  

  

  

  

  

  

  

Net interest income after provision for loan losses

     98.6       80.5       108.3       101.2      45.7       35.4      46.6       35.3

Noninterest income

     68.7       69.4       19.1       19.8      7.7       8.3      6.0       5.2

Noninterest expense

     98.2       91.6       59.6       57.9      26.8       23.5      24.3       21.0

Impairment loss on goodwill

     –         0.6       –         –        –         –        –         –  
    

  

  

  

  

  

  

  

Income before income taxes and minority interest

     69.1       57.7       67.8       63.1      26.6       20.2      28.3       19.5

Income tax expense (benefit)

     23.1       20.4       27.3       25.2      9.2       6.9      11.2       7.9

Minority interest

     –         –         –         –        –         –        –         –  
    

  

  

  

  

  

  

  

Net income (loss)

   $ 46.0     $ 37.3     $ 40.5     $ 37.9    $ 17.4     $ 13.3    $ 17.1     $ 11.6
    

  

  

  

  

  

  

  

AVERAGE BALANCE SHEET DATA

                                                       

Assets

   $ 12,497     $ 12,249     $ 10,236     $ 9,710    $ 3,693     $ 3,248    $ 3,972     $ 3,396

Net loans and leases

     8,523       7,212       7,269       6,808      2,791       2,456      3,464       2,769

Deposits

     8,620       7,822       8,627       8,186      3,271       2,877      3,420       2,974

Shareholder’s equity

     791       733       1,048       1,016      234       213      289       247

(In millions)

 

   Vectra Bank
Colorado


   The Commerce Bank
of Washington


   Other

  

Consolidated

Company


   2005

   2004

   2005

   2004

   2005

   2004

   2005

   2004

CONDENSED INCOME STATEMENT

                                                       

Net interest income excluding hedge income

   $ 22.6     $ 19.5    $ 7.5     $ 5.7    $ 0.2     $ (0.4)    $ 340.8     $ 280.6

Hedge income recorded directly at subsidiary

     (0.1)      1.6      (0.1)      0.4      0.2       0.9       (0.2)      10.5

Allocated hedge income

     (0.3)      1.3      (0.1)      0.5      –         –         –         –  
    

  

  

  

  

  

  

  

Net interest income

     22.2       22.4      7.3       6.6      0.4       0.5       340.6       291.1

Provision for loan losses

     0.3       –         0.3       0.3      –         (0.1)      12.1       9.4
    

  

  

  

  

  

  

  

Net interest income after provision for loan losses

     21.9       22.4      7.0       6.3      0.4       0.6       328.5       281.7

Noninterest income

     6.3       7.7      0.4       0.3      3.1       2.5       111.3       113.2

Noninterest expense

     22.1       22.7      3.0       2.7      14.5       13.4       248.5       232.8

Impairment loss on goodwill

     –         –        –         –        –         –         –         0.6
    

  

  

  

  

  

  

  

Income before income taxes and minority interest

     6.1       7.4      4.4       3.9      (11.0)      (10.3)      191.3       161.5

Income tax expense (benefit)

     2.2       2.7      1.3       1.2      (6.1)      (6.1)      68.2       58.2

Minority interest

     –         –        –         –        0.1       0.8       0.1       0.8
    

  

  

  

  

  

  

  

Net income (loss)

   $ 3.9     $ 4.7    $ 3.1     $ 2.7    $ (5.0)    $ (5.0)    $ 123.0     $ 102.5
    

  

  

  

  

  

  

  

AVERAGE BALANCE SHEET DATA

                                                       

Assets

   $ 2,324     $ 2,348    $ 781     $ 700    $ (285)    $ (282)    $ 33,218     $ 31,369

Net loans and leases

     1,511       1,520      375       341      76       114       24,009       21,220

Deposits

     1,645       1,628      429       443      (1,205)      (1,200)      24,807       22,730

Shareholder’s equity

     296       344      50       47      265       77       2,973       2,677

 

13


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

The following table presents selected operating segment information for the nine months ended September 30, 2005 and 2004:

 

(In millions)

 

 

Zions First

National Bank

and Subsidiaries


 

California

Bank & Trust


 

Nevada

State Bank


 

National

Bank of

Arizona


  2005

  2004

  2005

  2004

  2005

  2004

  2005

  2004

CONDENSED INCOME STATEMENT

                                               

Net interest income excluding hedge income

  $ 300.7    $ 249.4    $ 330.9    $ 290.9    $ 123.9    $ 101.7    $ 134.8    $ 99.1 

Hedge income recorded directly at subsidiary

    2.6      15.6      2.4      11.1      1.1      1.2      1.3      0.3 

Allocated hedge income

    (0.5)     (13.5)     –        –        –        1.4      0.1      3.5 
   

 

 

 

 

 

 

 

Net interest income

    302.8      251.5      333.3      302.0      125.0      104.3      136.2      102.9 

Provision for loan losses

    19.7      15.8      7.0      6.0      (0.4)     3.8      4.8      3.0 
   

 

 

 

 

 

 

 

Net interest income after provision for loan
losses

    283.1      235.7      326.3      296.0      125.4      100.5      131.4      99.9 

Noninterest income

    200.1      204.9      56.7      58.7      23.4      23.9      16.5      16.7 

Noninterest expense

    286.2      258.8      182.9      174.2      77.9      70.3      72.0      62.6 

Impairment loss on goodwill

    –        0.6      –        –        –        –        –        –   
   

 

 

 

 

 

 

 

Income before income taxes and minority
interest

    197.0      181.2      200.1      180.5      70.9      54.1      75.9      54.0 

Income tax expense (benefit)

    65.2      62.0      80.7      72.5      24.5      18.6      30.2      21.6 

Minority interest

    (0.1)     (0.3)     –        –        –        –        –        –   
   

 

 

 

 

 

 

 

Net income (loss)

  $ 131.9    $ 119.5    $ 119.4    $ 108.0    $ 46.4    $ 35.5    $ 45.7    $ 32.4 
   

 

 

 

 

 

 

 

AVERAGE BALANCE SHEET DATA

                                               

Assets

  $   12,367    $   12,247    $   10,165    $   9,540    $ 3,518    $ 3,123    $ 3,809    $ 3,171 

Net loans and leases

    8,265      7,141      7,163      6,666      2,679      2,321      3,297      2,583 

Deposits

    8,335      7,509      8,450      7,881      3,086      2,750      3,255      2,747 

Shareholder’s equity

    771      737      1,044      996      228      205      279      243 

(In millions)

 

 

Vectra Bank

Colorado


  The Commerce Bank
of  Washington


  Other

 

Consolidated

Company


  2005

  2004

  2005

  2004

  2005

  2004

  2005

  2004

CONDENSED INCOME STATEMENT

                                               

Net interest income excluding hedge income

  $ 64.7    $ 59.0    $ 21.5    $ 16.7    $ (0.6)   $ (0.4)   $ 975.9    $ 816.4 

Hedge income recorded directly at subsidiary

    1.5      4.6      0.1      1.3      1.6      0.9      10.6      35.0 

Allocated hedge income

    0.3      6.3      0.1      2.3      –        –        –        –   
   

 

 

 

 

 

 

 

Net interest income

    66.5      69.9      21.7      20.3      1.0      0.5      986.5      851.4 

Provision for loan losses

    0.9      1.6      0.9      0.8      –        (0.1)     32.9      30.9 
   

 

 

 

 

 

 

 

Net interest income after provision for loan
losses

    65.6      68.3      20.8      19.5      1.0      0.6      953.6      820.5 

Noninterest income

    19.8      22.5      1.2      1.2      3.1      4.7      320.8      332.6 

Noninterest expense

    65.4      69.0      9.2      8.4      36.9      41.8      730.5      685.1 

Impairment loss on goodwill

    –        –        –        –        –        –        –        0.6 
   

 

 

 

 

 

 

 

Income before income taxes and minority
interest

    20.0      21.8      12.8      12.3      (32.8)     (36.5)     543.9      467.4 

Income tax expense (benefit)

    7.1      7.9      3.9      4.0      (17.3)     (19.1)     194.3      167.5 

Minority interest

    –        –        –        –        (2.3)     (0.8)     (2.4)     (1.1)
   

 

 

 

 

 

 

 

Net income (loss)

  $ 12.9    $ 13.9    $ 8.9    $ 8.3    $ (13.2)   $ (16.6)   $ 352.0    $ 301.0 
   

 

 

 

 

 

 

 

AVERAGE BALANCE SHEET DATA

                                               

Assets

  $ 2,302    $ 2,425    $ 761    $ 704    $ (390)   $ (464)   $   32,532    $   30,746 

Net loans and leases

    1,480      1,607      373      337      86      116      23,343      20,771 

Deposits

    1,592      1,674      425      441      (1,198)     (1,247)     23,945      21,755 

Shareholder’s equity

    312      360      50      49      208      35      2,892      2,625 

 

14


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

FINANCIAL HIGHLIGHTS

(Unaudited)

 

(In thousands, except per share and ratio data)

 

  

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


   2005

   2004

   % Change

   2005

   2004

   % Change

EARNINGS

                                     

Taxable-equivalent net interest income

   $   345,826       $   296,384       16.68 %    $   1,002,034       $   867,519       15.51 %

Taxable-equivalent revenue

     457,075         409,540       11.61 %      1,322,831         1,200,113       10.23 %

Net interest income

     340,652         291,115       17.02 %      986,531         851,434       15.87 %

Noninterest income

     111,249         113,156       (1.69)%      320,797         332,594       (3.55)%

Provision for loan losses

     12,107         9,363       29.31 %      32,907         30,908       6.47 %

Noninterest expense

     248,472         232,813       6.73 %      730,473         685,127       6.62 %

Impairment loss on goodwill

     –           602       (100.00)%      –           602       (100.00)%

Income before income taxes and minority interest

     191,322         161,493       18.47 %      543,948         467,391       16.38 %

Income taxes

     68,200         58,140       17.30 %      194,279         167,485       16.00 %

Minority interest

     152         858       (82.28)%      (2,345)         (1,100)       113.18 %

Net income

     122,970         102,495       19.98 %      352,014         301,006       16.95 %

PER COMMON SHARE

                                     

Net income (diluted)

     1.34         1.13       18.58 %      3.84         3.31       16.01 %

Dividends

     0.36         0.32       12.50 %      1.08         0.94       14.89 %

Book value

                        33.30         30.39       9.58 %

SELECTED RATIOS

                                     

Return on average assets

     1.47%      1.30%           1.45%      1.31%     

Return on average common equity

     16.41%      15.23%           16.27%      15.32%     

Efficiency ratio

     54.36%      56.85%           55.22%      57.09%     

Net interest margin

     4.59%      4.20%           4.57%      4.21%     

 

15


Table of Contents

 

ZIONS BANCORPORATION AND SUBSIDIARIES

FINANCIAL HIGHLIGHTS (Continued)

(Unaudited)

 

(In thousands, except share and ratio data)

 

  

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


   2005

   2004

   % Change

   2005

   2004

   % Change

AVERAGE BALANCES

                                     

Total assets

   $   33,218,477       $   31,368,578       5.90 %    $   32,531,725       $   30,746,329       5.81 %

Securities

     4,993,735         5,232,188       (4.56)%      5,091,701         5,181,732       (1.74)%

Net loans and leases

     24,009,024         21,220,481       13.14 %      23,343,316         20,770,913       12.38 %

Goodwill

     638,957         645,462       (1.01)%      640,151         649,751       (1.48)%

Core deposit and other intangibles

     52,276         62,923       (16.92)%      53,964         66,622       (19.00)%

Total deposits

     24,807,387         22,729,540       9.14 %      23,945,430         21,754,978       10.07 %

Core deposits (1)

     23,029,389         21,463,026       7.30 %      22,376,328         20,521,173       9.04 %

Minority interest

     26,220         23,791       10.21 %      25,270         22,456       12.53 %

Shareholders’ equity

     2,972,615         2,677,404       11.03 %      2,892,162         2,625,039       10.18 %

Weighted average common and common-equivalent shares outstanding

     91,605,279         90,956,674       0.71 %      91,606,315         90,819,586       0.87 %

AT PERIOD END

                                     

Total assets

                      $ 33,422,701       $ 30,731,040       8.76 %

Securities

                        4,992,339         5,058,691       (1.31)%

Net loans and leases

                        23,930,017         21,507,043       11.27 %

Sold loans being serviced (2)

                        3,561,818         3,152,924       12.97 %

Allowance for loan losses

                        287,237         269,413       6.62 %

Allowance for unfunded lending commitments

                        15,830         12,030       31.59 %

Goodwill

                        639,120         642,645       (0.55)%

Core deposit and other intangibles

                        47,670         57,665       (17.33)%

Total deposits

                        25,399,741         23,165,131       9.65 %

Core deposits (1)

                        23,507,531         21,883,851       7.42 %

Minority interest

                        26,719         24,481       9.14 %

Shareholders’ equity

                        2,999,173         2,724,261       10.09 %

Common shares outstanding

                        90,067,016         89,638,753       0.48 %

Average equity to average assets

     8.95%      8.54%           8.89%      8.54%     

Common dividend payout

     26.47%      28.10%           27.74%      28.49%     

Tangible common equity ratio

                        7.06%      6.74%     

Nonperforming assets

                        83,101         91,105       (8.79)%

Accruing loans past due 90 days or more

                        15,836         18,182       (12.90)%

Nonperforming assets to net loans and leases and other real estate owned at period end

                        0.35%      0.42%     

 

(1) Amount consists of total deposits excluding time deposits $100,000 and over.
(2) Amount represents the outstanding balance of loans sold and being serviced by the Company, excluding conforming first mortgage residential real estate loans.

 

16


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

FORWARD-LOOKING INFORMATION

 

Statements in Management’s Discussion and Analysis that are based on other than historical data are forward-looking, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

 

    statements with respect to the Company’s beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance;

 

    statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” or similar expressions.

 

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in Management’s Discussion and Analysis. Factors that might cause such differences include, but are not limited to:

 

    the Company’s ability to successfully execute its business plans, manage its risks, and achieve its objectives;

 

    changes in political and economic conditions, including the economic effects of terrorist attacks against the United States and related events;

 

    changes in financial market conditions, either nationally or locally in areas in which the Company conducts its operations, including without limitation, reduced rates of business formation and growth and commercial real estate development;

 

    fluctuations in the equity and fixed-income markets;

 

    changes in interest rates;

 

    acquisitions and integration of acquired businesses;

 

    increases in the levels of losses, customer bankruptcies, claims and assessments;

 

    changes in fiscal, monetary, regulatory, trade and tax policies and laws;

 

    continuing consolidation in the financial services industry;

 

    new litigation or changes in existing litigation;

 

    success in gaining regulatory approvals, when required;

 

    changes in consumer spending and savings habits;

 

    increased competitive challenges and expanding product and pricing pressures among financial institutions;

 

    inflation and deflation;

 

    technological changes;

 

    legislation or regulatory changes, which adversely affect the Company’s operations or business;

 

    the Company’s ability to comply with applicable laws and regulations; and

 

    changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies.

 

In addition, the following factors relating to the Company’s proposed acquisition of Amegy Bancorporation, Inc., among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the businesses of Zions Bancorporation and Amegy Bancorporation may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; (2) the expected growth opportunities and

 

cost savings from the merger may not be fully realized or may take longer to realize than expected; (3) operating costs, customer losses and business disruption following the merger, including adverse effects on

 

17


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

relationships with employees, may be greater than expected; and (4) governmental approvals of the merger may not be obtained or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger.

 

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the 2004 Annual Reports on Form 10-K of Zions Bancorporation and Amegy Bancorporation, Inc. filed with the Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet site (http://www.sec.gov).

 

The Company specifically 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.

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

 

The Company has made no significant changes in its critical accounting policies and significant estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2004.

 

RESULTS OF OPERATIONS

 

Zions Bancorporation (“the Parent”) and subsidiaries (collectively “Zions,” “the Company,” “we,” “our”) reported net income of $123.0 million, or $1.34 per diluted share for the third quarter of 2005 compared with $102.5 million, or $1.13 per diluted share for the third quarter of 2004. The annualized return on average assets was 1.47% in the third quarter of 2005 compared to 1.30% in the third quarter of 2004. For the same comparative periods, the annualized return on average common equity was 16.41% compared to 15.23%. In addition, the efficiency ratio, which is defined as the percentage of noninterest expenses to taxable-equivalent revenue, was 54.4% compared to 56.8% for the third quarter of 2004.

 

Net income for the first nine months of 2005 was $352.0 million or $3.84 per diluted share, compared to $301.0 million or $3.31 per diluted share for the first nine months of 2004. For the first nine months of 2005, the annualized return on average assets was 1.45% compared to 1.31% for the same period of 2004. For the same comparative periods, the annualized return on average common equity was 16.27% compared to 15.32%. The efficiency ratio for the first nine months of 2005 was 55.2% compared to 57.1% for 2004.

 

Net Interest Income, Margin and Interest Rate Spreads

 

Taxable-equivalent net interest income for the third quarter of 2005 increased 16.7% to $345.8 million compared with $296.4 million for the comparable period of 2004. The increase reflects growth in both loans and deposits coupled with the effect of an increase in the net interest margin. For the first nine months of 2005, net interest income on a fully taxable-equivalent basis was $1,002.0 million, an increase of 15.5% compared to $867.5 million in 2004. The incremental tax rate used for calculating all taxable-equivalent adjustments is 35% for all periods presented.

 

The Company’s net interest margin was 4.59% for the third quarter of 2005, compared to 4.60% for the second quarter of 2005 and 4.20% for the third quarter of 2004. Since the middle of 2004, the margin has been positively impacted by the benefits of increasing noninterest-bearing demand deposits and the increasing spreads earned on those deposits. Also, reductions in lower-yielding short-term investments have been used to fund higher-yielding loans. The margin for the third quarter of 2005 continued to be influenced by solid loan and deposit growth. During the first quarter of 2005, the Company reclassified certain fees from

 

18


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

interest income to “Other service charges, commissions and fees” in noninterest income. This had the effect of reducing the net interest margin by four to six basis points in that and prior quarters. Prior quarters have been reclassified for comparability.

 

The yield on average earning assets increased 103 basis points during the third quarter of 2005 compared to the same period in 2004. The average rate paid this quarter on interest-bearing funds increased 93 basis points from the third quarter of 2004. The spread on average interest-bearing funds for the third quarter of 2005 was 3.93%, up from 3.83% for the third quarter of 2004. Comparing the first nine months of 2005 with 2004, the yield on average earning assets increased 94 basis points, while the cost of interest-bearing funds increased 81 basis points.

 

The Federal Reserve raised its target for the federal funds rate twice during the quarter by a combined 50 basis points. These increases were followed by corresponding increases in the prime rate charged by most major banks, including Zions’ subsidiary banks. The Federal Reserve has indicated that it will continue monitoring the economy and implement additional rate changes as appropriate. The Company expects to continue its efforts to maintain a slightly “asset sensitive” position with regard to interest rate risk. However, its actual position is highly dependent upon changes in both short-term and long-term interest rates, as well as the actions of competitors and customers in response to those changes.

 

19


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES

(Unaudited)

 

    

Three Months Ended

September 30, 2005


  

Three Months Ended

September 30, 2004


(In thousands)

 

  

Average

Balance


  

Amount of

Interest (1)


  

Average

Rate


  

Average

Balance


  

Amount of

Interest (1)


  

Average

Rate


ASSETS

                                     

Money market investments

   $ 915,954     $ 7,723    3.35%    $ 1,605,277     $ 4,994    1.24%

Securities:

                                     

Held to maturity

     641,745       11,159    6.90%      640,207       10,996    6.83%

Available for sale

     3,866,988       50,582    5.19%      3,753,811       41,164    4.36%

Trading account

     485,002       4,753    3.89%      838,170       8,884    4.22%
    

  

       

  

    

Total securities

     4,993,735       66,494    5.28%      5,232,188       61,044    4.64%
    

  

       

  

    

Loans:

                                     

Loans held for sale

     187,692       2,462    5.20%      124,000       932    2.99%

Net loans and leases (2)

     23,821,332       411,772    6.86%      21,096,481       317,695    5.99%
    

  

       

  

    

Total loans and leases

     24,009,024       414,234    6.85%      21,220,481       318,627    5.97%
    

  

       

  

    

Total interest-earning assets

     29,918,713       488,451    6.48%      28,057,946       384,665    5.45%
           

              

    

Cash and due from banks

     1,123,297                   1,038,432             

Allowance for loan losses

     (284,423)                  (272,463)            

Goodwill

     638,957                   645,462             

Core deposit and other intangibles

     52,276                   62,923             

Other assets

     1,769,657                   1,836,278             
    

              

           

Total assets

   $   33,218,477                 $   31,368,578             
    

              

           

LIABILITIES

                                     

Interest-bearing deposits:

                                     

Savings and NOW

   $ 3,404,743       7,756    0.90%    $ 3,379,890       5,359    0.63%

Money market super NOW

     9,943,220       51,783    2.07%      9,821,968       27,689    1.12%

Time under $100,000

     1,522,194       10,941    2.85%      1,407,490       6,773    1.91%

Time $100,000 and over

     1,777,998       14,954    3.34%      1,266,514       7,557    2.37%

Foreign

     715,838       5,641    3.13%      409,644       1,362    1.32%
    

  

       

  

    

Total interest-bearing deposits

     17,363,993       91,075    2.08%      16,285,506       48,740    1.19%
    

  

       

  

    

Borrowed funds:

                                     

Securities sold, not yet purchased

     503,722       4,660    3.67%      708,342       7,135    4.01%

Federal funds purchased and security repurchase agreements

     2,186,773       16,368    2.97%      2,397,862       7,959    1.32%

Commercial paper

     143,239       1,294    3.58%      191,767       756    1.57%

FHLB advances and other borrowings:

                                     

One year or less

     107,606       891    3.29%      154,593       519    1.34%

Over one year

     226,786       2,885    5.05%      229,703       2,928    5.07%

Long-term debt

     1,701,575       25,452    5.93%      1,697,356       20,244    4.74%
    

  

       

  

    

Total borrowed funds

     4,869,701       51,550    4.20%      5,379,623       39,541    2.92%
    

  

       

  

    

Total interest-bearing liabilities

     22,233,694       142,625    2.55%      21,665,129       88,281    1.62%
           

              

    

Noninterest-bearing deposits

     7,443,394                   6,444,034             

Other liabilities

     542,554                   558,220             
    

              

           

Total liabilities

     30,219,642                   28,667,383             

Minority interest

     26,220                   23,791             

Total shareholders’ equity

     2,972,615                   2,677,404             
    

              

           

Total liabilities and shareholders’ equity

   $ 33,218,477                 $ 31,368,578             
    

              

           

Spread on average interest-bearing funds

                 3.93%                  3.83%

Taxable-equivalent net interest income and net yield on interest-earning assets

          $   345,826    4.59%           $ 296,384    4.20%
           

              

    

 

(1) Taxable-equivalent rates used where applicable.

(2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.

 

20


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (Continued)

(Unaudited)

 

(In thousands)

 

  

Nine Months Ended

September 30, 2005


  

Nine Months Ended

September 30, 2004


  

Average

Balance


  

Amount of

Interest (1)


  

Average

Rate


  

Average

Balance


  

Amount of

Interest (1)


  

Average

Rate


ASSETS

                                     

Money market investments

   $ 865,182     $ 18,402    2.84%    $ 1,576,519     $ 11,529    0.98%

Securities:

                                     

Held to maturity

     640,090       33,245    6.94%      453,902       23,370    6.88%

Available for sale

     3,919,114       149,204    5.09%      3,956,116       127,433    4.30%

Trading account

     532,497       15,832    3.98%      771,714       23,227    4.02%
    

  

       

  

    

Total securities

     5,091,701       198,281    5.21%      5,181,732       174,030    4.49%
    

  

       

  

    

Loans:

                                     

Loans held for sale

     190,604       6,683    4.69%      157,452       3,595    3.05%

Net loans and leases (2)

     23,152,712       1,153,991    6.66%      20,613,461       914,080    5.92%
    

  

       

  

    

Total loans and leases

     23,343,316       1,160,674    6.65%      20,770,913       917,675    5.90%
    

  

       

  

    

Total interest-earning assets

     29,300,199       1,377,357    6.29%      27,529,164       1,103,234    5.35%
           

              

    

Cash and due from banks

     1,073,089                   1,000,655             

Allowance for loan losses

     (278,708)                  (271,782)            

Goodwill

     640,151                   649,751             

Core deposit and other intangibles

     53,964                   66,622             

Other assets

     1,743,030                   1,771,919             
    

              

           

Total assets

   $   32,531,725                 $ 30,746,329             
    

              

           

LIABILITIES

                                     

Interest-bearing deposits:

                                     

Savings and NOW

   $ 3,392,567       20,640    0.81%    $ 3,338,766       15,398    0.62%

Money market super NOW

     9,820,469       128,871    1.75%      9,316,936       70,590    1.01%

Time under $100,000

     1,463,881       28,398    2.59%      1,449,637       20,195    1.86%

Time $100,000 and over

     1,569,102       35,780    3.05%      1,233,805       21,015    2.28%

Foreign

     573,938       11,802    2.75%      317,667       2,615    1.10%
    

  

       

  

    

Total interest-bearing deposits

     16,819,957       225,491    1.79%      15,656,811       129,813    1.11%
    

  

       

  

    

Borrowed funds:

                                     

Securities sold, not yet purchased

     507,137       13,903    3.67%      659,441      19,152    3.88%

Federal funds purchased and security repurchase agreements

     2,314,856       44,783    2.59%      2,750,202       21,375    1.04%

Commercial paper

     149,637       3,471    3.10%      205,559       2,057    1.34%

FHLB advances and other borrowings:

                                     

One year or less

     269,859       5,837    2.89%      332,646       2,825    1.13%

Over one year

     227,319       8,587    5.05%      230,338       8,758    5.08%

Long-term debt

     1,694,642       73,251    5.78%      1,648,176       51,735    4.19%
    

  

       

  

    

Total borrowed funds

     5,163,450       149,832    3.88%      5,826,362       105,902    2.43%
    

  

       

  

    

Total interest-bearing liabilities

     21,983,407       375,323    2.28%      21,483,173       235,715    1.47%
           

              

    

Noninterest-bearing deposits

     7,125,473                   6,098,167             

Other liabilities

     505,413                   517,494             
    

              

           

Total liabilities

     29,614,293                   28,098,834             

Minority interest

     25,270                   22,456             

Total shareholders’ equity

     2,892,162                   2,625,039             
    

              

           

Total liabilities and shareholders’ equity

   $ 32,531,725                 $   30,746,329             
    

              

           

Spread on average interest-bearing funds

                 4.01%                  3.88%

Taxable-equivalent net interest income and net yield on interest-earning assets

          $   1,002,034    4.57%           $ 867,519    4.21%
           

              

    

 

(1) Taxable-equivalent rates used where applicable.

(2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.

 

21


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

Provisions for Credit Losses

 

The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level based upon the inherent risks in the portfolio. The provision for unfunded lending commitments is used to maintain the allowance for unfunded lending commitments at an adequate level. See “Credit Risk Management” for more information on how we determine the appropriate level for the allowances for loan and lease losses and unfunded lending commitments.

 

The provision for loan losses for the third quarter of 2005 was $12.1 million compared to $9.4 million for the same period in 2004. On an annualized basis, the provision was 0.20% of average loans for the third quarter of 2005 and 0.18% for the third quarter of 2004. The provision for unfunded lending commitments was $0.4 million for the third quarter of 2005 compared to $0.9 million for the same period of 2004. From period to period, the amounts of unfunded lending commitments may be subject to sizeable fluctuation due to changes in the timing and volume of loan originations and fundings. The related provision will generally reflect these fluctuations. When combined, the provisions for credit losses for the third quarter of 2005 were $12.5 million compared to $10.3 million for the third quarter of 2004.

 

The provision for loan losses for the first nine months of 2005 was $32.9 million, 6.5% more than the $30.9 million provision for the first nine months of 2004. The relatively low level of the provision corresponds to the general good credit quality that the Company is experiencing. However, we do not expect that the provision for loan losses can remain at these low levels indefinitely and we believe that the provision may increase at some point in the future. The provision for unfunded lending commitments was $3.1 million for the first nine months of 2005 compared to ($0.2) million for the same period in 2004, in part reflecting the rising levels of unfunded commitments resulting from the current strong levels of new commitment originations.

 

Noninterest Income

 

Compared with the third quarter of 2004, noninterest income for the third quarter of 2005 decreased $1.9 million, or 1.7%. The decrease included a $3.2 million decrease in net equity securities gains, as discussed later in this section. Service charges and fees on deposit accounts also decreased $1.3 million from the third quarter of 2004 and income from the Company’s securities conduit decreased $0.6 million. The decline in service charges and fees on deposit accounts was primarily the result of higher earnings credit rates on commercial transaction accounts as market interest rates continued to rise, and to a lesser extent, lower other fees on consumer accounts. Other service charges, commissions and fees increased $1.8 million from the third quarter of 2004 mainly due to a $1.7 million increase in debit card interchange fees. Market making, trading and nonhedge derivative income increased $1.6 million.

 

Net equity securities gains were $1.1 million for the third quarter of 2005 compared with net gains of $4.3 million for the same period in 2004 and included net gains on venture capital equity investments of $0.6 million in 2005 compared to net gains of $3.3 million in 2004. Adjusted for expenses, minority interest and income taxes, venture capital funds reduced net income by $0.1 million for the third quarter of 2005 and increased net income by $0.9 million in the third quarter of 2004.

 

Income from securities conduit represents fees that we receive from Lockhart Funding, a “qualifying special-purpose entity” securities conduit, in return for back-up liquidity, an interest rate agreement and administrative services that Zions First National Bank provides to the entity in accordance with a servicing agreement. The decrease in income for the third quarter of 2005 when compared to the same period in 2004 resulted from compression of spreads between Lockhart’s assets and liabilities.

 

22


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

Trading income for the third quarter of 2005 was $3.8 million compared to $3.5 million for the same period in 2004. Nonhedge derivative income for the third quarter of 2005 was $0.3 million compared to losses of $1.1 million for the comparable period of 2004.

 

Loan sales and servicing income for the third quarter of 2005 includes a gain of $2.6 million from the securitization of small business loans compared to a gain of $0.8 million from a securitization of small business loans during the third quarter of 2004. See “Sold Loans Being Serviced” for additional information on the securitization.

 

Noninterest income for the first nine months of 2005 of $320.8 million decreased $11.8 million or 3.5% from $332.6 million for the first nine months of 2004. Service charges and fees on deposit accounts decreased $5.2 million for the reasons previously discussed in the quarterly comparison. Other service charges, commissions and fees for the first nine months of 2005 increased $5.2 million compared to the same period in 2004 principally as a result of increases in debit card interchange and loan-related service charges, partially offset by reduced brokerage fees.

 

Market making, trading and nonhedge derivative income was $14.4 million compared to $14.7 million in the first nine months of 2004. Of these amounts, trading income was $12.8 million for 2005 compared to $14.1 million for 2004 and nonhedge derivative income was $1.6 million compared to $0.6 million for 2004.

 

Equity securities losses includes $3.9 million in net losses on venture capital equity investments, while for the same period in 2004 net losses were $5.2 million. Adjusted for expenses, minority interest and income taxes, the losses related to venture capital funds reduced net income by $2.2 million and $4.2 million in the first nine months of 2005 and 2004, respectively.

 

Net fixed income securities gains for the first nine months of 2005 include an impairment loss of $1.6 million on a security that was repurchased from Lockhart Funding, LLC, in accordance with the terms of the Lockhart Liquidity Facility. This is the only security that we have repurchased under the terms of the Liquidity Agreement and the security is still rated at an investment grade level. In addition, we expect to recover our investment plus contractual interest on the security. See “Liquidity” for additional information on Lockhart Funding, LLC.

 

“Other” noninterest income decreased $4.5 million from the first nine months of 2005 compared with the same period in 2004. Other noninterest income for 2005 includes a $2.3 million gain on the sale of a branch by Zions First National Bank and a $2.5 million increase in sales of scanners by NetDeposit (a subsidiary of Zions that develops and markets Check 21 software). Other noninterest income for the first nine months of 2004 includes $5.3 million from litigation settlements, $1.5 million from the sale of certain personal trust accounts in Arizona and a $1 million gain on the sale of a building in California.

 

Noninterest Expense

 

Noninterest expense for the third quarter of 2005 of $248.5 million increased $15.7 million or 6.7% over the $232.8 million for the third quarter of 2004. The Company’s efficiency ratio was 54.4% for the third quarter of 2005 compared to 56.8% for the same period of 2004.

 

Salaries and employee benefits increased $9.0 million or 6.7%, compared to the third quarter of 2004. The increase from the prior year was due principally to increased costs of performance-based incentive plans, inflationary salary increases and increased staffing levels in selected areas. Over the past year, the Company has specifically increased staffing related to its new Private Client Services business and the activities related to NetDeposit.

 

23


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

Legal and professional services for the third quarter of 2005 increased $2.0 million when compared to the third quarter of 2004. The increased expenses for 2005 result mainly from increased consulting costs associated with systems conversions efforts and data systems development. “Other” noninterest expense increased $3.3 million or 8.1% when compared to the same period in 2004. The increase is primarily attributable to increased data processing costs, increased NetDeposit scanner costs and higher operational losses.

 

Noninterest expense for the first nine months of 2005 of $730.5 million increased 6.6% from $685.1 million for the first nine months of 2004. The Company’s efficiency ratio was 55.2% for the first nine months of 2005 compared to 57.1% for the same period of 2004. Explanations previously provided for the quarterly changes also apply to the year-to-date changes. Additional explanations of variances follow.

 

Salaries and employee benefits for the first nine months of 2005 increased $25.7 million, or 6.5% when compared to the same period in 2004. The increase was primarily the result of higher performance-based bonus and profit sharing plan costs and increases in staff. Other noninterest expense for the first nine months of 2005 increased $13.6 million or 11.5% compared to the first nine months of 2004. The increase is primarily attributable to increased bankcard expense, higher data processing costs, NetDeposit scanner costs and higher fidelity insurance premiums.

 

As discussed in Note 3 of the Notes to Consolidated Financial Statements, in December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R requires that all share-based payments to employees, including grants of employee stock options, be recognized in the statement of income for all awards that vest based on their fair values. On April 15, 2005, the Securities and Exchange Commission (“SEC”) announced that it was amending Regulation S-X to provide up to a six-month delay for the adoption of SFAS No. 123R, or January 1, 2006 for calendar year public companies. The Company will adopt the standard beginning January 1, 2006. Upon adoption of this Statement, salaries and employee benefits expense will increase.

 

At September 30, 2005, the Company had 7,977 full-time equivalent employees, 389 domestic branches, and 475 ATMs, compared to 7,924 full-time equivalent employees, 385 domestic branches, and 479 ATMs at September 30, 2004.

 

Income Taxes

 

The Company’s income tax expense increased to $68.2 million for the third quarter of 2005 compared to $58.1 million for the same period in 2004. The Company’s effective income tax rates, including the effects of minority interest, were 35.7% and 36.2% for the third quarters of 2005 and 2004, respectively. The effective income tax rates for the first nine months of 2005 and 2004 were 35.6% and 35.7% respectively. As discussed in previous filings, the Company has received Federal income tax credits under the Community Development Financial Institutions Fund set up by the U.S. Government that will be recognized over the next seven years. The effect of these tax credits was to reduce income tax expense by $1.1 million for the third quarter of 2005 and $59 thousand for the third quarter of 2004 and first nine months of 2004. The credits reduced income tax expense by $2.6 million for the first nine months of 2005. The tax rates reflect a lower proportion of tax exempt income to total income for 2005 compared to 2004, offset by the increased tax credits.

 

24


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

BALANCE SHEET ANALYSIS

 

Interest-Earning Assets

 

Interest-earning assets are those assets that have interest rates or yields associated with them and consist of money market investments, securities and loans.

 

Average interest-earning assets increased 6.4% to $29.3 billion for the nine months ended September 30, 2005 compared to $27.5 billion for the comparable period in 2004. Interest-earning assets comprised 90.1% of total average assets for the first nine months of 2005, compared with 89.5% for the comparable period of 2004.

 

Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements, decreased 45.1% to $865 million for the first nine months of 2005 compared to $1.6 billion for the first nine months of 2004. Reductions in money market instruments have been used to fund new loan growth during 2005. Average net loans and leases for the first nine months of 2005 increased by 12.4% when compared to the same period in 2004. Average total deposits for the first nine months of 2005 increased 10.1% compared to the same period in 2004, with interest-bearing deposits increasing 7.4% and noninterest-bearing deposits increasing 16.8%.

 

Investment Securities Portfolio

 

The following table presents the Company’s held-to-maturity and available-for-sale investment securities:

 

(In millions)

 

  

September 30,

2005


  

December 31,

2004


  

September 30,

2004


   Amortized
Cost


   Estimated
Market
Value


   Amortized
Cost


   Estimated
Market
Value


   Amortized
Cost


   Estimated
Market
Value


HELD TO MATURITY

                                         

Municipal securities

   $ 643    $ 641    $ 642    $ 642    $ 639    $ 640
    

  

  

  

  

  

AVAILABLE FOR SALE

                                         

U.S. Treasury securities

     35      36      36      36      36      37

U.S. government agencies and corporations:

                                         

Small Business Administration loan-backed securities

     748      746      712      711      687      690

Other agency securities

     254      251      275      277      258      259

Municipal securities

     90      91      95      96      96      98

Mortgage/asset-backed and other debt securities

     2,593      2,613      2,743      2,760      2,621      2,637
    

  

  

  

  

  

       3,720      3,737      3,861      3,880      3,698      3,721
    

  

  

  

  

  

Other securities:

                                         

Mutual funds

     255      254      301      301      257      258

Stock

     6      7      6      8      7      7
    

  

  

  

  

  

       261      261      307      309      264      265
    

  

  

  

  

  

       3,981      3,998      4,168      4,189      3,962      3,986
    

  

  

  

  

  

Total

   $   4,624    $   4,639    $   4,810    $   4,831    $   4,601    $   4,626
    

  

  

  

  

  

 

The amortized cost of investment securities at September 30, 2005 decreased 3.9% from the amount at December 31, 2004 but was up slightly from the balance at September 30, 2004. The Company’s securities portfolio increased during 2004 as it took advantage of the availability of core deposits and favorable opportunities to issue debt. However, we have been reducing the securities portfolio during 2005 to fund a portion of the Company’s new loan growth. Since loan growth is expected to continue, we anticipate that additional reductions of investment securities may be necessary.

 

25


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

The investment securities portfolio includes $1.1 billion of nonrated, fixed income securities, compared to $1.0 billion at both December 31, 2004 and September 30, 2004. These securities include nonrated municipal securities as well as nonrated, asset-backed subordinated tranches.

 

Loan Portfolio

 

Net loans and leases at September 30, 2005 were $23.9 billion, an annualized increase of 7.7% from December 31, 2004 and an increase of 11.3% over the balance at September 30, 2004. See “Sold Loans Being Serviced” for a description of a small business loan sale during the third quarter of 2005.

 

The following table sets forth the loan portfolio by type of loan:

 

(In millions)

 

   September 30,
2005


   December 31,
2004


   September 30,
2004


Loans held for sale

   $ 213    $ 197    $ 151

Commercial lending:

                    

Commercial and industrial

     4,885      4,643      4,474

Leasing

     359      370      374

Owner occupied

     4,063      3,790      3,472
    

  

  

Total commercial lending

     9,307      8,803      8,320

Commercial real estate:

                    

Construction

     4,435      3,536      3,289

Term

     4,051      3,998      3,804
    

  

  

Total commercial real estate

     8,486      7,534      7,093

Consumer:

                    

Home equity credit line

     1,041      1,104      1,026

1-4 family residential

     4,229      4,234      4,118

Bankcard and other revolving plans

     194      225      217

Other

     437      532      573
    

  

  

Total consumer

     5,901      6,095      5,934

Foreign loans

     5      5      4

Other receivables

     125      98      109
    

  

  

Total loans

   $   24,037    $   22,732    $   21,611
    

  

  

 

The strong loan growth noted above for commercial and commercial real estate lending was widely diversified across our geographical footprint and consistent with the economic activity in that area.

 

Sold Loans Being Serviced

 

Zions performs loan servicing on both loans that it holds in its portfolios and also on loans that are owned by third party investor-owned trusts. In addition, Zions has a practice of securitizing and selling a portion of the loans that it originates, and in many instances provides the servicing on these loans as a condition of the sale.

 

In September 2005, we finalized a loan securitization that resulted in removing approximately $707 million of small business loans and $38 million of related loan purchase premiums from the Company’s balance sheet. Of these loans, an allocated amount of approximately $661 million was securitized and sold to Lockhart Funding, LLC, which is a qualifying special-purpose entity securities conduit. The Company recorded capitalized residual cash flows of approximately $45 million and subordinated retained interests of

 

26


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

$42 million as a result of the securitization. The gain recognized from the sale of the loans was $2.6 million, net of sales expenses.

 

     Sold loans being serviced

  

Residual interests

on balance sheet at September 30, 2005


(In millions)

 

  

Sales for nine

months ended

September 30,

2005


  

Outstanding

balance at

September 30,

2005


  

Subordinated

retained

interests


  

Capitalized

residual

cash flows


   Total

Home equity credit lines

   $ 336    $ 505    $ 13    $ 9    $ 22

Small business loans

     707      2,460      221      111      332

SBA 7(a) loans

     17      205      –        5      5

Farmer Mac

     40      392      –        6      6
    

  

  

  

  

Total

   $   1,100    $   3,562    $   234    $   131    $   365
    

  

  

  

  

 

Consumer and other loan securitizations being serviced for others totaled $3.6 billion at the end of the third quarter of 2005, $3.1 billion at December 31, 2004 and $3.2 billion at September 30, 2004.

 

As of September 30, 2005, the Company had recorded assets, comprised of subordinated retained interests and capitalized residual cash flows, in the amount of $365 million in connection with the $3.6 billion of sold loans being serviced. As is a common practice with securitized transactions, the Company had retained subordinated interests in the securitized assets that totaled $234 million at September 30, 2005, and represented junior positions to the other investors in the trust securities. The capitalized residual cash flows, which are sometimes referred to as “excess servicing,” of $131 million primarily represent the present value of the excess cash flows that have been projected over the lives of the sold loans.

 

As of September 30, 2005, conforming long-term first mortgage real estate loans being serviced for others were $423 million, compared with $404 million at December 31, 2004 and $418 million at September 30, 2004.

 

Other Noninterest-Bearing Investments

 

As of September 30, 2005, the Company had $708 million of other noninterest-bearing investments compared with $665 million at December 31, 2004 and $666 million at September 30, 2004.

 

(In millions)

 

   September 30,
2005


   December 31,
2004


   September 30,
2004


Bank-owned life insurance

   $ 417    $ 385    $ 380

Federal Home Loan Bank and Federal Reserve stock

     127      124      124

SBIC investments

     72      70      71

Other public companies

     39      40      41

Other nonpublic companies

     37      30      34

Trust preferred securities

     16      16      16
    

  

  

     $   708    $   665    $   666
    

  

  

 

Deposits

 

Total deposits at the end of the third quarter of 2005 increased at an annualized rate of 12.1% from the balances reported at December 31, 2004, and increased 9.6% over the September 30, 2004 amounts. Core deposits at September 30, 2005 increased 9.1%, annualized, compared to the December 31, 2004 balance and

 

27


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

7.4% compared to the balance at September 30, 2004. Noninterest-bearing demand deposits increased 17.7% annualized, compared to year end balances and 16.0% from balances at September 30, 2004.

 

The mix of deposits remained favorable during the third quarter of 2005 as demand, savings and money market deposits comprised 83.3% of total deposits at the end of the third quarter, compared with 86.6% and 86.8% as of December 31, 2004 and September 30, 2004, respectively.

 

RISK ELEMENTS

 

Since risk is inherent in most of the Company’s operations, management of risk is an integral part of its operations and is also a key determinant of its overall performance. We apply various strategies to reduce the risks to which the Company’s operations are exposed, namely credit, operational, interest rate and market, and liquidity risks.

 

Credit Risk Management

 

Effective management of credit risk is essential in maintaining a safe and sound financial institution. We have structured the organization to separate the lending function from the credit administration function, which adds strength to the control over and the independent evaluation of credit activities. Formal 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 a well-defined set of standards for evaluating its loan portfolio, and management utilizes a comprehensive loan grading system to determine the risk potential in the portfolio. Further, an independent, internal credit examination department periodically conducts examinations of the Company’s lending departments. These examinations are designed to review credit quality, adequacy of documentation, appropriate loan grading administration and compliance with lending policies, and reports thereon are submitted to the Audit Committee of the Board of Directors.

 

Both the credit policy and the credit examination functions are managed centrally. Each affiliate bank is permitted to modify corporate credit policy to be more conservative; however, approval at the corporate level must be obtained if a bank wishes to create an exception to policy that is more liberal. Historically, only a limited number of such exceptions have been approved. This entire process has been designed to place an emphasis on early detection of potential problem credits so that any required action plans can be developed and implemented on a timely basis to mitigate any potential losses.

 

Another aspect of the Company’s credit risk management strategy is to diversify its loan portfolio. The Company maintains a diversified loan portfolio with some emphasis in real estate. As set forth in the following table, at September 30, 2005 no single loan type exceeded 20.3% of the Company’s total loan portfolio.

 

28


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

    

September 30,

2005


  

December 31,

2004


  

September 30,

2004


(In millions)

 

   Amount

  

% of

total loans


   Amount

  

% of

total loans


   Amount

  

% of

total loans


Commercial lending:

                                   

Commercial and industrial

   $ 4,885    20.3%    $ 4,643    20.4%    $ 4,474    20.7%

Leasing

     359    1.5%      370    1.6%      374    1.7%

Owner occupied

     4,063    16.9%      3,790    16.7%      3,472    16.1%

Commercial real estate:

                                   

Construction

     4,435    18.5%      3,536    15.6%      3,289    15.2%

Term

     4,051    16.9%      3,998    17.6%      3,804    17.6%

Consumer:

                                   

Home equity credit line

     1,041    4.3%      1,104    4.9%      1,026    4.7%

1-4 family residential

     4,229    17.6%      4,234    18.6%      4,118    19.1%

Bankcard and other revolving plans

     194    0.8%      225    1.0%      217    1.0%

Other

     437    1.8%      532    2.3%      573    2.7%

Other

     343    1.4%      300    1.3%      264    1.2%
    

  
  

  
  

  

Total loans

   $   24,037    100.0%    $   22,732    100.0%    $   21,611    100.0%
    

  
  

  
  

  

 

The Company’s potential risk from concentration in owner occupied commercial loans is substantially reduced by the emphasis we place on lending programs sponsored by the Small Business Administration. On these types of loans, the Small Business Administration bears a major portion of the credit risk. In addition, the Company attempts to avoid the risk of an undue concentration of credits in a particular industry, trade group or property type. The Company also has no significant exposure to highly-leveraged transactions and the majority of the Company’s business activity is with customers located within the states of Utah, Idaho, California, Nevada, Arizona, Colorado, and Washington. Finally, the Company has no significant exposure to any individual customer or counterparty.

 

A more comprehensive discussion of our credit risk management is contained in Zions’ Annual Report on Form 10-K for the year ended December 31, 2004. In addition, as discussed in the following sections, the Company’s level of credit quality continued to be very strong during the third quarter of 2005 compared to historical standards. We believe that this level of credit quality will not be able to be maintained indefinitely.

 

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 both well secured and in the process of collection. Consumer loans, however, are not normally placed on a nonaccrual status, inasmuch as they are generally charged off when they become 120 days past due. Loans occasionally may be restructured to provide a reduction or deferral of interest or principal payments. This generally occurs when the financial condition of a borrower deteriorates to the point that the borrower needs to be given temporary or permanent relief from the original contractual terms of the loan. Other real estate owned is acquired primarily through or in lieu of foreclosure on loans secured by real estate.

 

29


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

The following table sets forth the Company’s nonperforming assets:

 

(In millions)

 

   September 30,
2005


   December 31,
2004


   September 30,
2004


Nonaccrual loans

   $ 67       $ 72       $ 76   

Restructured loans

     1         –           1   

Other real estate owned

     15         12         14   
    

  

  

Total

   $ 83       $ 84       $ 91   
    

  

  

% of net loans and leases* and other real estate owned

     0.35%      0.37%      0.42%

Accruing loans past due 90 days or more

   $ 16       $ 16       $ 18   
    

  

  

% of net loans and leases*

     0.07%      0.07%      0.08%

 

* Includes loans held for sale

 

Total nonperforming assets decreased 1.4% as of September 30, 2005 compared with the balance at December 31, 2004.

 

Included in nonaccrual loans are loans that we have determined to be impaired. Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. The amount of the impairment is measured based on either the present value of expected cash flows, the observable market price of the loan, or the fair value of the collateral securing the loan.

 

The Company’s total recorded investment in impaired loans was $35 million at September 30, 2005, compared with $41 million at December 31, 2004 and $40 million at September 30, 2004. Estimated losses on impaired loans are included in the allowance for loan losses. At September 30, 2005, the allowance for loan losses included $4 million for impaired loans with a recorded investment of $14 million. At December 31, 2004, the allowance included $9 million for impaired loans with a $27 million recorded investment, and at September 30, 2004 the allowance included $6 million for impaired loans with a $21 million recorded investment.

 

Allowances for Credit Losses

 

Allowance for Loan Losses – In analyzing the adequacy of the allowance for loan losses, we utilize a comprehensive loan grading system to determine the risk potential in the portfolio and also consider the results of independent internal credit reviews. To determine the adequacy of the allowance, the Company’s loan and lease portfolio is broken into segments based on loan type.

 

For commercial loans, we use historical loss experience factors by loan segment, adjusted for changes in trends and conditions, to help determine an indicated allowance for each portfolio segment. These factors are evaluated and updated using migration analysis techniques and other considerations based on the makeup of the specific segment. These other considerations include:

 

    volumes and trends of delinquencies;

 

    levels of nonaccruals, repossessions and bankruptcies;

 

    trends in criticized and classified loans;

 

30


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

    expected losses on real estate secured loans;

 

    new credit products and policies;

 

    economic conditions;

 

    concentrations of credit risk; and

 

    experience and abilities of the Company’s lending personnel.

 

The allowance for consumer loans is determined using historically developed experience rates at which loans migrate from one delinquency level to the next higher level. Using average roll rates for the most recent twelve-month period and comparing projected losses to actual loss experience, the model estimates expected losses in dollars for the forecasted period. By refreshing the model with updated data, it is able to project losses for a new twelve-month period each month, segmenting the portfolio into nine product groupings with similar risk profiles. This methodology is an accepted industry practice, and the Company believes it has a sufficient volume of information to produce reliable projections.

 

The following table shows the changes in the allowance for loan losses and a summary of loan loss experience:

 

(In millions)

 

   Nine Months
Ended
September
30, 2005


   Twelve Months
Ended
December 31,
2004


   Nine Months
Ended
September
30, 2004


Loans* and leases outstanding (net of unearned income) at end of period

   $   23,930       $   22,627       $   21,507   
    

  

  

Average loans* and leases outstanding (net of unearned income)

   $ 23,343       $ 21,046       $ 20,771   
    

  

  

Allowance for loan losses:

                    

Balance at beginning of the year

   $ 271       $ 269       $ 269   

Allowance of branches sold

     –           (2)        (2)  

Provision charged against earnings

     33         44         31   

Loans and leases charged-off:

                    

Commercial lending

     (15)        (35)        (21)  

Commercial real estate

     (1)        (1)        (1)  

Consumer

     (14)        (23)        (17)  

Other receivables

     (1)        (1)        (1)  
    

  

  

Total

     (31)        (60)        (40)  
    

  

  

Recoveries:

                    

Commercial lending

     9         15         7   

Commercial real estate

     1         –           –     

Consumer

     4         5         4   
    

  

  

Total

     14         20         11   
    

  

  

Net loan and lease charge-offs

     (17)        (40)        (29)  
    

  

  

Balance at end of period

   $ 287       $ 271       $ 269   
    

  

  

Ratio of annualized net charge-offs to average loans and leases

     0.10%      0.19%      0.18%

Ratio of allowance for loan losses to net loans and leases at end of period

     1.20%      1.20%      1.25%

Ratio of allowance for loan losses to nonperforming loans

     422.87%      374.42%      350.42%

Ratio of allowance for loan losses to nonaccrual loans and accruing loans past due 90 days or more

     345.72%      307.61%      284.96%

 

* Includes loans held for sale

 

31


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

Net loan and lease charge-offs, along with their annualized ratios to average loans and leases, are shown in the preceding table for the periods presented. The same respective amounts for the third quarter of 2005 were $6.3 million and 0.10%.

 

The allowance for loan losses at September 30, 2005 increased $16.1 million from the level at year-end 2004. The amount of the allowance for loan losses indicated for criticized and classified loans increased when compared to year-end 2004 by approximately $4.9 million. Criticized and classified loans increased for both the commercial and commercial real estate portfolios. In addition, we had a $17.7 million increase in the level of the allowance indicated for noncriticized and classified loans as a result of $1.5 billion of commercial and commercial real estate loan growth since year-end 2004. The allowance for consumer loans at September 30, 2005 decreased by $6.5 million when compared to the allowance at the end of 2004 principally as a result of a $194 million reduction in the consumer portfolio.

 

Allowance for Unfunded Lending Commitments – The Company also estimates an allowance for potential losses associated with off-balance sheet commitments and standby letters of credit. We determine the allowance for unfunded lending commitments using a process that is similar to the one we use for commercial loans. Based on historical experience, we have developed experience-based loss factors that we apply to the Company’s unfunded lending commitments to estimate the potential for loss in that portfolio. These factors are generated from tracking commitments that become funded and develop into problem loans.

 

The following table sets forth the allowance for unfunded lending commitments:

 

(In millions)

 

   Nine Months
Ended
September 30, 2005


   Twelve Months
Ended
December 31, 2004


   Nine Months
Ended
September 30, 2004


Balance at beginning of period

   $ 12.7    $ 12.2    $ 12.2 

Provision credited (charged) against earnings

     3.1      0.5      (0.2)
    

  

  

Balance at end of period

   $   15.8    $   12.7    $   12.0 
    

  

  

 

Commitments to extend credit on loans and standby letters of credit upon which the above allowances were calculated were $4.1 billion, $3.8 billion and $3.6 billion on September 30, 2005, December 31, 2004, and September 30, 2004, respectively.

 

The following table sets forth the combined allowances for credit losses:

 

(In millions)

 

   September 30,
2005


   December 31,
2004


   September 30,
2004


Allowance for loan losses

   $ 287    $ 271    $ 269

Allowance for unfunded lending commitments

     16      13      12
    

  

  

Total allowances for credit losses

   $   303    $   284    $   281
    

  

  

 

Operational Risk Management

 

Operational risk is the potential for unexpected losses attributable to human error, systems failures, fraud, or inadequate internal controls and procedures. In its ongoing efforts to identify and manage operational risk, the Company has created an Operating Risk Management Group, whose responsibility is to help Company management identify and monitor the key internal controls and processes that the Company has in place to mitigate operational risk.

 

32


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

 

To manage and minimize its operating risk, the Company has in place transactional documentation requirements, systems and procedures to monitor transactions and positions, regulatory compliance reviews, and periodic reviews by internal audit and credit examination. In addition, reconciliation procedures have been established to ensure that data processing systems consistently and accurately capture critical data. Further, we maintain contingency plans and systems for operations support in the event of natural or other disasters. We expect to continue enhancing the Company’s oversight of operational risk throughout 2005.

 

Interest Rate and Market Risk Management

 

Interest rate risk is the potential for loss resulting from adverse changes in the level of interest rates on the Company’s net interest income. Market risk is the potential for loss arising from adverse changes in the prices of fixed income securities, equity securities, other earning assets and derivative financial inst