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, 2008

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 001-12307

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, 15TH FLOOR

SALT LAKE CITY, UTAH

 

84133

(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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

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 31, 2008    115,343,553 shares

 

 

 


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

INDEX

 

         Page
PART I.        FINANCIAL INFORMATION   
      ITEM 1.  

Financial Statements (Unaudited)

   3
 

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

   22
      ITEM 3.  

Quantitative and Qualitative Disclosures About Market Risk

   61
      ITEM 4.  

Controls and Procedures

   62
PART II.        OTHER INFORMATION   
      ITEM 1.  

Legal Proceedings

   62
      ITEM 1A.  

Risk Factors

   62
      ITEM 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   63
      ITEM 6.  

Exhibits

   63
SIGNATURES    65

 

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,
2008
   December 31,
2007
   September 30,
2007
     (Unaudited)         (Unaudited)

ASSETS

        

Cash and due from banks

   $ 1,441,957     $ 1,855,155     $ 1,481,238 

Money market investments:

        

Interest-bearing deposits and commercial paper

     568,875       726,446       513,395 

Federal funds sold

     274,129       102,225       23,567 

Security resell agreements

     170,009       671,537       484,678 

Investment securities:

        

Held-to-maturity, at adjusted cost (approximate fair value $1,587,006, $702,148 and $686,026)

     1,917,354       704,441       695,842 

Available-for-sale, at fair value

     2,792,236       5,134,610       4,549,721 

Trading account, at fair value (includes $531, $741 and $22 transferred as collateral under repurchase agreements)

     45,769       21,849       15,494 
                    
     4,755,359       5,860,900       5,261,057 

Loans:

        

Loans held for sale

     152,095       207,943       200,653 

Loans and leases

     41,876,371       39,044,163       37,778,228 
                    
     42,028,466       39,252,106       37,978,881 

Less:

        

Unearned income and fees, net of related costs

     140,773       164,327       156,622 

Allowance for loan losses

     609,433       459,376       418,165 
                    

Loans and leases, net of allowance

     41,278,260       38,628,403       37,404,094 

Other noninterest-bearing investments

     1,170,367       1,034,412       1,043,475 

Premises and equipment, net

     675,480       655,712       658,294 

Goodwill

     2,009,504       2,009,513       2,021,519 

Core deposit and other intangibles

     133,989       149,493       172,140 

Other real estate owned

     156,817       15,201       11,973 

Other assets

     1,339,422       1,238,417       969,256 
                    
   $   53,974,168     $   52,947,414     $   50,044,686 
                    

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Deposits:

        

Noninterest-bearing demand

   $ 9,413,484     $ 9,618,300     $ 9,322,668 

Interest-bearing:

        

Savings and NOW

     4,341,873       4,507,837       4,365,600 

Money market

     11,703,163       10,304,225       10,446,015 

Internet money market

     2,384,125       2,163,014       1,707,544 

Time under $100,000

     2,954,116       2,562,363       2,599,595 

Time $100,000 and over

     4,468,225       4,391,588       4,535,644 

Foreign

     3,325,915       3,375,426       2,797,647 
                    
     38,590,901       36,922,753       35,774,713 

Securities sold, not yet purchased

     29,528       224,269       21,036 

Federal funds purchased

     1,179,197       2,463,460       2,391,805 

Security repurchase agreements

     734,379       1,298,112       1,070,702 

Other liabilities

     649,672       644,375       560,853 

Commercial paper

     40,493       297,850       411,007 

Federal Home Loan Bank advances and other borrowings:

        

One year or less

     4,455,234       3,181,990       2,037,644 

Over one year

     128,855       127,612       128,218 

Long-term debt

     2,569,594       2,463,254       2,354,317 
                    

Total liabilities

     48,377,853       47,623,675       44,750,295 
                    

Minority interest

     30,288       30,939       37,411 

Shareholders’ equity:

        

Capital stock:

        

Preferred stock, without par value, authorized 3,000,000 shares:

        

Series A and C (liquidation preference $1,000 per share); issued and outstanding 240,000 and 46,949 shares

     286,949       240,000       240,000 

Common stock, without par value; authorized 350,000,000 shares; issued and outstanding 115,302,598, 107,116,505 and 106,934,360 shares

     2,482,517       2,212,237       2,200,228 

Retained earnings

     2,968,242       2,910,692       2,914,439 

Accumulated other comprehensive income (loss)

     (157,305)      (58,835)      (86,914)

Deferred compensation

     (14,376)      (11,294)      (10,773)
                    

Total shareholders’ equity

     5,566,027       5,292,800       5,256,980 
                    
   $ 53,974,168     $ 52,947,414     $ 50,044,686 
                    

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(In thousands, except per share amounts)    2008    2007    2008    2007

Interest income:

           

Interest and fees on loans

   $   663,677     $ 724,598     $   1,995,227     $   2,096,197 

Interest on loans held for sale

     1,916       3,695       7,632       11,892 

Lease financing

     5,515       5,461       17,100       15,901 

Interest on money market investments

     9,267       10,841       40,608       24,939 

Interest on securities:

           

Held-to-maturity – taxable

     21,780       2,343       39,965       6,610 

Held-to-maturity – nontaxable

     6,319       6,402       18,972       18,720 

Available-for-sale – taxable

     25,044       61,248       122,459       193,580 

Available-for-sale – nontaxable

     1,697       2,274       5,459       7,130 

Trading account

     437       880       1,277       2,838 
                           

Total interest income

     735,652       817,742       2,248,699       2,377,807 
                           

Interest expense:

           

Interest on savings and money market deposits

     90,720       123,586       274,851       353,984 

Interest on time and foreign deposits

     74,837       119,781       264,519       353,111 

Interest on short-term borrowings

     47,518       59,034       153,907       151,095 

Interest on long-term borrowings

     30,574       38,704       92,218       116,550 
                           

Total interest expense

     243,649       341,105       785,495       974,740 
                           

Net interest income

     492,003       476,637       1,463,204       1,403,067 

Provision for loan losses

     156,606       55,354       363,080       82,228 
                           

Net interest income after provision for loan losses

     335,397       421,283       1,100,124       1,320,839 
                           

Noninterest income:

           

Service charges and fees on deposit accounts

     53,695       46,919       154,347       135,420 

Other service charges, commissions and fees

     42,794       44,471       127,137       126,159 

Trust and wealth management income

     8,865       9,040       28,842       26,381 

Capital markets and foreign exchange

     12,257       11,325       34,850       32,956 

Dividends and other investment income

     7,042       14,720       30,361       37,084 

Loan sales and servicing income

     3,633       11,607       19,959       29,863 

Income from securities conduit

     336       3,221       3,960       15,704 

Fair value and nonhedge derivative loss

     (26,155)      (9,391)      (42,157)      (7,222)

Equity securities gains, net

     12,971       11,072       14,918       16,370 

Fixed income securities gains, net

     135       58       1,988       3,772 

Impairment losses on investment securities and valuation losses on securities purchased from Lockhart Funding

     (28,022)      –         (112,772)      –   

Other

     2,059       2,781       11,549       16,091 
                           

Total noninterest income

     89,610       145,823       272,982       432,578 
                           

Noninterest expense:

           

Salaries and employee benefits

     208,995       204,488       619,640       608,743 

Occupancy, net

     30,552       27,203       84,715       80,126 

Furniture and equipment

     24,281       23,996       73,629       71,535 

Legal and professional services

     11,297       10,918       30,743       31,697 

Postage and supplies

     9,257       10,024       27,582       27,096 

Advertising

     6,782       6,624       20,653       20,598 

Impairment losses on long-lived assets

     2,239       –         2,239       –   

Merger related expense

     384       682       972       4,579 

Amortization of core deposit and other intangibles

     8,096       11,495       25,107       34,436 

Provision (credit) for unfunded lending commitments

     (3,264)      172       2,044       1,700 

Other

     73,657       56,429       189,472       171,112 
                           

Total noninterest expense

     372,276       352,031       1,076,796       1,051,622 
                           

Income before income taxes and minority interest

     52,731       215,075       296,310       701,795 

Income taxes

     11,214       71,853       83,147       246,772 

Minority interest

     3,757       7,490       (3,544)      6,819 
                           

Net income

     37,760       135,732       216,707       448,204 

Preferred stock dividends

     4,409       3,770       9,316       10,980 
                           

Net earnings applicable to common shareholders

   $ 33,351     $   131,962     $ 207,391     $ 437,224 
                           

Weighted average common shares outstanding during the period:

           

Basic shares

     108,407       106,814       107,176       107,671 

Diluted shares

     108,497       107,880       107,333       109,059 

Net earnings per common share:

           

Basic

   $ 0.31     $ 1.24     $ 1.94     $ 4.06 

Diluted

     0.31       1.22       1.93       4.01 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

 

(In thousands, except share and
per share amounts)
   Preferred
stock
  

 

 

Common stock

   Retained
earnings
   Accumulated
other

comprehensive
income (loss)
   Deferred
compensation
   Total
shareholders’
equity
      Shares    Amount            

Balance, December 31, 2007

   $ 240,000     107,116,505     $ 2,212,237     $ 2,910,692     $ (58,835)    $ (11,294)    $ 5,292,800 

Cumulative effect of change in accounting principle, adoption of SFAS 159

              (11,471)      11,471          –   

Comprehensive income:

                    

Net income for the period

              216,707             216,707 

Other comprehensive loss, net of tax:

                    

Net realized and unrealized holding losses on investments and retained interests

                 (210,856)      

Foreign currency translation

                 (52)      

Reclassification for net realized losses on investments recorded in operations

                 67,129       

Net unrealized gains on derivative instruments

                 33,104       

Pension and postretirement

                 734       
                        

Other comprehensive loss

                 (109,941)         (109,941)
                        

Total comprehensive income

                       106,766 

Issuance of preferred stock

     46,949          (503)               46,446 

Issuance of common stock

      7,194,079       244,889                244,889 

Stock issued under dividend reinvestment plan

      39,857       1,261                1,261 

Net stock issued under employee plans and related tax benefits

      952,157       24,633                24,633 

Dividends declared on preferred stock

              (9,316)            (9,316)

Dividends on common stock, $1.29 per share

              (138,370)            (138,370)

Change in deferred compensation

                    (3,082)      (3,082)
                                              

Balance, September 30, 2008

   $   286,949     115,302,598     $ 2,482,517     $ 2,968,242     $ (157,305)    $ (14,376)    $ 5,566,027 
                                              

Balance, December 31, 2006

   $ 240,000     106,720,884     $   2,230,303     $   2,602,189     $ (75,849)    $ (9,620)    $   4,987,023 

Cumulative effect of change in accounting principle, adoption of FIN 48

              10,408             10,408 

Comprehensive income:

                    

Net income for the period

              448,204             448,204 

Other comprehensive loss, net of tax:

                    

Net realized and unrealized holding losses on investments and retained interests

                 (49,338)      

Foreign currency translation

                 12       

Reclassification for net realized gains on      investments recorded in operations

                 (3,889)      

Net unrealized gains on derivative instruments

                 42,150       
                        

Other comprehensive loss

                 (11,065)         (11,065)
                        

Total comprehensive income

                       437,139 

Common stock issued in acquisition

      2,600,117       206,075                206,075 

Stock redeemed and retired

      (3,933,128)      (318,756)               (318,756)

Net stock issued under employee plans and related tax benefits

      1,546,487       82,606                82,606 

Dividends declared on preferred stock

              (10,980)            (10,980)

Dividends on common stock, $1.25 per share

              (135,382)            (135,382)

Change in deferred compensation

                    (1,153)      (1,153)
                                              

Balance, September 30, 2007

   $ 240,000     106,934,360     $ 2,200,228     $ 2,914,439     $ (86,914)    $ (10,773)    $ 5,256,980 
                                              

Total comprehensive income for the three months ended September 30, 2008 and 2007 was $38,780 and $161,658, respectively.

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(In thousands)    2008    2007    2008    2007

CASH FLOWS FROM OPERATING ACTIVITIES:

           

Net income for the period

   $        37,760     $      135,732     $      216,707     $      448,204 

Adjustments to reconcile net income to net cash provided by operating activities:

           

Impairment and valuation losses on investment securities and long-lived assets

     30,261       –         115,011       –   

Provision for loan losses

     156,606       55,354       363,080       82,228 

Depreciation of premises and equipment

     17,918       18,438       52,830       58,090 

Amortization

     19,729       12,888       48,996       35,883 

Deferred income tax benefit

     (48,293)      (30,075)      (119,187)      (52,099)

Share-based compensation

     8,875       6,499       23,255       19,481 

Common stock issued for 401(k) employer match

     4,379       –         4,379       –   

Excess tax benefits from share-based compensation

     (128)      (947)      (527)      (11,540)

Gain (loss) allocated to minority interest

     3,757       7,490       (3,544)      6,819 

Equity securities gains, net

     (12,971)      (11,072)      (14,918)      (16,370)

Fixed income securities gains, net

     (135)      (58)      (1,988)      (3,772)

Net decrease (increase) in trading securities

     5,901       7,314       (15,819)      47,942 

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

     224,344       327,892       887,700       895,809 

Additions to loans held for sale

     (221,828)      (333,500)      (851,599)      (938,500)

Net losses (gains) on sales of loans, leases and other assets

     4,587       (6,225)      (5,956)      (12,179)

Income from increase in cash surrender value of bank-owned life insurance

     (6,393)      (6,498)      (18,994)      (19,655)

Change in accrued income taxes

     8,861       15,721       (68,764)      28,782 

Change in accrued interest receivable

     14,171       (6,685)      36,390       (5,713)

Change in other assets

     164,171       74,884       82,898       70,979 

Change in other liabilities

     87,690       (60,065)      60,365       (105,845)

Change in accrued interest payable

     1,308       4,911       (10,016)      2,740 

Other, net

     (5,271)      (5,896)      3,580       (18,833)
                           

Net cash provided by operating activities

     495,299       206,102       783,879       512,451 
                           

CASH FLOWS FROM INVESTING ACTIVITIES:

           

Net decrease (increase) in money market investments

     250,244       (353,387)      487,195       (351,064)

Proceeds from maturities of investment securities held-to-maturity

     28,379       36,788       82,271       90,822 

Purchases of investment securities held-to-maturity

     (43,162)      (30,339)      (83,345)      (110,091)

Proceeds from sales of investment securities available-for-sale

     82,422       251,856       586,878       610,441 

Proceeds from maturities of investment securities available-for-sale

     382,356       701,567       3,021,041       2,056,755 

Purchases of investment securities available-for-sale

     (459,523)      (969,231)      (2,786,420)      (2,250,559)

Proceeds from sales of loans and leases

     211,808       11,850       260,947       42,567 

Securitized loans purchased

     (8,639)      –         (1,165,943)      –   

Net increase in loans and leases

     (358,017)      (1,000,894)      (2,288,981)      (2,430,212)

Net decrease (increase) in other noninterest-bearing investments

     (6,624)      (45,145)      (120,492)      42,069 

Proceeds from sales of premises and equipment and other assets

     106       3,221       8,534       6,975 

Purchases of premises and equipment

     (37,999)      (28,592)      (81,806)      (77,479)

Proceeds from sales of other real estate owned

     14,875       1,593       33,866       6,684 

Net cash received from (paid for) acquisitions

     688,940       (12,970)      688,940       27,274 

Net cash received from sale of subsidiary

     –         –         –         6,995 
                           

Net cash provided by (used in) investing activities

     745,166       (1,433,683)      (1,357,315)      (2,328,823)
                           

 

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)    2008    2007    2008    2007

CASH FLOWS FROM FINANCING ACTIVITIES:

           

Net increase (decrease) in deposits

   $ 250,943     $ (515,847)    $ 936,107     $ (406,778)

Net change in short-term funds borrowed

     (1,933,434)      1,727,137       (1,027,016)      2,209,805 

Proceeds from FHLB advances and other borrowings over one year

     –         –         3,500       –   

Payments on FHLB advances and other borrowings over one year

     (619)      (614)      (2,257)      (8,840)

Proceeds from issuance of long-term debt

     28,460       –         261,336       –   

Debt issuance costs

     (64)      –         (675)      (32)

Payments on long-term debt

     (137,000)      (7,732)      (155,025)      (34,982)

Proceeds from issuance of preferred stock

     46,446       –         46,446       –   

Proceeds from issuance of common stock

     244,914       4,017       246,355       56,423 

Payments to redeem common stock

     (55)      (90,129)      (2,635)      (321,974)

Excess tax benefits from share-based compensation

     128       947       527       11,540 

Dividends paid on preferred stock

     (4,409)      (3,770)      (9,316)      (10,980)

Dividends paid on common stock

     (45,542)      (46,136)      (137,109)      (135,382)
                           

Net cash provided by (used in) financing activities

     (1,550,232)      1,067,873       160,238       1,358,800 
                           

Net decrease in cash and due from banks

     (309,767)      (159,708)      (413,198)      (457,572)

Cash and due from banks at beginning of period

     1,751,724       1,640,946       1,855,155       1,938,810 
                           

Cash and due from banks at end of period

   $     1,441,957     $   1,481,238     $   1,441,957     $   1,481,238 
                           

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

           

Cash paid for:

           

Interest

   $   239,041     $   335,531     $   793,697     $   964,517 

Income taxes

     42,150       84,489       259,402       256,472 

Noncash items:

           

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

     –         –         1,226,832       –   

Loans transferred to other real estate owned

     57,951       4,587       192,425       14,391 

Acquisitions:

           

Common stock issued

     –         –         –         206,075 

Assets acquired

     66,192       –         66,192       1,348,233 

Liabilities assumed

     737,116       –         737,116       1,142,158 

See accompanying notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2008

1.    BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Zions Bancorporation (“the Parent”) and its majority-owned subsidiaries (collectively “the Company,” “Zions,” “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. These reclassifications did not affect net income or shareholders’ equity.

Operating results for the three- and nine-month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected in future periods. The consolidated balance sheet at December 31, 2007 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The Company provides a full range of banking and related services through banking subsidiaries in ten Western and Southwestern states as follows: Zions First National Bank (“Zions Bank”), in Utah and Idaho; California Bank & Trust (“CB&T”); Amegy Corporation (“Amegy”) and its subsidiary, Amegy Bank, in Texas; National Bank of Arizona (“NBA”); Nevada State Bank (“NSB”); Vectra Bank Colorado (“Vectra”), in Colorado and New Mexico; The Commerce Bank of Washington (“TCBW”); and The Commerce Bank of Oregon (“TCBO”). The Parent also owns and operates certain nonbank subsidiaries that engage in the development and sale of financial technologies and related services.

2.    CERTAIN RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS 161, among other things, requires greater transparency in disclosing information about derivatives including the objectives for their use, the volume of derivative activity, tabular disclosure of financial statement amounts, and any credit-risk-related features. The Statement is effective for annual and interim financial statements beginning after November 15, 2008. Earlier application is encouraged but not required. Management is evaluating the impact this Statement may have on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, and SFAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. Both Statements are effective for annual and interim financial statements beginning on or after December 15, 2008. Generally, adoption is prospective and early adoption is prohibited. Management is evaluating the impact these Statements may have on the Company’s financial statements.

 

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Effective January 1, 2008, we adopted the provisions of FASB Staff Position (“FSP”) FIN 39-1, Offsetting of Amounts Related to Certain Contracts. FSP FIN 39-1 permits entities to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against recognized fair value amounts of derivatives executed with the same counterparty under a master netting arrangement. At September 30, 2008, cash collateral was used to reduce recorded amounts of derivative assets by approximately $69 million. The reduction of derivative liabilities was insignificant.

Additional accounting pronouncements recently adopted are discussed where applicable in the Notes to Consolidated Financial Statements.

3.    ACQUISITION

Effective September 5, 2008, the Company acquired from the FDIC the insured deposits and certain assets of the failed Silver State Bank, headquartered in Henderson, Nevada. The acquisition was made through the Company’s Nevada State Bank and National Bank of Arizona subsidiaries and included approximately $737 million of deposits and $66 million of assets.

4.    INVESTMENT SECURITIES

As a result of an ongoing valuation review of our investment securities portfolio, we recognized a pretax charge of approximately $28.0 million during the third quarter of 2008 for certain investment securities deemed to have other-than-temporary impairment (“OTTI”). Details of this OTTI are as follows:

 

   

$19.2 million for three bank and insurance trust preferred collateralized debt obligations (“CDOs”)

 

   

$1.3 million for two bank and insurance income notes (OTTI also taken previously)

 

   

$4.1 million for three trust preferred CDOs related to real estate investment trusts (“REITs”) (OTTI also taken previously)

 

   

$3.4 million for two structured asset-backed (“ABS”) CDOs

For the first nine months of 2008, total OTTI was $107.6 million. As discussed in Note 5, valuation losses on securities purchased from Lockhart Funding, LLC (“Lockhart”) during the first quarter of 2008 were $5.2 million. The total of these amounts comprises the “Impairment losses on investment securities and valuation losses on securities purchased from Lockhart Funding” in the statement of income for the first nine months of 2008.

During the second quarter of 2008, we reassessed the classification of certain asset-backed and trust preferred CDOs. On April 28, 2008, we reclassified approximately $1.2 billion at fair value of these available-for-sale (“AFS”) securities to held-to-maturity (“HTM”). The related unrealized pretax loss of approximately $273 million included in accumulated other comprehensive income (“OCI”) remained in OCI and is being amortized as a yield adjustment through earnings over the remaining terms of the securities. No gain or loss was recognized at the time of reclassification. We consider the HTM classification to be more appropriate because we have the ability and the intent to hold these securities to maturity.

At September 30, 2008, unrealized pretax losses recognized in OCI were $248.5 million for HTM securities and $145.8 million for AFS securities.

 

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5.    OFF-BALANCE SHEET ARRANGEMENT

Zions Bank provides a liquidity facility for a fee to Lockhart, which is an off-balance sheet qualifying special-purpose entity (“QSPE”) securities conduit. Lockhart was structured to purchase floating rate U.S. Government and AAA-rated securities with funds from the issuance of asset-backed commercial paper. Zions Bank also provides interest rate hedging support and administrative and investment advisory services for a fee.

Pursuant to the Liquidity Agreement, Zions Bank is required to purchase nondefaulted securities from Lockhart to provide funds for Lockhart to repay maturing commercial paper upon Lockhart’s inability to access a sufficient amount of funding in 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-, or the downgrade of one or more securities results in more than ten securities having ratings of AA+ to AA-, Zions Bank must either 1) place its letter of credit on the security, 2) obtain credit enhancement from a third party, or 3) purchase the security from Lockhart at book value. Zions Bank may incur losses if it is required to purchase securities from Lockhart when the fair value of the securities at the time of purchase is less than book value.

During the first and second quarters of 2008, Zions Bank purchased an aggregate of $1,067 million of securities and related accrued interest at book value from Lockhart. Of these purchases, $792 million were required by the Liquidity Agreement when the securities, and MBIA Inc. which insured certain of the securities, were downgraded below AA-. The remaining $275 million were due to the inability of Lockhart to issue a sufficient amount of commercial paper.

The securities purchased included $987 million which comprised the entire remaining small business loan securitizations created by Zions Bank and held by Lockhart. No gain or loss was recognized on these purchases. Upon dissolution of the securitization trusts (including a total of $170 million of related securities owned by the Parent), Zions Bank recorded $1,180 million of loans on its balance sheet including $23 million of premium. See further discussion of this premium in Note 9.

The commitment of Zions Bank to Lockhart cannot exceed the book value of Lockhart’s securities portfolio, which was approximately $828 million at September 30, 2008. Lockhart is limited in size by program agreements, agreements with rating agencies, and the size of the liquidity facility. The book value of Lockhart’s remaining securities portfolio exceeded the fair value of the securities by approximately $110 million at September 30, 2008. During the first quarter of 2008, Zions Bank recorded valuation losses of approximately $5.2 million when it purchased certain securities from Lockhart.

As permitted by the governing documents, the Company has also purchased asset-backed commercial paper from Lockhart and held approximately $557 million on its balance sheet at September 30, 2008. The average amount of Lockhart commercial paper included in money market investments for the three months ended September 30, 2008 was approximately $597 million. These purchases were made to provide liquidity to Lockhart due to ongoing contraction and disruptions in the asset-backed commercial paper markets. If at any given time the Company were to own more than 90% of Lockhart’s outstanding commercial paper (beneficial interest), Lockhart would cease to be a QSPE and the Company would be required to consolidate Lockhart in its financial statements.

On September 15, 2008, the FASB issued a proposed amendment, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, that among other things, would remove the concept of a QSPE and remove the exception from applying FIN 46R to QSPEs. The proposed amendment would be effective for calendar-year companies beginning in 2010. Management is monitoring these developments as they relate to the operations and existence of Lockhart.

 

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6.    DEBT

During the third quarter and first nine months of 2008, the Company issued a net amount of $28.5 million and $261.3 million, respectively, of one- and two-year senior medium-term notes at coupon rates ranging from 4.50% to 5.65%. Interest is payable semiannually. These unsecured notes were sold via Zions’ online auction process and direct sales. They were issued under the Company’s existing shelf registration with the Securities and Exchange Commission (“SEC”).

The Company repaid senior medium-term notes of $137 million and $155 million during the third quarter and first nine months of 2008, respectively.

7.     INCOME TAXES

The lower effective tax rate during the third quarter of 2008 is mainly due to lower taxable income in 2008, which increased the proportion of nontaxable income relative to total income. Income tax expense for the first nine months of 2008 included a net benefit of approximately $5.3 million primarily from a settlement with governmental authorities during the second quarter that allowed the Company to reduce its liability and related interest for uncertain tax positions under the provisions of FIN 48.

 

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8.    SHAREHOLDERS’ EQUITY

Changes in accumulated other comprehensive income (loss) are summarized as follows (in thousands):

 

     Net unrealized
gains (losses)
on investments,
retained interests
and other
   Net
unrealized
gains (losses)
on derivative
instruments
   Pension and
post-
retirement
   Total

Nine Months Ended September 30, 2008:

           

Balance, December 31, 2007

   $  (108,766)    $    65,213     $  (15,282)    $    (58,835)

Cumulative effect of change in accounting principle, adoption of SFAS 159

   11,471           11,471 

Other comprehensive income (loss), net of tax:

           

Net realized and unrealized holding losses, net of income tax benefit of $130,611

   (210,856)          (210,856)

Foreign currency translation

   (52)          (52)

Reclassification for net realized losses recorded in operations, net of income tax benefit of $41,582

   67,129           67,129 

Net unrealized gains, net of reclassification to operations of $40,219 and income tax expense of $20,927

      33,104        33,104 

Pension and postretirement, net of income tax expense of $477

         734     734 
                   

Other comprehensive income (loss)

   (143,779)    33,104     734     (109,941)
                   

Balance, September 30, 2008

   $  (241,074)    $    98,317     $  (14,548)    $  (157,305)
                   

Nine Months Ended September 30, 2007:

           

Balance, December 31, 2006

   $    (18,371)    $  (41,716)    $  (15,762)    $    (75,849)

Other comprehensive income (loss), net of tax:

           

Net realized and unrealized holding losses, net of income tax benefit of $30,562

   (49,338)          (49,338)

Foreign currency translation

   12           12 

Reclassification for net realized gains recorded in operations, net of income tax expense of $2,409

   (3,889)          (3,889)

Net unrealized gains, net of reclassification to operations of $(33,432) and income tax expense of $27,953

      42,150        42,150 
                   

Other comprehensive income (loss)

   (53,215)    42,150     –       (11,065)
                   

Balance, September 30, 2007

   $    (71,586)    $        434     $  (15,762)    $    (86,914)
                   

On July 2, 2008, the Company completed a $47 million offering of 9.50% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock. The Company issued 46,949 shares in the form of 1,877,971 depositary shares with each depositary share representing a 1/40th ownership interest in a share of the preferred stock. Terms and conditions, except for the dividend amount, are generally similar to the existing issuance of Series A floating rate preferred stock described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The offering was sold via Zions’ online auction process and direct sales primarily by the Company’s broker/dealer subsidiary.

During September 8-11, 2008, the Company issued $250 million of new common stock consisting of 7,194,079 shares at an average price of $34.75 per share. Net of issuance costs and fees, this issuance added $244.9 million to common shareholders’ equity.

 

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On October 27, 2008, the U.S. Department of the Treasury gave preliminary approval to the Company’s application to receive a capital investment of $1.4 billion. The application was made under the Treasury’s Capital Purchase Program announced on October 14, 2008. The capital investment is expected to be received prior to year-end and will be in the form of nonvoting senior preferred shares pari passu with the Company’s existing preferred shares. The Company will also issue to the Treasury warrants exercisable for 10 years to purchase $210 million of the Company’s common shares. The number of common shares issuable under the warrants will be determined from the average share price during a specified 20-day trading period. The preferred shares will qualify for regulatory Tier 1 capital and may be redeemed after three years. They will have a dividend rate of 5% for the first five years, increasing to 9% thereafter. Among other things, the Company will be subject to restrictions and conditions including those related to common dividends, share repurchases, executive compensation, and corporate governance.

9.    FAIR VALUE

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Both Standards address the application of fair value accounting and reporting.

Fair Value Measurements

SFAS 157 defines fair value, establishes a consistent framework for measuring fair value, and enhances disclosures about fair value measurements. In February 2008, the FASB amended SFAS 157 with the issuance of FSP FAS 157-1, which excludes with certain exceptions SFAS No. 13, Accounting for Leases, from the scope of SFAS 157, and FSP FAS 157-2, which delayed the adoption of SFAS 157 for one year for the measurement of nonfinancial assets and nonfinancial liabilities. There was no material effect from the adoption of SFAS 157 on the Company’s consolidated financial statements.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, SFAS 157 has established a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities; includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets; certain securities sold, not yet purchased; and certain derivatives.

Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities; certain CDO securities; corporate debt securities; certain private equity investments; certain securities sold, not yet purchased; and certain derivatives.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data. This category generally includes certain CDO securities, certain private equity investments, and retained interests from securitizations.

 

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The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. This is done primarily for available-for-sale and trading investment securities; certain private equity investments; certain retained interests from securitizations; securities sold, not yet purchased; and derivatives. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values, such as for loans held for sale, impaired loans, certain private equity investments, and other real estate owned. Fair value is also used when evaluating impairment on certain assets, including held-to-maturity and available-for-sale securities, goodwill, and core deposit and other intangibles, and for annual disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments.

Available-for-sale and trading investment securities are fair valued under Level 1 using quoted market prices when available for identical securities. When quoted prices are not available, fair values are determined under Level 2 using quoted prices for similar securities or independent pricing services that incorporate observable market data when possible. Available-for-sale securities include certain CDOs that consist of trust preferred securities related to banks and insurance companies and to REITs. Where possible, the fair value of these CDOs is priced under Level 2 using a whole market price quote method that incorporates matrix pricing and uses the prices of securities of similar type and rating to value comparable securities held by the Company. This method is described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. If sufficient information is not available for matrix pricing, fair value is determined under Level 3 using nonbinding single dealer quotes or the model pricing discussed subsequently.

At September 30, 2008 due to the market conditions subsequently described, the Company determined that certain CDOs with an amortized cost of $1,878 million at September 30, 2008 previously fair valued under a Level 2 matrix approach would be more appropriately fair valued under a Level 3 cash flow modeling approach. Additional securities of $190 million at amortized cost previously fair valued with Level 3 single dealer quotes were also moved to a Level 3 cash flow modeling approach. The total of these amounts, or $2,068 million, included approximately $1,353 million accounted for as HTM securities.

Because of recent market disruptions, particularly during the third quarter of 2008, both the SEC on September 30, 2008 (Release No. 2008-234) and the FASB on October 10, 2008 (FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active) issued additional guidance on fair value accounting when markets become distressed and inactive. In general, this guidance clarifies under such market conditions when and how an entity might appropriately determine fair value using unobservable inputs under Level 3 rather than using observable inputs under Level 2, particularly when significant adjustments become necessary under Level 2 and extensive judgment must be employed to evaluate inputs and results in estimating fair value.

The Company values its CDO portfolio using several methodologies that primarily include internal and third party models and to a lesser extent dealer quotes and pricing services. A licensed model is used internally to fair value bank and insurance trust preferred CDOs. This model uses estimated values of expected losses on underlying collateral and applies market-based discount rates on resultant cash flows to estimate fair value. Third party models are used to fair value certain REIT and ABS CDOs. These models utilize relevant data assumptions, which are evaluated by the Company for reasonableness. These assumptions include but are not limited to probability of default, collateral recovery rates, discount rates, over-collateralization levels, and rating transition probability matrices from rating agencies. The model prices obtained from third party services were evaluated for reasonableness including quarter to quarter changes in assumptions and comparison to other available data which included third party and internal model results and valuations. The Company’s decision to use Level 3 model pricing for certain CDOs was made due to continued trading contraction of these securities and the lack of observable market inputs to value such securities.

 

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Private equity investments valued under Level 2 on a recurring basis are investments in partnerships that invest in financial institutions. Fair values are determined from net asset values provided by the partnerships. Private equity investments valued under Level 3 on a nonrecurring basis are recorded initially at acquisition cost, which is considered the best indication of fair value unless there have been significant subsequent positive or negative developments that justify an adjustment in the fair value estimate. Subsequent adjustments to recorded amounts are based as necessary on current and projected financial performance, recent financing activities, economic and market conditions, market comparables, market liquidity, sales restrictions, and other factors.

Retained interests from securitizations are fair valued under Level 3 based on the modeling techniques previously described. The assumptions used in the models are evaluated quarterly.

Derivatives are fair valued primarily under Level 2 using third party services. Observable market inputs include yield curves, option volatilities, counterparty credit risk, and other related data. Certain foreign exchange derivatives have been fair valued under Level 1 because they are traded in active markets. Amounts disclosed in the following table are net of the cash collateral offsets pursuant to the guidance of FSP FIN 39-1, as discussed in Note 2.

Securities sold, not yet purchased are fair valued under Level 1 when quoted prices are available for the securities involved. Those under Level 2 are fair valued similar to trading account investment securities.

Assets and liabilities measured at fair value on a recurring basis, including those elected under SFAS 159, are summarized as follows at September 30, 2008 (in thousands):

 

     Level 1    Level 2    Level 3     Total

ASSETS

          

Investment securities:

          

Available-for-sale

   $  40,610     $  1,985,267     $  766,359      $  2,792,236 

Trading account

      40,364     5,405  (1)   45,769 

Other noninterest-bearing investments:

          

Private equity

      26,660       26,660 

Other assets:

          

Derivatives

   9,847     286,795       296,642 
                    
   $  50,457     $  2,339,086     $  771,764      $  3,161,307 
                    

LIABILITIES

          

Securities sold, not yet purchased

      $      29,528       $      29,528 

Other liabilities:

          

Derivatives

   $    6,747     158,229       164,976 

Other

         $      1,422      1,422 
                    
   $    6,747     $    187,757     $      1,422      $    195,926 
                    

 

(1) Elected under SFAS 159 for fair value option, as discussed subsequently.

 

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The following reconciles the beginning and ending balances of assets and liabilities for the three- and nine-month periods ended September 30, 2008 that are measured at fair value on a recurring basis using Level 3 inputs (in thousands):

 

     Level 3 Instruments
     Three Months Ended September 30, 2008
     Investment securities    Retained     
     Available-    Trading    interests from    Other
     for-sale    account (1)    securitizations (1)    liabilities

Balance at June 30, 2008

   $ 182,268     $ 5,724     $ –       $ (292)

Total net gains (losses) included in:

           

Statement of income (2):

           

Fair value and nonhedge derivative income (loss)

        (319)      –      

Impairment losses on available-for sale securities

     (14,006)         

Other noninterest expense

              (1,130)

Other comprehensive income (loss)

     (57,429)         

Purchases, sales, issuances, and settlements, net

     (4,315)         –      

Net transfers in (out)

     659,841       –         –         –   
                           

Balance at September 30, 2008

   $   766,359     $ 5,405     $ –       $   (1,422)
                           
     Level 3 Instruments
     Nine Months Ended September 30, 2008
     Investment securities    Retained     
     Available-    Trading    interests from    Other
     for-sale    account (1)    securitizations (1)    liabilities

Balance at January 1, 2008

   $ 337,338     $   8,100     $   42,426     $ (44)

Total net gains (losses) included in:

           

Statement of income (2):

           

Fair value and nonhedge derivative income (loss)

        (2,695)      (2,098)   

Impairment losses on available-for sale securities and valuation losses on securities purchased from Lockhart Funding

     (82,032)         

Other noninterest expense

              (378)

Other comprehensive income (loss)

     (123,560)         

Proceeds from ESOARS auction

              (1,000)

Fair value of available-for-sale securities transferred to held-to-maturity

     (200,873)         

Purchases, sales, issuances, and settlements, net

     (5,985)         (13,593)   

Net transfers in (out)

     841,471       –         (26,735)      –   
                           

Balance at September 30, 2008

   $   766,359     $ 5,405     $ –       $   (1,422)
                           

 

(1) Elected under SFAS 159 for fair value option, as discussed subsequently.
(2) Amounts are all unrealized.

 

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Assets measured at fair value on a nonrecurring basis are summarized as follows (in thousands):

 

                         Gains (losses) from fair value changes
     Fair value at September 30, 2008    Three months ended    Nine months ended
     Level 1    Level 2    Level 3    Total    September 30, 2008    September 30, 2008

ASSETS

                 

Loans held for sale

      $    16,355        $    16,355     $    (355)    $        (349)

Impaired loans

      200,805        200,805     (2,759)    (34,887)

Other noninterest-bearing investments:

                 

Private equity

         $  63,430     63,430     7,957     550 
                             
   $  –       $  217,160     $  63,430     $  280,590     $  4,843     $  (34,686)
                             

Loans held for sale relate to loans purchased under the Small Business Administration 7(a) program. They are fair valued under Level 2 based on quotes of comparable instruments.

Impaired loans that are collateral-dependent are fair valued under Level 2 based on the fair value of the collateral, which is determined when appropriate from appraisals and other observable market data.

Fair Value Option

SFAS 159 allows for the option to report certain financial assets and liabilities at fair value initially and at subsequent measurement dates with changes in fair value included in earnings. The option may be applied instrument by instrument, but is on an irrevocable basis. As of January 1, 2008, the Company elected the fair value option for one available-for-sale REIT trust preferred CDO security and three retained interests on selected small business loan securitizations. The cumulative effect of adopting SFAS 159 decreased retained earnings at January 1, 2008 by approximately $11.5 million.

The REIT trust preferred CDO was selected as part of a directional hedging program to hedge the credit exposure the Company has to homebuilders in its REIT CDO portfolio. This allows the Company to avoid complex hedge accounting provisions associated with the implemented hedging program. Management selected this security because it had the most exposure to the homebuilder market compared to the other REIT CDOs in the Company’s portfolio, both in dollar amount and as a percentage, and was therefore considered the most suitable for hedging.

The retained interests were selected to more appropriately reflect their fair value and to account for increases and decreases in their fair value through earnings. Net decreases in fair value of approximately $2.1 million during the first and second quarters of 2008 were recognized in fair value and nonhedge derivative income (loss) in the statement of income. However as discussed in Note 5, during the first and second quarters of 2008, Zions Bank purchased securities from Lockhart that comprised the entire remaining small business loan securitizations created by Zions Bank and held by Lockhart. These retained interests related to the securities purchased and, as part of the purchase transaction, were included with the $23 million premium amount recorded with the loan balances at Zions Bank.

 

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10.    GUARANTEES AND COMMITMENTS

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

 

     September 30,
2008
   December 31,
2007

Standby letters of credit:

     

Financial

   $  1,349,044     $  1,317,304 

Performance

   272,092     351,150 
         
   $  1,621,136     $  1,668,454 
         

The Company’s Annual Report on Form 10-K for the year ended December 31, 2007 contains further information on these letters of credit including their terms and collateral requirements. At September 30, 2008, the carrying value recorded by the Company as a liability for these guarantees was $5.6 million.

As of September 30, 2008, the Parent has guaranteed approximately $300.4 million of debt primarily issued by affiliated trusts issuing trust preferred securities.

During the first quarter of 2008, the Company’s subsidiary banks recorded an aggregate pretax cash gain of approximately $12.4 million from the partial redemption of their equity interests in Visa Inc. The redemption approximated 39% of the subsidiary banks’ equity interests and was included in equity securities gains (losses), net in the statement of income for the nine months ended September 30, 2008. Also during the first quarter of 2008, the Company reversed approximately $5.6 million of the $8.1 million accrual established during the fourth quarter of 2007 for indemnification liabilities related to certain Visa (SM) litigation. The effect of this reversal is included in other noninterest expense in the statement of income for the nine months ended September 30, 2008. In accordance with generally accepted accounting principles and recent guidance from the SEC, the Company’s subsidiary banks have not recognized any value for their remaining investment in Visa.

See Note 5 for a discussion of Zions Bank’s commitment to Lockhart.

11.    RETIREMENT PLANS

The following discloses the net periodic benefit cost (credit) and its components for the Company’s pension and postretirement plans (in thousands):

 

          Supplemental              Supplemental     
          retirement    Postretirement         retirement    Postretirement
     Pension benefits    benefits    benefits    Pension benefits    benefits    benefits
     Three Months Ended September 30,    Nine Months Ended September 30,
     2008    2007    2008    2007    2008    2007    2008    2007    2008    2007    2008    2007

Service cost

   $ 94     $ 93     $      –       $ –       $    $ 27     $ 296     $ 337     $ –       $ –       $ 49     $ 79 

Interest cost

     2,061       2,081     194       211       19       79       6,501       6,323       552       565       162       238 

Expected return on plan assets

     (2,628)      (2,822)    –         –         –         –         (8,290)      (8,621)      –         –         –         –   

Amortization of prior service cost (credit)

     –         –       43       54       (61)      –         –         –         116       117       (81)      –   

Amortization of transition liability

     –         –       –              –         –         –         –         –         15       –         –   

Settlement gain

     –         –       –         –         –         –         –         –         –         –         (2,973)      –   

Amortization of net actuarial (gain) loss

     227       264     (5)      72       (52)      (67)      716       775       (17)      66       (154)      (201)
                                                                                 

Net periodic benefit cost (credit)

   $   (246)    $   (384)    $  232     $   344     $   (86)    $   39     $   (777)    $   (1,186)    $   651     $   763     $   (2,997)    $   116 
                                                                                 

 

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As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, the Company has frozen its participation and benefit accruals for the pension plan and its contributions for individual benefit payments in the postretirement benefit plan. The settlement gain resulted from the Company’s curtailment of coverage effective June 1, 2008 for certain participants in the postretirement benefit plan and was accounted for in accordance with applicable accounting standards.

12.    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, 2008, we operate eight community/regional banks in distinct geographical areas. Performance assessment and resource allocation are based upon this geographical structure. Zions Bank operates 114 branches in Utah and 25 branches in Idaho. CB&T operates 90 branches in California. Amegy operates 87 branches in Texas. NBA operates 78 branches in Arizona. NSB operates 71 branches in Nevada. Vectra operates 40 branches in Colorado and one branch in New Mexico. TCBW operates one branch in the state of Washington. TCBO operates one branch in Oregon. Additionally, Zions Bank, CB&T, Amegy, NBA, Vectra, and TCBW each operate a foreign branch in the Grand Cayman Islands. NSB has an application pending to open a foreign branch. In addition, as of September 30, 2008, NBA operated 4 branches and NSB operated 13 branches from the failed Silver State Bank, which the Company acquired as discussed in Note 3. Subsequent to September 30, 2008, NBA and NSB closed certain of these branches and are still determining which of the remaining branches will continue to be operated.

On September 15, 2008, the Company announced it had entered into a definitive agreement to exit 49 grocery store branches (28 in Nevada and 21 in Utah). The leases on these branches are being assumed by another bank; however, all loans and deposits will be transferred to nearby Company branch locations. In connection with this transaction, the Company recorded $2.2 million in impairment losses on the associated leasehold improvements. The amount is separately reflected as impairment losses on long-lived assets in the statement of income.

The operating segment identified as “Other” includes the Parent, Zions Management Services Company (“ZMSC”), certain nonbank financial service and financial technology subsidiaries, other smaller nonbank operating units, TCBO, and eliminations of transactions between segments. ZMSC provides internal technology and operational services to affiliated operating businesses of the Company. ZMSC charges most of its costs to the affiliates on an approximate break-even basis.

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.

 

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The following table presents selected operating segment information for the three months ended September 30, 2008 and 2007:

 

    Zions Bank   CB&T   Amegy   NBA   NSB
(In millions)   2008   2007   2008   2007   2008   2007   2008   2007   2008   2007

CONDENSED INCOME STATEMENT

                   

Net interest income

  $ 170.3    $ 140.9    $ 106.1    $ 108.9    $ 92.7    $ 85.6    $ 54.1    $ 63.4    $ 39.6    $ 45.0 

Provision for loan losses

    40.0      11.0      15.0      10.5      12.5      6.1      55.0      23.5      29.5      1.8 
                                                           

Net interest income after provision for loan losses

    130.3      129.9      91.1      98.4      80.2      79.5      (0.9)     39.9      10.1      43.2 

Impairment losses on investment securities

    (3.3)     –        (12.0)     –        –        –        –        –        (2.0)     –   

Other noninterest income

    33.7      52.9      22.0      23.3      39.8      32.2      10.7      9.0      11.4      8.4 

Noninterest expense

    118.5      116.1      58.0      58.4      80.7      75.2      37.5      33.3      34.3      28.9 
                                                           

Income (loss) before income taxes and minority interest

    42.2      66.7      43.1      63.3      39.3      36.5      (27.7)     15.6      (14.8)     22.7 

Income taxes (benefit)

    12.8      22.2      16.8      25.4      12.9      11.6      (11.1)     6.1      (5.2)     7.8 

Minority interest

    –        –        –        –        –        –        –        –        –        –   
                                                           

Net income (loss)

    29.4      44.5      26.3      37.9      26.4      24.9      (16.6)     9.5      (9.6)     14.9 

Preferred stock dividend

    –        –        –        –        –        –        –        –        –        –   
                                                           

Net earnings applicable to common shareholders

  $ 29.4    $ 44.5    $ 26.3    $ 37.9    $ 26.4    $ 24.9    $ (16.6)   $ 9.5    $ (9.6)   $ 14.9 
                                                           

AVERAGE BALANCE SHEET DATA

                   

Total assets

  $   19,605    $   15,808    $   10,386    $   10,091    $   12,146    $   10,315    $   5,114    $   5,490    $   3,844    $   3,854 

Net loans and leases

    14,930      11,946      7,945      7,770      8,795      7,187      4,351      4,708      3,203      3,187 

Total deposits

    11,700      10,982      8,218      8,226      8,546      7,066      3,769      4,201      3,212      3,389 

Shareholder’s equity:

                   

Preferred equity

    –        –        –        –        –        –        –        –        –        –   

Common equity

    1,108      1,034      1,069      1,086      2,008      1,857      589      613      293      256 

Total shareholder’s equity

    1,108      1,034      1,069      1,086      2,008      1,857      589      613      293      256 
    Vectra   TCBW   Other   Consolidated Company        
(In millions)   2008   2007   2008   2007   2008   2007   2008   2007        

CONDENSED INCOME STATEMENT

                   

Net interest income

  $ 25.8    $ 24.9    $ 8.3    $ 9.2    $ (4.9)   $ (1.2)   $ 492.0    $ 476.7     

Provision for loan losses

    4.3      2.3      0.2      0.2      0.1      –        156.6      55.4     
                                                   

Net interest income after provision for loan losses

    21.5      22.6      8.1      9.0      (5.0)     (1.2)     335.4      421.3     

Impairment losses on investment securities

    –        –        –        –        (10.7)     –        (28.0)     –       

Other noninterest income

    7.6      7.3      0.6      0.7      (8.1)     12.0      117.7      145.8     

Noninterest expense

    20.7      22.1      3.6      3.8      19.0      14.2      372.3      352.0     
                                                   

Income (loss) before income taxes and minority interest

    8.4      7.8      5.1      5.9      (42.8)     (3.4)     52.8      215.1     

Income taxes (benefit)

    3.0      2.8      1.7      2.0      (19.7)     (6.1)     11.2      71.8     

Minority interest

    –        –        –        –        3.8      7.5      3.8      7.5     
                                                   

Net income (loss)

    5.4      5.0      3.4      3.9      (26.9)     (4.8)     37.8      135.8     

Preferred stock dividend

    –        –        –        –        4.4      3.8      4.4      3.8     
                                                   

Net earnings applicable to common shareholders

  $ 5.4    $ 5.0    $ 3.4    $ 3.9    $ (31.3)   $ (8.6)   $ 33.4    $ 132.0     
                                                   

AVERAGE BALANCE SHEET DATA

                   

Total assets

  $   2,734    $   2,481    $   848    $   873    $ (397)   $ (9)   $   54,280    $   48,903     

Net loans and leases

    2,073      1,817      575      497      112      83      41,984      37,195     

Total deposits

    1,872      1,745      555      574      (550)     (426)     37,322      35,757     

Shareholder’s equity:

                   

Preferred equity

    –        –        –        –        283      240      283      240     

Common equity

    334      319      68      60      (346)     (238)     5,123      4,987     

Total shareholder’s equity

    334      319      68      60      (63)         5,406      5,227     

 

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The following table presents selected operating segment information for the nine months ended September 30, 2008 and 2007:

 

    Zions Bank   CB&T   Amegy     NBA   NSB
(In millions)   2008   2007   2008     2007   2008   2007     2008   2007   2008     2007

CONDENSED INCOME STATEMENT

                   

Net interest income

  $ 499.0    $ 403.6    $ 307.1      $ 329.1    $ 270.0    $ 244.0      $ 169.7    $ 191.2    $ 120.5      $ 139.8 

Provision for loan losses

    114.1      19.5      58.9        15.5      31.2      13.2        97.8      27.0      47.3        4.8 
                                                                 

Net interest income after provision for loan losses

    384.9      384.1      248.2        313.6      238.8      230.8        71.9      164.2      73.2        135.0 

Impairment losses on investment securities and valuation losses on securities purchased from Lockhart Funding

    (20.8)     –        (12.0 )     –        –        –          –        –        (2.0 )     –   

Other noninterest income

    146.6      183.3      63.0       65.8      112.8      93.3        26.7      25.3      33.4       24.8 

Noninterest expense

    344.6      337.2      178.1       176.4      232.7      223.7        104.9      107.9      92.5       84.4 
                                                                 

Income (loss) before income taxes and minority interest

    166.1      230.2      121.1       203.0      118.9      100.4        (6.3)     81.6      12.1       75.4 

Income taxes (benefit)

    53.5      77.4      47.4       83.3      38.9      32.4        (2.7)     31.9      4.1       26.2 

Minority interest

    –        0.3      –         –        0.4      0.1        –        –        –         –   
                                                                 

Net income (loss)

    112.6      152.5      73.7       119.7      79.6      67.9        (3.6)     49.7      8.0       49.2 

Preferred stock dividend

    –        –        –         –        –        –          –        –        –         –   
                                                                 

Net earnings applicable to common shareholders

  $ 112.6    $ 152.5    $ 73.7     $ 119.7    $ 79.6    $ 67.9      $ (3.6)   $ 49.7    $ 8.0     $ 49.2 
                                                                 

AVERAGE BALANCE SHEET DATA

                   

Total assets

  $   19,041    $   15,466    $   10,244      $   10,150    $   11,940    $   10,097      $ 5,235    $ 5,443    $   3,858      $   3,866 

Net loans and leases

    14,008      11,415      7,874        7,878      8,415      6,792        4,456      4,651      3,209        3,199 

Total deposits

    11,496      11,025      8,078        8,181      8,309      6,987        3,844      4,276      3,248        3,363 

Shareholder’s equity:

                   

Preferred equity

    –        –        –          –        –        –          –        –        –          –   

Common equity

    1,076      1,006      1,065        1,102      1,982      1,835        591      591      289        262 

Total shareholder’s equity

    1,076      1,006      1,065        1,102      1,982      1,835        591      591      289        262 
    Vectra   TCBW   Other     Consolidated Company          
(In millions)   2008   2007   2008     2007   2008   2007     2008   2007          

CONDENSED INCOME STATEMENT

                   

Net interest income

  $ 78.6    $ 71.4    $ 24.8      $ 26.0    $ (6.5)   $ (2.1)     $   1,463.2    $ 1,403.0     

Provision for loan losses

    12.5      2.0      0.6        0.2      0.7      –          363.1      82.2     
                                                       

Net interest income after provision for loan losses

    66.1      69.4      24.2        25.8      (7.2)     (2.1)       1,100.1      1,320.8     

Impairment losses on investment securities and valuation losses on securities purchased from Lockhart Funding

    –        –        –          –        (78.0)     –          (112.8)     –       

Other noninterest income

    21.4      20.2      1.9        1.6      (20.0)     18.3        385.8      432.6     

Noninterest expense

    65.1      64.7      10.8        11.0      48.1      46.3        1,076.8      1,051.6     
                                                       

Income (loss) before income taxes and minority interest

    22.4      24.9      15.3        16.4      (153.3)     (30.1)       296.3      701.8     

Income taxes (benefit)

    8.0      9.0      5.1        5.4      (71.2)     (18.8)       83.1      246.8     

Minority interest

    –        –        –          –        (3.9)     6.4        (3.5)     6.8     
                                                       

Net income (loss)

    14.4      15.9      10.2        11.0      (78.2)     (17.7)       216.7      448.2     

Preferred stock dividend

    –        –        –          –        9.3      11.0        9.3      11.0     
                                                       

Net earnings applicable to common shareholders

  $ 14.4    $ 15.9    $ 10.2      $ 11.0    $ (87.5)   $ (28.7)     $ 207.4    $ 437.2     
                                                       

AVERAGE BALANCE SHEET DATA

                   

Total assets

  $ 2,740    $ 2,426    $ 895      $ 824    $ (454)   $ (130)     $ 53,499    $   48,142     

Net loans and leases

    2,043      1,772      549        464      100      84        40,654      36,255     

Total deposits

    1,779      1,714      577        517      (433)     (427)       36,898      35,636     

Shareholder’s equity:

                   

Preferred equity

    –        –        –          –        254      240        254      240     

Common equity

    334      315      68        58      (298)     (191 )     5,107      4,978     

Total shareholder’s equity

    334      315      68        58      (44)     49        5,361      5,218     

 

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

FINANCIAL HIGHLIGHTS

(Unaudited)

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(In thousands, except per share and ratio data)    2008    2007    % Change    2008    2007    % Change

EARNINGS

                 

Taxable-equivalent net interest income

   $   497,822        $   483,115        3.04 %    $   1,480,946        $   1,422,896        4.08 %

Taxable-equivalent revenue

     587,432          628,938        (6.60)%      1,753,928          1,855,474        (5.47)%

Net interest income

     492,003          476,637        3.22 %      1,463,204          1,403,067        4.29 %

Noninterest income

     89,610          145,823        (38.55)%      272,982          432,578        (36.89)%

Provision for loan losses

     156,606          55,354        182.92 %      363,080          82,228        341.55 %

Noninterest expense

     372,276          352,031        5.75 %      1,076,796          1,051,622        2.39 %

Income before income taxes and minority interest

     52,731          215,075        (75.48)%      296,310          701,795        (57.78)%

Income taxes

     11,214          71,853        (84.39)%      83,147          246,772        (66.31)%

Minority interest

     3,757          7,490        (49.84)%      (3,544)         6,819        (151.97)%

Net income

     37,760          135,732        (72.18)%      216,707          448,204        (51.65)%

Net earnings applicable to common shareholders

     33,351          131,962        (74.73)%      207,391          437,224        (52.57)%

PER COMMON SHARE

                 

Net earnings (diluted)

     0.31          1.22        (74.59)%      1.93          4.01        (51.87)%

Dividends

     0.43          0.43        –            1.29          1.25        3.20 %

Book value per common share

              45.78          46.92        (2.43)%

SELECTED RATIOS

                 

Return on average assets

     0.28%       1.10%          0.54%       1.24%    

Return on average common equity

     2.59%       10.50%          5.42%       11.74%    

Efficiency ratio

     63.37%       55.97%          61.39%       56.68%    

Net interest margin

     4.13%       4.44%          4.18%       4.49%    

 

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FINANCIAL HIGHLIGHTS (Continued)

(Unaudited)

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(In thousands, except share and ratio data)    2008    2007    % Change    2008    2007    % Change

AVERAGE BALANCES

                 

Total assets

   $   54,279,760        $   48,903,319         10.99 %    $   53,498,514        $   48,141,571        11.13 %

Total interest-earning assets

     47,984,725          43,200,858        11.07 %      47,349,240          42,354,935        11.79 %

Securities

     4,582,727          5,221,722        (12.24)%      4,928,877          5,480,047          (10.06)%

Net loans and leases

     41,984,123          37,194,850        12.88 %      40,654,431          36,254,519        12.14 %

Goodwill

     2,009,509          2,015,532        (0.30)%      2,009,501          2,003,972        0.28 %

Core deposit and other intangibles

     132,167          177,864        (25.69)%      138,711          186,884        (25.78)%

Total deposits

     37,321,656          35,756,600        4.38 %      36,898,398          35,636,209        3.54 %

Core deposits (1)

     33,227,950          31,017,730        7.13 %      32,547,862          30,692,123        6.05 %

Minority interest

     29,949          37,527        (20.19)%      29,292          37,747        (22.40)%

Shareholders’ equity:

                 

Preferred equity

     282,500          240,000        17.71 %      254,270          240,000        5.95 %

Common equity

     5,123,399          4,987,275        2.73 %      5,106,750          4,978,473        2.58 %

Weighted average common and common-equivalent shares outstanding

     108,497,464          107,879,963        0.57 %      107,333,422          109,059,322        (1.58)%

AT PERIOD END

                 

Total assets

            $   53,974,168        $   50,044,686        7.85 %

Total interest-earning assets

              47,656,065          44,104,956        8.05 %

Securities

              4,755,359          5,261,057        (9.61)%

Net loans and leases

              41,887,693          37,822,259        10.75 %

Allowance for loan losses

              609,433          418,165        45.74 %

Reserve for unfunded lending commitments

              23,574          21,394        10.19 %

Goodwill

              2,009,504          2,021,519        (0.59)%

Core deposit and other intangibles

              133,989          172,140        (22.16)%

Total deposits

              38,590,901          35,774,713        7.87 %

Core deposits (1)

              33,854,963          31,170,466        8.61 %

Minority interest

              30,288          37,411        (19.04)%

Shareholders’ equity:

                 

Preferred equity

              286,949          240,000        19.56 %

Common equity

              5,279,078          5,016,980        5.22 %

Common shares outstanding

              115,302,598          106,934,360        7.83 %

Average equity to average assets

     9.96%       10.69%          10.02%       10.84%    

Common dividend payout

     138.44%       34.96%          66.72%       30.96%    

Tangible equity ratio

              6.60%       6.40%    

Nonperforming assets

            $   924,442        $   196,575        370.27 %

Accruing loans past due 90 days or more

              97,831          64,516        51.64 %

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

              2.20%       0.52%    

 

(1) Amount consists of total deposits excluding brokered deposits and time deposits $100,000 and over.

 

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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 beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Zions Bancorporation (“the Parent”) and its subsidiaries (collectively “the Company,” “Zions,” “we,” “our,” “us”);

 

   

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 the 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 internationally, nationally or locally in areas in which the Company conducts its operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices;

 

   

fluctuations in markets for equity, fixed-income, commercial paper and other securities, including availability, market liquidity levels, and pricing;

 

   

changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;

 

   

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, including policies of the U.S. Department of Treasury and the Federal Reserve Board;

 

   

the Company’s participation or lack of participation in governmental programs implemented under the Emergency Economic Stabilization Act, including without limitation the Troubled Asset Relief Program and the Capital Purchase Program, and the impact of such programs and related regulations on the Company and on international, national, and local economic and financial markets and conditions;

 

   

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;

 

   

demand for financial services in the Company’s market areas;

 

   

inflation and deflation;

 

   

technological changes and the Company’s implementation of new technologies;

 

   

the Company’s ability to develop and maintain secure and reliable information technology systems;

 

   

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

 

   

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

 

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

 

   

increased costs of deposit insurance and changes with respect to FDIC insurance coverage levels.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the 2007 Annual Report on Form 10-K of Zions Bancorporation 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, 2007, except as noted below.

Fair Value Accounting

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 157 defines fair value, establishes a consistent framework for measuring fair value, and enhances disclosures about fair value measurements. Adoption of SFAS 157 has been delayed one year for the measurement of all nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not have a material effect on the Company’s consolidated financial statements, but significantly expanded the disclosure requirements for fair value measurements.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, SFAS 157 has established a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities; includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets; certain securities sold, not yet purchased; and certain derivatives.

Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities; certain collateralized debt obligations (“CDO”) securities; corporate debt securities; certain private equity investments; certain securities sold, not yet purchased; and certain derivatives.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Additionally, observable inputs such as nonbinding single dealer quotes that are not corroborated by observable market data are included in this category. This category generally includes certain private equity investments, retained interests in securitizations, and certain CDO securities.

 

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The Company uses models when quotations are not available for certain securities or in markets where trading activity has slowed or ceased. When quotations are not available, and are not provided by third party pricing services, management judgment is necessary to determine fair value. In situations involving management judgment, fair value is determined using discounted cash flow analysis or other valuation models, which incorporate available market information, including appropriate benchmarking to similar instruments, analysis of default and recovery rates, estimation of prepayment characteristics and implied volatilities.

At September 30, 2008, approximately 5.9% of total assets, or $3.2 billion, consisted of financial instruments recorded at fair value on a recurring basis. Approximately 75.6% or $2.4 billion of these financial instruments used valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value. Approximately 24.4% or $772 million of these financial assets are measured using model-based techniques or nonbinding single dealer quotes, both of which constitute Level 3 measurements. At September 30, 2008, approximately 0.40% of total liabilities, or $196 million, consisted of financial instruments recorded at fair value on a recurring basis. At September 30, 2008, approximately 0.52% of total assets, or $281 million of financial assets were valued on a nonrecurring basis. Of the $281 million of assets valued on a nonrecurring basis, approximately $217 million were valued at Level 2 and $64 million were valued at Level 3.

Fair Value Option

SFAS 159 allows for the option to report certain financial assets and liabilities at fair value initially and at subsequent measurement dates with changes in fair value included in earnings. The option may be applied instrument by instrument, but is on an irrevocable basis. On January 1, 2008, the Company applied the fair value option to one available-for-sale real estate investment trust (“REIT”) trust preferred CDO security and three retained interests on selected small business loan securitizations. The REIT CDO and retained interests were valued using Level 3 models. The cumulative effect of adopting SFAS 159 reduced the beginning balance of retained earnings at January 1, 2008 by approximately $11.5 million, comprised of a decrease of $11.7 million for the REIT CDO and an increase of $0.2 million for the three retained interests. During the third quarter of 2008, the net change in fair value for the REIT CDO decreased pretax earnings by approximately $0.3 million. During the first nine months of 2008, the net change in fair value decreased pretax earnings by approximately $4.8 million, consisting of $2.7 million for the REIT CDO security and $2.1 million for the retained interests. These adjustments to fair value are included in fair value and nonhedge derivative income (loss) in the statement of income.

The Company elected the fair value option for the REIT CDO security as part of a directional hedging program in an effort to hedge the credit exposure the Company has to homebuilders in its REIT CDO portfolio. Management selected this security because it had the most exposure to the homebuilder market compared to the other REIT CDO securities in the Company’s portfolio, both in dollar amount and as a percentage, and was therefore considered the most suitable for hedging. The fair value option adoption for the REIT CDO allows the Company to avoid the complex hedge accounting provisions under SFAS No. 133, Accounting for Derivatives, associated with the implemented hedging program.

On June 23, 2008, Zions Bank purchased $787 million of securities from Lockhart, which comprised the entire remaining small business loan securitizations created by Zions Bank and held by Lockhart. As a result, the three small business securitization retained interests elected under the fair value option were included in this transaction and were part of the premium amount recorded with the loan balances at Zions Bank. See “Off-Balance Sheet Arrangement” for further discussion of these securities purchased.

 

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Estimates of Fair Value

The Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Examples of these include derivative instruments, available-for-sale and trading securities, certain private equity investments and certain residual interests from Company-sponsored securitizations. Additionally, fair value is used on a nonrecurring basis to evaluate assets or liabilities for impairment or for disclosure purposes in accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. Examples of these nonrecurring uses of fair value include loans held for sale accounted for at the lower of cost or fair value, certain private equity investments, impaired loans, long-lived assets, goodwill, and core deposit and other intangible assets. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating the instrument’s fair value. These valuation techniques and assumptions are in accordance with SFAS 157.

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. If observable market prices are not available, then fair value is estimated using modeling techniques such as discounted cash flow analyses. These modeling techniques utilize assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. To increase consistency and comparability in fair value measures, SFAS 157 established a three-level hierarchy to prioritize the inputs used in valuation techniques between observable inputs that reflect quoted prices in active markets, inputs other than quoted prices with observable market data, and unobservable data such as the Company’s own data or single dealer nonbinding pricing quotes.

Fair values for investment securities, trading assets, and most derivative financial instruments are based on independent, third party market prices, or if identical market prices are not available they are based on the market prices of similar instruments. If market prices of similar instruments are not available, instruments are valued based on the best available data, some of which may not be readily observable in the market. The fair values of loans are typically based on quotes from market participants. The fair values of OREO and other repossessed assets are typically determined based on appraisals by third parties, less estimated selling costs.

Estimates of fair value are also required when performing an impairment analysis of long-lived assets, goodwill, and core deposit and other intangible assets. The Company reviews goodwill for impairment at the reporting unit level on an annual basis, or more often if events or circumstances indicate the carrying value may not be recoverable. The goodwill impairment test compares the fair value of the reporting unit with its carrying value. If the carrying amount of the Company’s investment in the reporting unit exceeds its fair value, an additional analysis must be performed to determine the amount, if any, by which goodwill is impaired. In determining the fair value of the Company’s reporting units, management uses discounted cash flow models which require assumptions about growth rates of the reporting units and the cost of equity. To the extent that adequate data is available, other valuation techniques relying on market data may be incorporated into the estimate of a reporting unit’s fair value. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the amount that is most representative of fair value. For long-lived assets and intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the asset is not recoverable and exceeds its fair value. In determining the fair value, management uses models which require assumptions about growth rates, the life of the asset, and/or the fair value of the assets. The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

Valuation of Collateralized Debt Obligations

The Company values CDO available-for-sale and held-to-maturity securities using several methodologies based on the appropriate fair value hierarchy consistent with current available market information. At September 30, 2008, the Company valued substantially all of the CDO portfolio using Level 3 pricing methods as follows:

 

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     Held-to-maturity    Available-for-sale
(In millions)    Amortized
cost
   Estimated
fair

value
   Amortized
cost
   Estimated
fair

value

Trust preferred securities – bank
and insurance:

           

Internal model

   $  1,353    $  807    $  715    $  601

Third party models

   9    8      

Dealer quotes

         17    18

Other

         10    9

Level 2

         2    2
                   
   1,362    815    744    630

Trust preferred securities – real
estate investment trusts:

           

Third party models

   36    24    39    37

Dealer quotes

         1    1
                   
   36    24    40    38

Small business loan-backed:

           

Other

         13    13

Other:

           

Third party models

   72    55    15    15

Dealer quotes

         45    39

Monoline CDS spreads

         48    33
                   
   72    55    108    87
                   

Total

   $  1,470    $  894    $  905    $  768
                   

Internal Model

At September 30, 2008, the Company determined that the $1,878 million of bank and insurance trust preferred securities at amortized cost that had previously been valued using a Level 2 matrix pricing approach would require a Level 3 cash flow modeling approach. An additional $190 million of securities at amortized cost previously valued with Level 3 single dealer quotes were also moved to a Level 3 cash flow modeling approach. Four market developments in the bank and insurance trust preferred asset class led management to this determination.

 

   

Market activity in the sector became increasingly illiquid, disordered and dominated by if not limited to forced sellers. Substantiating actual trading levels and the “willingness” of sellers executing at certain levels became increasingly difficult. The determination of inactivity/ illiquidity was based on discussion with dealers and CDO managers specializing in the sector as well as a review of bid lists, execution levels of forced trades, and any other information available on trades.

 

   

Secondly, bank failures and announced deferrals of interest payments on trust preferred securities contained within the CDOs impacted differently each tranche of each CDO held. Each tranche is unique in the amount of performing, deferring and defaulting collateral, remaining collateral quality and waterfall mechanics.

 

   

Thirdly, rating agency watch listing and downgrading of CDO tranches occurred in July and August. S&P, Moody’s and Fitch are reassessing their ratings model assumptions. This resulted in an increasing lack of consistency in rating levels for CDO tranches. The matrix pricing methodology used from September 2007 to June of 2008 was dependent on securities being substantially similar. In management’s judgment, an operational definition of “substantially similar” securities capable of supporting the requirements of Level 2 pricing could no longer be created without the addition of significant adjustments based on unobservable inputs.

 

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Finally, a joint statement of the SEC Office of the Chief Accountant and the FASB staff on September 30, 2008 and FASB’s October 10, 2008 issuance of FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, provided additional guidance on determining fair value of financial assets when the market for such assets is not active. These statements clarified when and how an entity might, given an inactive market, appropriately determine that the use of an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs may be equally or more representative of fair value than a market approach valuation.

The Company uses a licensed internal model to value substantially all bank and insurance trust preferred CDOs. The model uses market-based estimates of expected loss for the individual pieces of underlying collateral to arrive at a pool-level expected loss rate for each CDO. These loss assumptions are applied to the CDO’s structure to generate cash flow projections for each tranche of the CDO. The fair value of each tranche is determined by discounting its resultant loss-adjusted cash flows with appropriate market based discount rates. At September 30, 2008, the discount rate primarily referenced current collateralized loan obligation spreads obtained from a third party.

The method for deriving loss expectation for collateral underlying the CDOs depends on whether the collateral is from a public or private company. For public companies, a term structure of Probabilities of Default (“PDs”) is obtained from a commercially available service. The service estimates PDs using a proprietary reduced form model derived using logistic regression on a historical default database. Because the service’s model requires equity valuation related inputs (along with other macro and firm specific inputs) to produce default probabilities, the service does not produce results for private firms and some very small public firms that do not have readily available data.

For private companies (and the few small public companies not evaluated by the service) PDs are estimated based on credit ratings. The credit ratings come from two external rating sources; one specific to banks, and the other to insurers. The Company has credit ratings for each piece of collateral whether private or public. Using the PD data on the public companies obtained from the commercial service, the Company calculates the average PD for each credit rating level by industry. The rating level average is then applied to all corresponding credits within each rating level that do not have a PD from the commercial service.

The PDs for the underlying collateral are then used to develop CDO deal-level expected loss curves. An external service which models the unique cash-flow waterfall and structure of each CDO deal is used to generate tranche-level cash flows using the Company’s derived CDO deal-level loss assumptions (along with other relevant assumptions). The resultant cash-flows are discounted using current market spreads approximated from related structured product markets. The discount rate assumption includes both credit and liquidity components.

The Company did find evidence of one forced trade during the third quarter in a tranche of a CDO that is owned by the Company. The forced trade occurred at a price of 35% of face value. This particular CDO had amortized down considerably from issuance and the tranche was currently the most senior in the CDO. At the time of the trade the underlying collateral consisted of only five bank obligations and a Freddie Mac zero-coupon principal-only security strip due 2031. Two of the five bank obligations were from Wells Fargo Corporation, which also has publicly available secondary market trading levels on a similar public trust preferred issuance. Even under the assumption that all three of the non-Wells Fargo obligations in the CDO immediately defaulted with no recovery, the projected tranche cash-flows, discounted at the yield of the public Wells Fargo trust preferred issue, resulted in a value of 68% of face value. Based on this analysis, the observed trade at 35% does not reflect the level at which an informed market participant would value the security. As a comparison, the Company’s model produced a price of 58%. The Company feels that the difference between the model price of 58% and the above outlined scenario price of 68% reflects an appropriate liquidity discount given the lack of activity in CDO markets compared to publicly traded trust preferred markets.

 

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The following schedule sets forth the sensitivity of the current CDO fair values using an internal model to changes in the most significant assumptions utilized in the model:

SENSITIVITY OF BANK AND INSURANCE CDO VALUATIONS TO ADVERSE

CHANGES OF CURRENT MODEL KEY VALUATION ASSUMPTIONS

 

          Bank and insurance
CDOs at Level 3
(Amounts in millions)         Held-to-maturity    Available-for-sale

Fair value balance at September 30, 2008

      $        807           $      601       

Expected cumulative credit losses (1)

        

Weighted average:

        

1-year

      1.9%        2.0%    

5-year

      5.1%        5.4%    

30-year

      9.9%        10.5%    

Increase (decrease) in fair value due to adverse change

   25%    $    (13.7)          $      6.2       
   50%    (22.8)          2.3       

Discount rate (2)

        

Weighted average spread

      880 bp    380 bp

Decrease in fair value due to adverse change

   + 100 bp    $    (60.3)          $  (35.8)      
   + 200 bp      (107.1)          (74.2)      

 

(1) The Company uses an expected credit loss model which specifies cumulative losses at the 1-year, 5-year, and 30-year points from the date of valuation.
(2) The discount rate is a spread over the LIBOR swap yield curve at the date of valuation.

The AFS portfolio is composed primarily of more senior CDO tranches. In general these senior tranches receive accelerated principal payments under scenarios of high credit losses provided that the credit losses do not exceed the available subordination in the CDO deal. Therefore, under 25% and 50% higher credit losses the value of the AFS portfolio increases. By contrast more junior tranches which are in our HTM portfolio absorb credit losses and defer principal and interest payments and thus decrease in value.

Third Party Models

At September 30, 2008, the Company utilized third party valuation services for 18 securities with an aggregate amortized cost of $171 million in the ABS CDO and trust preferred asset classes. These securities continued to have insufficient observable market data available to directly determine prices. The Company reviewed the methodologies employed by third party models. This included a review of all relevant data inputs and the appropriateness of key model assumptions. These assumptions included, but were not limited to, probability of default, collateral recovery rates, discount rates, over-collateralization levels, and rating transition probability matrices from rating agencies. The model valuations obtained from third party services were evaluated for reasonableness including quarter to quarter changes in assumptions and comparison to other available data which included third party and internal model results and valuations. A range of value estimates is not provided because third party vendors utilized point estimates.

 

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Dealer Quotes

The $63 million of asset backed securities at amortized cost are valued using nonbinding and unadjusted dealer quotes. Multiple quotes are not available and the values provided are based on a combination of proprietary dealer quotes. Broker disclosure levels vary and the Company seeks to minimize dependence on this Level 3 source. Of the $63 million of securities, $42 million are AAA rated.

Monoline CDS Spreads

A total of $48 million at amortized cost of AA rated AMBAC insured securities purchased out of Lockhart Funding were valued using AMBAC credit derivative levels.

See Note 9 of the Notes to Consolidated Financial Statements and “Investment Securities Portfolio” for further information.

Derivative Financial Instruments Fair Value Accounting

The Company uses interest rate swaps and options to manage its interest rate risk. Additionally, the Company executes derivative instruments, including interest rate swaps and options, forward currency exchange contracts, and energy commodity swaps, with commercial banking customers to facilitate their respective risk management strategies. Those derivatives are immediately hedged by offsetting derivative contracts, such that the Company minimizes its net risk exposure resulting from such transactions. When quoted market prices are not available, the valuation of derivative instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company does not use credit default swaps in its investment or hedging operations.

Derivative contracts can be exchange-traded or over-the-counter (“OTC”). The Company’s exchange-traded derivatives consist of forward currency exchange contracts, which are part of the Company’s services provided to commercial customers. Exchange-traded derivatives are classified as Level 1 in the fair value hierarchy, as the values of these derivatives are obtained from quoted prices in active markets for identical contracts.

The Company’s OTC derivatives consist of interest rate swaps and options, as well as energy commodity derivatives for customers. The Company has classified its OTC derivatives in Level 2 of the fair value hierarchy, as the significant inputs to the overall valuations are based on market-observable data or information derived from or corroborated by market-observable data, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment.

To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its OTC derivatives. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (the current plus potential future exposure) and then applying each counterparty’s credit spread to the applicable exposure. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, counterparty credit rating thresholds, mutual puts, and guarantees. Additionally, the Company actively monitors counterparty credit ratings for significant changes. The income statement impact of nonperformance risk included in the fair value of OTC derivatives is approximately $1.6 million in noninterest income for the first nine months of 2008.

 

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Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has classified its OTC derivative valuations in Level 2 of the fair value hierarchy.

When appropriate, valuations are also adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

RESULTS OF OPERATIONS

The Company reported net earnings applicable to common shareholders of $33.4 million or $0.31 per diluted share for the third quarter of 2008 compared with $132.0 million or $1.22 per diluted share for the third quarter of 2007. The decrease is mainly due to a $101.3 million increase in the provision for loan losses, a $17.0 million decrease in the fair value and interest on nonhedge derivatives due to decreasing spreads between the London Interbank Offer Rate (“LIBOR”) and prime rates, and $28.0 million of impairment losses on investment securities recognized during the third quarter of 2008.

The annualized return on average assets was 0.28% for the third quarter of 2008 and 1.10% for the third quarter of 2007. For the same comparative periods, the annualized return on average common equity was 2.59% compared to 10.50%. The efficiency ratio for the third quarter of 2008 was 63.4% compared to 56.0% for the third quarter of 2007.

Net earnings applicable to common shareholders for the first nine months of 2008 were $207.4 million or $1.93 per diluted share, compared to $437.2 million or $4.01 per diluted share for the first nine months of 2007. The decrease reflects a $280.9 million increase in the provision for loan losses and $112.8 million of impairment losses on investment securities and valuation losses on securities purchased from Lockhart.

The annualized return on average assets was 0.54% for the first nine months of 2008 compared to 1.24% for the first nine months of 2007. For the same comparative periods, the annualized return on average common equity was 5.42% compared to 11.74%. The efficiency ratio for the first nine months of 2008 was 61.4% compared to 56.7% for the same period in 2007.

Net Interest Income, Margin and Interest Rate Spreads

Taxable-equivalent net interest income for the third quarter of 2008 increased 3.0% to $497.8 million compared with $483.1 million for the comparable period of 2007. This growth reflects the significant increase in earning assets driven by loan growth the last three months of 2007 and the first nine months of 2008. The tax rate used for calculating all taxable-equivalent adjustments was 35% for all periods presented.

The Company’s net interest margin was 4.13% for the third quarter of 2008 compared to 4.18% for the second quarter of 2008 and 4.44% for third quarter of 2007. The margin decrease for the third quarter of 2008 compared to the second quarter of 2008 primarily resulted from lower average asset yields driven by the increase in nonperforming assets during the quarter and increased money market deposit rates. The margin

 

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decrease for the third quarter of 2008 compared to the third quarter of 2007 resulted from a decline in noninterest-bearing demand deposits, increased reliance on nondeposit borrowings to fund loan growth and asset-backed commercial paper purchased from Lockhart, and also from increased nonperforming assets. We expect that the net interest margin will continue to be under pressure in the next few quarters due to the persistence of these factors.

Although deposit rates did decline slightly during the third quarter, competitive pressures on deposit rates may impede our ability to reprice deposits in the future, which may have a negative impact on the net interest margin during future quarters. See “Interest Rate Risk” for further information.

The spread on average interest-bearing funds for the third quarter of 2008 was 3.67%, which decreased from 3.71% for the second quarter of 2008 and increased from 3.55% for the third quarter of 2007. The spread on average interest-bearing funds for 2008 has benefited from improved loan spreads on newly originated and renewed loans; however increased nonperforming assets throughout the year negatively impacted the affect of the aforementioned improved loan spreads.

The Company expects to continue its efforts over the long run to maintain a slightly “asset-sensitive” position with regard to interest rate risk. Our estimates of the Company’s actual rate risk position is highly dependent upon changes in both short-term and long-term interest rates, modeling assumptions, and the actions of competitors and customers in response to those changes.

 

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CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES

(Unaudited)

 

     Three Months Ended
September 30, 2008
    Three Months Ended
September 30, 2007
 
(In thousands)    Average
balance
    Amount of
interest (1)
   Average
rate
    Average
balance
    Amount of
interest (1)
   Average
rate
 

ASSETS

              

Money market investments

   $    1,417,875       $      9,267    2.60 %   $        784,286       $    10,841    5.48 %

Securities:

              

Held-to-maturity

   1,918,436       31,502    6.53 %   701,587       12,192    6.89 %

Available-for-sale

   2,621,756       27,654    4.20 %   4,462,480       64,746    5.76 %

Trading account

   42,535       437    4.09 %   57,655       880    6.06 %
                          

Total securities

   4,582,727       59,593    5.17 %   5,221,722       77,818    5.91 %
                          

Loans:

              

Loans held for sale

   160,026       1,916    4.76 %   235,345       3,695    6.23 %

Net loans and leases (2)

   41,824,097       670,695    6.38 %   36,959,505       731,866    7.86 %
                          

Total loans and leases

   41,984,123       672,611    6.37 %   37,194,850       735,561    7.85 %
                          

Total interest-earning assets

   47,984,725       741,471    6.15 %   43,200,858       824,220    7.57 %
                  

Cash and due from banks

   1,424,407            1,421,895         

Allowance for loan losses

   (562,518)            (390,078)         

Goodwill

   2,009,509            2,015,532         

Core deposit and other intangibles

   132,167            177,864         

Other assets

   3,291,470            2,477,248         
                      

Total assets

   $  54,279,760            $  48,903,319         
                      

LIABILITIES

              

Interest-bearing deposits:

              

Savings and NOW

   $    4,248,715       8,285    0.78 %   $    4,337,513       9,942    0.91 %

Money market

   11,552,968       62,571    2.15 %   10,466,124       93,156    3.53 %

Internet money market

   2,327,315       19,864    3.40 %   1,619,423       20,488    5.02 %

Time under $100,000

   2,675,894       21,898    3.26 %   2,577,033       28,831    4.44 %

Time $100,000 and over

   3,929,454       32,918    3.33 %   4,688,695       57,710    4.88 %

Foreign

   3,397,729       20,021    2.34 %   2,703,397       33,240    4.88 %
                          

Total interest-bearing deposits

   28,132,075       165,557    2.34 %   26,392,185       243,367    3.66 %
                          

Borrowed funds:

              

Securities sold, not yet purchased

   30,966       393    5.05 %   20,673       252    4.84 %

Federal funds purchased and security repurchase agreements

   2,284,997       10,246    1.78 %   3,350,693       40,123    4.75 %

Commercial paper

   74,596       577    3.08 %   293,432       4,063    5.49 %

FHLB advances and other borrowings:

              

One year or less

   5,765,265       36,302    2.50 %   1,115,750       14,596    5.19 %

Over one year

   129,162       1,856    5.72 %   128,534       1,862    5.75 %

Long-term debt

   2,662,046       28,718    4.29 %   2,329,325       36,842    6.28 %
                          

Total borrowed funds

   10,947,032       78,092    2.84 %   7,238,407       97,738    5.36 %
                          

Total interest-bearing liabilities

   39,079,107       243,649    2.48 %   33,630,592       341,105    4.02 %
                  

Noninterest-bearing deposits

   9,189,581            9,364,415         

Other liabilities

   575,224            643,510         
                      

Total liabilities

   48,843,912            43,638,517         

Minority interest

   29,949            37,527         

Shareholders’ equity:

              

Preferred equity

   282,500            240,000         

Common equity

   5,123,399            4,987,275         
                      

Total shareholders’ equity

   5,405,899            5,227,275         
                      

Total liabilities and shareholders’ equity

   $  54,279,760            $  48,903,319         
                      

Spread on average interest-bearing funds

        3.67 %        3.55 %

Taxable-equivalent net interest income and net

yield on interest-earning assets

     $  497,822    4.13 %     $  483,115    4.44 %
                  

 

(1) Taxable-equivalent rates used where applicable.
(2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.

 

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CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (Continued)

(Unaudited)

 

     Nine Months Ended
September 30, 2008
    Nine Months Ended
September 30, 2007
 
(In thousands)    Average
balance
    Amount of
interest (1)
   Average
rate
    Average
balance
    Amount of
interest (1)
   Average
rate
 

ASSETS

              

Money market investments

   $    1,765,932       $        40,608      3.07 %   $      620,369       $      24,939      5.37 %

Securities:

              

Held-to-maturity

   1,385,803       69,153      6.67 %   679,113       35,410      6.97 %

Available-for-sale

   3,502,132       130,857      4.99 %   4,732,689       204,549      5.78 %

Trading account

   40,942       1,277      4.17 %   68,245       2,838      5.56 %
                          

Total securities

   4,928,877       201,287      5.46 %   5,480,047       242,797      5.92 %
                          

Loans:

              

Loans held for sale

   186,940       7,632      5.45 %   246,360       11,892      6.45 %

Net loans and leases (2)

   40,467,491       2,016,914      6.66 %   36,008,159       2,118,008      7.86 %
                          

Total loans and leases

   40,654,431       2,024,546      6.65 %   36,254,519       2,129,900      7.85 %
                          

Total interest-earning assets

   47,349,240       2,266,441      6.39 %   42,354,935       2,397,636      7.57 %
                  

Cash and due from banks

   1,387,584            1,499,900         

Allowance for loan losses

   (518,840)            (380,121)         

Goodwill

   2,009,501            2,003,972         

Core deposit and other intangibles

   138,711            186,884         

Other assets

   3,132,318            2,476,001         
                      

Total assets

   $  53,498,514            $  48,141,571         
                      

LIABILITIES

              

Interest-bearing deposits:

              

Savings and NOW

   $    4,472,175       27,530      0.82 %   $    4,452,344       30,181      0.91 %

Money market

   10,954,861       189,598      2.31 %   10,320,360       267,985      3.47 %

Internet money market

   2,249,017       57,723      3.43 %   1,476,561       55,818      5.05 %

Time under $100,000

   2,589,543       72,339      3.73 %   2,510,342       81,939      4.36 %

Time $100,000 and over

   4,243,922       122,454      3.85 %   4,867,183       176,992      4.86 %

Foreign

   3,314,535       69,726      2.81 %   2,570,641       94,180      4.90 %
                          

Total interest-bearing deposits

   27,824,053       539,370      2.59 %   26,197,431       707,095      3.61 %
                          

Borrowed funds:

              

Securities sold, not yet purchased

   32,608       1,140      4.67 %   30,892       1,060      4.59 %

Federal funds purchased and security repurchase agreements

   2,864,224       49,021      2.29 %   3,104,079       110,978      4.78 %

Commercial paper

   142,771       4,131      3.86 %   222,523       9,075      5.45 %

FHLB advances and other borrowings:

              

One year or less

   4,852,840       99,615      2.74 %   759,780       29,982      5.28 %

Over one year

   128,513       5,521      5.74 %   131,393       5,686      5.79 %

Long-term debt

   2,600,002       86,697      4.45 %   2,356,434       110,864      6.29 %
                          

Total borrowed funds

   10,620,958       246,125      3.10 %   6,605,101       267,645      5.42 %
                          

Total interest-bearing liabilities

   38,445,011       785,495      2.73 %   32,802,532       974,740      3.97 %
                  

Noninterest-bearing deposits

   9,074,345            9,438,778         

Other liabilities

   588,846            644,041         
                      

Total liabilities

   48,108,202            42,885,351         

Minority interest

   29,292            37,747         

Shareholders’ equity:

              

Preferred equity

   254,270            240,000         

Common equity

   5,106,750            4,978,473         
                      

Total shareholders’ equity

   5,361,020            5,218,473         
                      

Total liabilities and shareholders’ equity

   $  53,498,514            $  48,141,571         
                      

Spread on average interest-bearing funds

        3.66 %        3.60 %

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

     $  1,480,946      4.18 %     $  1,422,896      4.49 %
                  

 

(1) Taxable-equivalent rates used where applicable.
(2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.

 

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