Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
Zions Bancorporation (the Parent) is a multibank holding company organized under the laws of Utah in 1955, registered under the Bank Holding Company Act of 1956, as amended. Zions Bancorporation and its subsidiaries (the Company), is the second largest bank holding company headquartered in Utah and provides a full range of banking and related services primarily in Utah, Nevada, and Arizona. Its principal subsidiaries are banking subsidiaries which include Zions First National Bank, the second largest commercial banking organization in the state of Utah, Nevada State Bank, the fifth largest commercial bank in Nevada, and National Bank of Arizona the fifth largest commercial bank in Arizona.
The Company's business and the businesses of many of its larger borrowers are primarily concentrated in the state of Utah. Consequently, the Company's results of operations and financial condition are dependent upon general trends in the Utah economy and real estate markets.
The Company has focused in recent years on maintaining strong liquidity, risk-based capital and cash flow positions and on developing strong internal controls. An increasing focus is currently being placed on strengthening the Company's retail banking business, as well as its small- and medium-sized business lending, residential mortgage and investment activities, and increasing the proportion of fee income in its total revenue mix. The Company's general operating objectives include enhancing the Company's market position in Utah, Nevada, and Arizona through in-market acquisitions of smaller depository institutions, and through the continued development of the Company's present lines of business.
The Company is committed to improving the communities it serves now and in the years to come. Employees, as active concerned citizens, perform acts of service and goodwill to heighten a standard of living and boost community pride and morale. The Company engages in a variety of loan programs which benefit low to moderate income individuals; ranging from housing and business loans to automobile loans.
At December 31, 1994, the Company had assets of $4.9 billion, loans of $2.4 billion, deposits of $3.7 billion, and shareholders' equity of more than $.3 billion. A more detailed discussion concerning the Company's financial condition is contained in Part II of this report.
The Banking Subsidiaries
The banks provide a wide variety of commercial and retail banking and mortgage-lending financial services. Commercial loans, lease financing, cash management, lockbox, customized draft processing, and other special financial services are provided for business and other commercial banking customers. A wide range of personal banking services are provided to individuals, including bankcard, student and other installment loans and home equity credit line loans, checking accounts, savings accounts, time certificates of various types and maturities, trust services and safe deposit facilities. In addition, direct deposit of payroll, social security and various other government checks is offered. Automated teller machines provide 24-hour access and availability to customers' accounts and to many consumer banking services through statewide, regional, and nationwide ATM networks.
Zions First National Bank in Utah has developed special packages of financial services designed to meet the financial needs of particular market niches, including the Premier Account for those 50 years and older and the Student Account. The Bank has also established a Private Banking group to service the financial needs of wealthy individuals; an Executive Banking program to service the needs of corporate executives of commercial clients, and an Affinity program which offers discounted financial services to employees of commercial accounts on a group basis. Zions Bank has also developed a series of products geared to the lower-income customer, including the Flex Loan (a low-income personal loan), several low-income housing programs, and the Reddi-Savings account-- a savings account with unlimited ATM access for those not qualifying for or desiring a checking account.
Both Zions First National Bank and Nevada State Bank have established trust divisions which offer clients a variety of fiduciary services ranging from the administration of estates and trusts to the management of funds held under pension and profit sharing plans. They also offer custodian, portfolio, and management services. The Trust Division of Zions First National Bank also acts as fiscal and payment agent, transfer agent, registrar, and trustee under corporate and trust indentures for corporations, governmental bodies, and public authorities.
Zions First National Bank is a registered dealer in, and underwriter of, general obligations of state and municipal governments, and a primary dealer in obligations of the United States government and several federal agencies. Zions First National Bank also provides correspondent banking services such as cash letter processing, wire services, federal funds facilities, and loan participations.
Zions First National Bank's International Banking Department issues letters of credit and handles foreign exchange transactions for customers, but it does not take a trading position in foreign exchange. Zions First National Bank's Grand Cayman branch accepts Eurodollar deposits from qualified customers, and places deposits with foreign banks and foreign branches of other U.S. banks. Zions' banking subsidiaries, however, do not engage in any foreign lending.
The Company's commercial banking operations generated net income of $65,661,000 in 1994, a .6% increase over the $65,263,000 earned in 1993. Results for 1993 have been restated to reflect the pooling-of-interests accounting treatment afforded the acquisition of National Bancorp of Arizona during the first quarter of 1994. Income from commercial banking operations was negatively affected in 1994 by rising interest rates and narrowing margins, particularly in the indirect installment contract business. Rising interest rates adversely affected the sale of fixed income securities, reducing revenues at the recently acquired Discount Corporation of New York. Rising rates were also manifest in the cost of deposits, as competitors' balance sheets became more fully loaned-up, creating pressure to generate greater deposit growth. Competitive conditions were also intense in the indirect automobile receivables business. Although the volume of such receivables originated increased, margins were greatly reduced from levels previously experienced.
During the year a major effort was initiated to reduce the cost structure in the Company's banking operations. A major focus of this initiative is to eliminate redundant operations in the three subsidiary banks, and to centralize functions which are transparent to customers while at the same time maintaining a great deal of decision-making capability at the local management level. At year-end 1994, staffing in the lead bank, excluding the mortgage operations, had been reduced by 57 full-time equivalent employees, or 3.4% below staffing levels a year earlier. An early retirement program was made available to certain employees subsequent to year-end 1994, with approximately 40 employees participating. Further cost-reduction projects are underway in 1995.
Average federal funds sold and securities purchased under agreements to resell increased 31.4% or $208,136,000 in 1994, and average securities held-to-maturity, available-for-sale and in trading accounts increased 27.9% or $336,701,000. Average interest-bearing deposits held at other banks and other money market investments decreased $108,185,000 or 81.7% during the year. Total average loans and lease receivables, net of unearned discount, increased 16.0% or $354,310,000, despite the fact that the Company securitized receivables in the gross amount of $703,013,000 during 1994.
Core deposits continued to experience strong growth, as the total volume of such accounts rose $339,049,000 or 11.1%. The components of this growth included an increase of $111,723,000 or 15.3% in average demand deposits, an increase of $92,161,000 or 14.2% in savings deposits, an increase of $167,103,000 or 14.9% in average money market account balances, and a decrease of $31,938,000 in time deposits under $100,000. Total average deposits increased 12.5% or $398,935,000 to $3,595,409,000 in 1994.
Average federal funds purchased and securities sold under agreements to repurchase increased 40.0% or $309,817,000 in 1994, while securities sold short increased 165.6% or $114,963,000. Advances from the Federal Home Loan Bank of Seattle and other borrowings decreased 20.0% or $36,016,000. Total shareholders' equity allocated to commercial banking operations increased 18.5% or $54,467,000 in 1994.
The ATM network was further expanded in 1994, with 40 additional machines being deployed. The total number of ATM's in service at year-end 1994 was 215, a 23% increase over the prior year-end totals. The ATM network includes installations at branch offices, stores, shopping centers, resort areas, hotels, airports, and university campuses.
Utah
Zions First National Bank, founded in 1873, has 86 offices located throughout the state of Utah, plus one foreign office, for a total of 87 banking offices. Zions First National Bank's net income was $48,203,000, a decline of 8.8% from the $52,867,000 earned in 1993. The decline was a result of a $321,000 decline in net revenue, a $6,437,000 increase in noninterest expenses and a $1,435,000 reduction in benefit from 1993 accounting changes, offset by a $926,000 decline in provision for loan losses and a $2,603,000 reduction in the income tax provision.
Several initiatives were launched in 1994 to increase the convenience of banking for consumers and businesses. Zions First National Bank was the first Utah bank to aggressively promote point-of-sale debit card services throughout Utah. The bank also expanded its telephone service center to provide access to a wide variety of banking services via telephone. The Company's Reddi-Response system now handles approximately 10,000 phone calls per day. Zions Bank also became the first Utah-based institution to introduce Electronic Data Interchange, a package of data transmission services for corporate customers which facilitates the electronic processing of purchase orders, invoices, and payment information.
Zions First National Bank successfully completed the first phase of a pilot program in conjunction with the National Association of Certified Development Companies to underwrite SBA 504 loans through selected local CDC's throughout the United States. An initial $43.7 million pool of commercial first mortgage loans originated under the program was securitized in 1994, and it is anticipated that the program will be significantly expanded in 1995.
During 1994, Zions First National Bank organized a Small Business Investment Corporation to provide early-stage capital, primarily for technology companies located in the Intermountain West. The fund, operating as Wasatch Venture Fund, completed ten investments during its first year of operation.
In 1994, two new branches were opened in Layton and Eden, Utah, and during the fourth quarter, the pending merger transaction of Zions Bancorporation and First Western Bancorporation was announced. The transaction is expected to be consummated during the second quarter of 1995, and will mark the Company's initial entry into the southeastern area of the state. The acquisition will provide $37 million in assets and the addition of three banking offices operated by First Western Bancorporation's banking subsidiary, First Western National Bank, in Moab, Monticello and Blanding, Utah.
Nevada
Nevada State Bank, a state-chartered Federal Deposit Insurance Corporation ("FDIC")-insured institution, with its main office in downtown Las Vegas, opened two new grocery store banking centers in Summerlin and Pahrump, Nevada, during 1994, expanding its banking offices to 21 in Nevada. Net income at Nevada State Bank, after the amortization of purchase premium, increased 30.9% to $6,140,000 in 1994 as compared to $4,691,000 in 1993. Nevada State Bank's earnings increase was attributable to a $3,890,000 increase in net revenue, offset by a $646,000 increase in noninterest expenses, a $410,000 increase in the loan loss provision, a $1,032,000 increase in income taxes and a $353,000 reduction in the net benefit produced by accounting changes in 1993.
Arizona
During 1994, the Company substantially increased its presence in the Arizona market. The acquisition of National Bancorp of Arizona was completed during the first quarter, and Rio Salado Bancorp was acquired during the second quarter. The banking operations of these two companies were merged with Zions First National Bank of Arizona, and the resulting bank, with 10 offices, is operating under the National Bank of Arizona name. At year-end, the bank had over $700 million in assets, and over $36 million in net revenue, making it the fifth largest commercial bank in Arizona. Despite the disruptions caused by the merger of these three organizations, National Bank of Arizona achieved a 46.9% increase in net income, with 1994 earnings of $11,318,000 as compared with 1993 net income of $7,705,000. The increase resulted from a net revenue increase of $11,163,000, a reduction in loan loss provision of $301,000, offset by increases in noninterest expenses and taxes of $4,758,000 and $2,599,000, respectively, and a reduction in income from 1993 accounting changes of $494,000. The 1994 net income of National Bank of Arizona produced a strong return on average shareholders' equity of 24.3%. National Bank of Arizona's results have been restated to reflect the pooling-of-interest acquisition of that operation in the first quarter of 1994 and the results also reflect the acquisition of Rio Salado Bancorp, using the purchase accounting method, during the second quarter of 1994. The two acquisitions also provide a foundation for increased activity on the part of Zions Bancorporation's nonbank subsidiaries in the Arizona market.
Other Subsidiaries
The Company conducts various other bank-related business activities through subsidiaries owned by the Parent and wholly-owned subsidiaries of Zions First National Bank. Zions Credit Corporation engages in lease origination and servicing operations in Utah, Nevada, and Arizona. Zions Life Insurance Company underwrites as reinsurer credit-related life and disability insurance. Zions Insurance Agency, Inc., operates an insurance brokerage business which administers various credit-related insurance programs in the Company's subsidiaries and sells general lines of insurance. The Company's insurance subsidiaries offer customers a full range of insurance products through licensed agents. The products include credit life products, collateral protection products, life policies, homeowners policies, property and casualty policies, and commercial business owner type policies. Zions Data Service Company provides data processing services to all subsidiaries of the Company. Zions Mortgage Company, a subsidiary of Zions First National Bank, conducts a mortgage banking operation in Utah, Nevada, and Arizona. Zions Investment Securities, Inc., also a subsidiary of the Bank, provides discount investment brokerage services on a nonadvisory basis to both commercial and consumer customers. Personal investment officers employed by the discount brokerage subsidiary in many larger offices provide customers with a wide range of investment products, including municipal bonds, mutual funds and tax-deferred annuities.
Zions Credit Corporation generated $63,140,000 in new lease volume in 1994, a 17.1% increase over the 1993 volume. An additional $15,722,000 in leases was brokered to third parties. Average gross lease receivable and conditional sales contracts serviced by Zions Credit Corporation decreased 3.7% to $129,134,000 in 1994 from $134,029,000 in 1993.
Zions Insurance Agency, Inc. and Zions Life Insurance Company produced combined net income of $1,070,000, a 92.4% increase over the $556,000 generated in 1993. The increased income was largely attributable to increased volume in personal lines of insurance and improved performance in the sale of mortgage life and other credit life products.
Zions Data Service Company engaged in a variety of significant projects in 1994. Most notable was the installation of a new deposit and account analysis system which will simplify the development of new products and provide greater flexibility in meeting customer requirements. A new trust system was also installed, providing state-of-the-art operational capabilities. A loan management system was developed using relational database technology. The new system will provide managers with a much greater capability to view the full range of a customer's account relationships and to easily develop customized management reports. Zions Data Service Company also began the installation of a wide area network to support improved data and voice communications between the Company's various branches and departments. The new network will improve response times and allow the Company to significantly leverage its substantial investment in personal computer equipment and software.
Zions Mortgage Company experienced a sharp reduction in mortgage originations as a result of an adverse interest rate environment in 1994. Total retail mortgage origination volume decreased 47.4% to $382,800,000 in 1994 from $727,500,000 in 1993. In reaction to the decline in activity, staffing was reduced 27% between March and December, 1994. Higher interest rates resulted in a loss on loan sales of $3,445,000, including a downward mark-to-market adjustment of $1,700,000 in a portfolio of adjustable rate mortgages, as compared to a gain on loan sales of $2,035,000 in 1993. The loss on loan sales was partially offset by a gain in the amount of $2,516,000 from the sale of mortgage servicing rights. Zions Mortgage Company experienced a net loss of $319,000 in 1994, as compared to net income of $530,000 in 1993. Inasmuch as Zions Mortgage Company is a direct subsidiary of Zions First National Bank, its results of operations are included in the banking operations results.
In a very difficult year for securities sales, Zions Investment Securities, Inc. nevertheless contributed $730,000 in pretax income, rent income and revenue sharing to the Company's banking operations. Net income, which is included in the banking operations results, was $193,000, a 37.5% reduction from the $309,000 earned in 1993.
1994 Economic Trends
The Intermountain region continued to exhibit a healthy economy during 1994, though the pace of economic growth slowed somewhat in the Company's primary market area of Utah. Employment growth in Utah totaled 6.2% in 1994, down from 6.9% in 1993, while residential construction slowed 13% between the first and fourth quarters of 1994. Commercial construction remains strong, driven by low vacancy rates. Although it appears that Utah may lose approximately 2,000 defense jobs over the next few years as a result of downsizing at Defense Depot Ogden and Dugway Proving Grounds, the future of the state's largest employer, Hill Air Force Base, currently appears secure, inasmuch as the Department of Defense has not recommended the facility's closure to the Base Closure and Realignment Commission.
Nevada's employment growth slowed to 4.2% in 1994 from 7.2% in 1993 as a result of the completion of several major hotel construction projects. The state's net gaming revenues - an indicator of tourist activity - rose 16% in the fourth quarter of 1994 as compared to the year-earlier period.
Employment grew 4.9% in Arizona in 1994 compared to 4.1% in 1993. There has been a substantial reduction in office vacancy rates in Phoenix and Tucson in recent months, with the result that suburban office vacancy rates are now well below national averages.
The Federal Reserve System moved aggressively during 1994 to slow the rate of growth in the nation's economy. The result was a two- and-a-half percentage point increase in the prime rate, and commensurate increases in intermediate and long-term rates, producing the most difficult fixed-income market in several decades. The increase in rates significantly affected mortgage lending activity, as retail mortgage originations declined. The rise in interest rates also slowed retail and institutional investment sales.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both federal and state law. The information contained in this section summarizes portions of the applicable laws and regulations relating to the supervision and regulation of Zions Bancorporation and its subsidiaries. These summaries do not purport to be complete, and they are qualified in their entirety by reference to the particular statutes and regulations described. Any change in applicable law or regulation may have a material effect on the business and prospects of Zions Bancorporation and its subsidiaries.
Bank Holding Company Regulation
Zions Bancorporation is a bank holding company within the meaning of the Bank Holding Company Act and is registered as such with the Federal Reserve Board. Under the current terms of that Act, activities of Zions Bancorporation, and those of companies which it controls or in which it holds more than 5% of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Bank holding companies, such as Zions Bancorporation, are required to file with the Federal Reserve Board certain reports and information and are required to obtain prior approval of the Board to engage in an new activity or to acquire more than 5% of any class of voting stock of any company. Generally, no application to acquire shares of a bank located outside that state in which the operations of the applicant's banking subsidiaries were principally conducted on the date it became subject to the Act may be approved by the Federal Reserve Board unless such acquisition is specifically authorized by the laws of the state in which the bank whose shares are to be acquired is located. In the meantime, most state have specifically authorized the acquisition of banks located in those states by out-out-state companies, in many cases subject to various restrictions.
The Federal Reserve Board has authorized the acquisition and control by bank holding companies of savings and loan associations and certain other savings institutions without regard to geographic restrictions applicable to acquisition of shares of a bank.
The Riegle-Neal Interstate Branching and Efficiency Act of 1994 ("Riegle-Neal Act") permits, beginning one year after enactment and subject to approval by the Federal Reserve Board, bank holding companies to acquire either control of, or substantial assets of, a bank located outside the bank holding company's home state. These acquisitions are subject to limitations which are mentioned in the discussion on "Interstate Banking". The Riegle-Neal Act reaffirms the right of states to segregate and tax separately incorporated subsidiaries of a bank or bank holding company. The Riegle-Neal Act also affects interstate branching and merger.
The Federal Reserve Board is authorized to adopt regulations affecting various aspects of bank holding companies. Pursuant to the general supervisory authority of the Bank Holding Company Act and directives set forth in the International Lending Supervision Act of 1983, the Federal Reserve Board has adopted capital adequacy guidelines prescribing both risk-based capital and leverage ratios.
Regulatory Capital Requirements
Risk-Based Capital Guidelines
The Federal Reserve Board established risk-based capital guidelines for bank holding companies effective March 15, 1989. The guidelines define Tier I Capital and Total Capital. Tier I Capital consists of common and qualifying preferred shareholders' equity and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% (and in some cases up to 100%) of investment in unconsolidated subsidiaries. Total Capital consists of Tier I Capital plus qualifying mandatory convertible debt, perpetual debt, certain hybrid capital instruments, certain preferred stock not qualifying as Tier I Capital, subordinated and other qualifying term debt up to specified limits, and a portion of the allowance for credit losses, less investments in unconsolidated subsidiaries and in other designated subsidiaries or other associated companies at the discretion of the Federal Reserve Board, certain intangible assets, a portion of limited-life capital instruments approaching maturity and reciprocal holdings of banking organizations' capital instruments. The Tier I component must constitute at least 50% of qualifying Total Capital.
Risk-based capital ratios are calculated with reference to risk-weighted assets, which include both on-balance sheet and off-balance sheet exposures. The risk-based capital framework contains four risk-weighted categories for bank holding company assets -- 0%, 20%, 50%, and 100%. Zero percent risk-weighted assets include, inter alia, cash and balances due from Federal Reserve Banks, and obligations unconditionally guaranteed by the U.S. government or its agencies. Twenty percent risk-weighted assets include, inter alia, claims on U.S. Banks and obligations guaranteed by U.S. government sponsored agencies as well as general obligations of states or other political subdivisions of the United States. Fifty percent risk-weighted assets include, inter alia, loans fully secured by first liens on one to-four-family residential properties, subject to certain conditions. All assets not included in the foregoing categories are assigned to the 100% risk-weighted category, including loans to commercial and other borrowers. As of year-end 1992, the minimum required ratio for qualifying Total Capital became 8%, of which at least 4% must consist of Tier I Capital. At December 31, 1994, the Company's Tier I and Total Capital ratios were 11.81% and 14.96%, respectively.
The current risk-based capital ratio analysis establishes minimum supervisory guidelines and standards. It does not evaluate all factors affecting an organization's financial condition. Factors which are not evaluated include (i) overall interest rate exposure; (ii) liquidity, funding, and market risks; (iii) quality and level of earnings; (iv) investment or loan portfolio concentrations; (v) quality of loans and investments; (vi) the effectiveness of loan and investment policies; (vii) certain risks arising from nontraditional activities; and (viii) management's overall ability to monitor and control other financial and operating risks, including the risks presented by concentrations of credit and nontraditional activities. The capital adequacy assessment of federal bank regulators will, however, continue to include analyses of the foregoing considerations and in particular, the level and severity of problem and classified assets.
Minimum Leverage Ratio
On June 20, 1990, the Federal Reserve Board adopted new capital standards and leverage capital guidelines that include a minimum leverage ratio of 3% Tier I Capital to total assets (the "leverage ratio"). The leverage ratio is used in tandem with the final risk-based ratio of 8% that took effect at the end of 1992.
The Federal Reserve Board has emphasized that the leverage ratio constitutes a minimum requirement for well-run banking organizations having well-diversified risk, including no undue interest rate exposure, excellent asset quality, high liquidity, good earnings, and a composite rating of 1 under the Interagency Bank Rating System. Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not exhibit the characteristics of a strong, well-run banking organization described above, will be required to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a "tangible Tier I Capital Leverage Ratio" (deducting all intangibles) and other indices of capital strength in evaluating proposals for expansion or new activities. At December 31, 1994, the Company's Tier I leverage ratio was 6.24%.
The Federal Reserve Board has adopted amendments to its capital guidelines, effective as of December 31, 1994, under which bank holding companies and state member banks must deduct from Tier I Capital in calculating risk-based capital and leverage ratios net unrealized holding losses on available-for-sale equity securities (i.e., those securities a bank does not have the positive interest and ability to hold to maturity, but which it has no intent to trade as a part of a trading account). Implementation of this amendment to the Federal Reserve Board's capital guidelines has not resulted in a material increase in the capital requirement applicable to it. The Federal Reserve Board has also adopted a final rule amending its capital guidelines effective April 1, 1995, limiting the amount of certain deferred tax assets that may be included by bank holding companies and member banks in Tier I Capital for calculation of risk-based capital and leverage ratios. Zions Bancorporation does not anticipate that implementation of this amendment to the Federal Reserve Board's capital guidelines will result in a material increase in the capital requirements applicable to it. The Federal Reserve Board has also recently published proposed amendments to its risk-based capital guidelines which, if adopted in their current form, would generally increase the amount of capital required to be carried against certain long-term derivative contracts; the proposal also recognizes the effect of certain bilateral netting arrangements in reducing potential future exposure under these contracts. Until the proposed amendments are adopted in final form by the Federal Reserve Board, Zions Bancorporation cannot predict their effect upon the capital requirements applicable to it.
Other Issues and Developments Relating to Regulatory Capital
Pursuant to such authority and directives set forth in the International Lending Supervision Act of 1983, the Comptroller, the FDIC, and the Federal Reserve Board have issued regulations establishing the capital requirements for banks under federal law. The regulations, which apply to Zions Bancorporation's banking subsidiaries, establish minimum risk-based and leverage ratios which are substantially similar to those applicable to the Company. As of December 31, 1994, the risk-based and leverage ratios of each of Zions Bancorporation's banking subsidiaries exceeded the minimum requirements.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was signed into law. FDICIA subjects banks to significantly increased regulation and supervision. Among other things, FDICIA requires federal bank regulatory authorities to revise, prior to June 19, 1993, their risk-based capital guidelines to ensure that those standards take account of interest rate risk, concentrations of credit, and the risk of nontraditional activities, as well as reflect the actual performance and risk of multifamily mortgages.
Pursuant to the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle-Neal Act"), signed into law on September 23, 1994, such revisions by the federal banking agencies to their risk-based capital guidelines must also take account of the size and activities of insured institutions and not cause undue reporting burdens to them. The manner of implementation by the FDIC of this requirement mandated by FDICIA, as modified by the Riegle Act, is described below:
(i) In 1993 and 1994, the Federal Reserve Board, the Comptroller and the FDIC adopted rules which assigned a 50% risk weight for loans that are fully secured by multifamily residential property and do not exceed 80% of the property's value. To be eligible for the 50% risk weight, the property's annual net operating income must be 120% of the amount to the annual debt service and the loan must be amortized within 30 years. The principal and interest payments must be made on a timely basis for one year before the 50% risk weight may be applied and the loan must provide for principal repayment beginning within seven years of the date of the loan. Implementation of these rules have not had a material adverse effect upon the capital requirements applicable to Zions Bancorporation or upon those applicable to its bank subsidiaries.
(ii) The federal banking agencies have adopted rules, effective January 17, 1995, under which they will take account of risks from concentrations of credit (in specific countries, region, industries and loan types) and from nontraditional activities in their analyses of capital adequacy of state nonmember banks. Pursuant to the rule, in such institutions are required to identify, monitor and control, significant exposures from concentrations of credit and from nontraditional activities, and hold additional capital above the regulatory minimums to reflect such risks. The level of such risks, as well as an institution's ability to identify, monitor and control them, will be considered by the federal banking agencies in determining the capital adequacy of the institution. Zions Bancorporation does not anticipate the implementation of this rule will result in an increase in the capital requirements applicable to it or upon those applicable to its bank subsidiaries.
(iii) On September 14, 1993, the Federal Reserve Board, the Comptroller and the FDIC published in the Federal Register a proposed measure of interest rate risk exposure which measures such exposure as the effect that a specified change in market interest rates would have on the net economic value of banks. Under this proposal, banks (excluding certain "low risk" institutions as defined therein) would calculate and report estimated changes in their net economic value resulting from the effect of specified changes in market interest rates on their assets, liabilities and off-balance sheet positions, utilizing either a supervisory model or approved internal models. The proposal sets forth two alternative methods for utilizing such results in assessing institutions' capital adequacy for interest rate risk exposure. One method would require institutions to hold capital equal to the dollar decline in their net economic value exceeding a supervisory threshold of one percent of total assets; the other method provides for an agency assessment of institutions' capital needs for interest rate risk in light of both the level of measured interest rate risk exposure and qualitative factors. However, the proposal is still under consideration. Because the final terms of the regulators' implementation of this requirement of FDICIA are not yet known, Zions Bancorporation cannot predict the effect the inclusion of interest rate risk factors in the risk-based capital rules of the federal banking agencies will have upon capital requirements applicable to it or its bank subsidiaries.
FDICIA amended Section 38 of the Federal Deposit Insurance Act to require the federal banking regulators to take "prompt corrective action" in respect of banks that do not meet minimum capital requirements and imposes certain restrictions upon banks which meet minimum capital requirements but are not "well-capitalized" for purposes of FDICIA. FDICIA establishes five capital tiers: "well- capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized."
Implementing regulations adopted by the federal banking agencies in September 1992 and effective on December 19, 1992 define the capital categories for banks which will determine the necessity for prompt corrective actions by the federal banking agencies. A bank may be placed in a capitalization category that is lower than is indicated by its capital position if it receives an unsatisfactory examination rating with respect to certain matters.
Under the regulations, a "well-capitalized" institution has a minimum total capital to total risk-weighted assets ratio of at least 10 percent, a minimum Tier I capital to total risk-weighted assets ratio of at least 6 percent, a minimum leverage ratio of at least 5 percent, and is not subject to any written order, agreement, or directive; an "adequately capitalized" institution has a total capital to total risk-weighted assets ratio of at least 8 percent, a Tier I capital to total risk-weighted assets ratio of at least 4 percent, and a leverage ratio of at least 4 percent (3 percent if given the highest regulatory rating and not experiencing significant growth), but does not qualify as "well-capitalized. An "undercapitalized" institution fails to meet any one of the three minimum capital requirements. A "significantly undercapitalized" institution has a total capital to total risk-weighted assets ratio of less than 6 percent, a Tier I capital to total risk-weighted assets ratio of less than 3 percent or a Tier I leverage ratio of less than 3 percent. A "critically undercapitalized" institution has a Tier I leverage ratio of 2 percent or less. Under certain circumstances, a "well-capitalized," "adequately capitalized," or "undercapitalized" institution may be required to comply with supervisory actions as if the institution was in the next lowest capital category.
Failure to meet capital guidelines could subject a bank to a variety of restrictions and enforcement remedies. Under FDICIA, all insured banks are generally prohibited from making any capital distributions and from paying management fees to persons having control of the bank where such payments would cause the bank to be undercapitalized. Holding companies of significantly undercapitalized, critically undercapitalized and certain undercapitalized banks may be required to obtain the approval of the Federal Reserve Board before paying capital distributions to their shareholders. Moreover, a bank that is not well-capitalized is generally subject to various restrictions on "pass through" insurance coverage for certain of its accounts and is generally prohibited from accepting brokered deposits and offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited). Such banks and their holding companies are also required to obtain regulatory approval prior to their retention of senior executive officers. Banks which are classified undercapitalized, significantly undercapitalized or critically undercapitalized are required to submit capital restoration plans satisfactory to their federal banking regulator and guaranteed within stated limits by companies having control of such banks (i.e., to the extent of the lesser of five percent of the institution's total assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with its capital restoration plan, until the institution is adequately capitalized on average during each of four consecutive calendar quarters), and are subject to regulatory monitoring and various restrictions on their operations and activities, including those upon asset growth, acquisitions, branching and entry into new lines of business and may be required to divest themselves of or liquidate subsidiaries under certain circumstances. Holding companies of such institutions may be required to divest themselves of such institutions or divest themselves of or liquidate nondepository affiliates under certain circumstances. Critically undercapitalized institutions are also prohibited from making payments of principal and interest on debt subordinated to the claims of general creditors and are generally subject to the mandatory appointment of a conservator or receiver.
Other Regulations
FDICIA requires the federal banking agencies to adopt regulations prescribing standards for safety and soundness of insured banks and their holding companies, including standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality, earnings and stock valuation, as well as other operational and managerial standards deemed appropriate by the agencies. Upon a determination by a federal banking agency that an insured bank has failed to satisfy any such standard, the bank will be required to file an acceptable plan to correct the deficiency. If the bank fails to submit or implement an acceptable plan, the federal banking agency may, and in some instances must, issue an order requiring the institution to correct the deficiency, restrict its asset growth, increase its ratio of tangible equity to assets, or impose other operating restrictions. The Riegle Act modified this provision of FDICIA to authorize the federal banking agencies to prescribe safety and soundness standards by regulation or by guidelines for all insured depository institutions, afford the federal banking agencies flexibility to establish asset quality, earnings and stock valuation standards that they determine to be appropriate and eliminate the requirement that such standards apply to depository institution holding companies. On February 2, 1995, the Federal Reserve Board agreed to seek (and Zions Bancorporation believes the other federal banking agencies will soon seek) public comment on proposed guidelines applicable to state member banks setting forth asset quality, earnings and stock valuation standards, final guidelines with respect to all other standards required under FDICIA and a final rule establishing deadlines and procedures for submission and review of safety and soundness compliance plans and issuance of compliance orders. In the view of the Federal Reserve Board, the proposed and final standards, respectively, do not represent a change in existing policies but, instead, formalize fundamental standards already applied by the agencies. In general, the standards establish objectives of proper operations and management while leaving the specific methods for achieving those objectives to each institution. The final rule implements the requirements of FDICIA regarding the submission and review of safety and soundness plans by institutions failing to meet the prescribed standards and the issuance of orders where institutions have failed to submit acceptable compliance plans or implement and accepted plan in any material respect. Zions Bancorporation does not believe that implementation of the final guidelines and rule will have a material adverse effect upon the operations or earnings of its bank subsidiaries. Until final guidelines prescribing asset quality, earnings and stock valuation standards are adopted by the federal banking agencies, Zions Bancorporation cannot predict the effect of their application to its operations or earnings or the operations or earnings of its subsidiaries.
FDICIA also contains provisions which, among other things, restrict investments and activities as principal by state nonmember banks to those eligible for national banks, impose limitations on deposit account balance determinations for the purpose of the calculation of interest, and require the federal banking regulators to prescribe, implement, or modify standards, respectively, for extensions of credit secured by liens on interests in real estate or made for the purpose of financing construction of a building or other improvements to real estate, loans to bank insiders, regulatory accounting and reports, internal control reports, independent audits, exposure on interbank liabilities, contractual arrangements under which institutions receive goods, products or services, deposit account-related disclosures and advertising, as well as to impose restrictions on Federal Reserve discount window advances for certain institutions and to require that insured depository institutions generally be examined on-site by federal or state personnel at least every 12 months.
In connection with an institutional failure or FDIC rescue of a financial institution, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") grants to the FDIC the right, in many situations, to charge its actual or anticipated losses against commonly controlled depository institution affiliates of the failed or rescued institution (although not against a bank holding company itself). FIRREA also explicitly allows bank holding companies to acquire healthy as well as troubled savings associations (including savings and loan associations and federal savings banks) under Section 4 of the Bank Holding Company Act. In connection with this authorization, the Federal Reserve Board has been instructed not to impose so-called "tandem operating restrictions" which might otherwise limit the joint marketing or joint operations of affiliated banks and thrifts beyond those restrictions otherwise embodied in law. FIRREA also relieves bank holding companies that own savings associations of certain duplicative or intrusive savings and loan holding company regulations and, in some instances, allows savings associations that have been acquired by bank holding companies to merge into affiliated banks or become banks.
On October 28, 1992, the Housing and Community Development Act of 1992 was enacted which, inter alia, modified prior law regarding the establishment of compensation standards by the federal banking agencies, deposit account disclosures, loans to bank insiders and real estate appraisal requirements; made certain technical corrections to FDICIA; imposed new sanctions upon banks convicted of money laundering or cash transaction reporting offenses; and restricted the methods banks may employ to calculate and refund prepaid interest on mortgage refinancing and consumer loans. In addition, on October 23, 1992, the Depository Institutions Disaster Relief Act of 1992 was enacted, affording the federal banking agencies limited discretion to provide relief from certain regulatory requirements to depository institutions doing business or seeking to do business in an emergency or major disaster area. Zions Bancorporation does not currently expect that the implication of these laws will have a material adverse effect upon its operations and business or upon the operations and business of its subsidiaries.
On August 10, 1993, the President signed into law the Omnibus Budget Reconciliation Act of 1993 which contains provisions that, inter alia, affect the amortization of intangible assets by banks, require securities dealers (including banks) to adopt mark-to-market accounting to calculate income taxes, transfer surplus funds from the Federal Reserve System to the Department of the Treasury, authorize the United States government to originate student loans and establish a preference for depositors in liquidations of FDIC-insured banks. Zions Bancorporation does not currently expect that the implementation of these laws will have a material adverse effect upon its earnings or capital position or the earnings or capital position of its subsidiaries.
The Riegle Act, in addition to enacting measures intended to increase credit available to businesses in distressed communities (by providing incentives to lenders to provide credit in those communities), remove impediments to the securitization of small business loans, improve the National Flood Insurance Program and strengthen enforcement against money laundering, mandates modifications to federal laws and regulations affecting banks and bank holding companies in an attempt to reduce regulatory and administrative burdens on these entities (including the modifications to requirements mandated by FDICIA noted previously). These changes include, inter alia, requirements that federal banking agencies consider the burden and benefits which may affect insured depository institutions and their customers when establishing the effective dates of certain new regulations or imposing certain new administrative compliance requirements, that certain new federal regulations affecting depository institutions and amendments to existing regulations take effect on the first day of a calendar quarter and that federal banking agencies streamline regulatory requirements and eliminate duplicative filings and coordinate examinations of financial institutions. The Riegle Act also provides for simplified bank holding company formation and bank and bank holding company merger application procedures, modified insider lending rules and capital rules applicable to assets transferred with recourse. Because all provisions of the Riegle Act have not been implemented, Zions Bancorporation cannot predict the effect of these changes upon its operations or upon those of its subsidiaries.
The Community Reinvestment Act (CRA) requires banks to help serve the credit needs in their communities, including credit to low and moderate income individuals and geographies. Should the Company or its subsidiaries fail to adequately serve the community, there are penalties which might be given. Corporate applications to expand branches, relocate, add subsidiaries and affiliates, and merge with or purchase other financial institutions could be denied. Community groups are encouraged through the regulation to protest applications for any bank subject to this regulation if they feel that the bank is not serving the credit needs of the community in which it serves. The Company and its subsidiaries have been deemed by regulators in the past to be adequately serving its communities. A proposed revision to CRA is now being considered by the regulators. Zions Bancorporation cannot predict the effect that proposed changes, if adopted, would have on its operations and upon those of its subsidiaries.
The nature of the banking and financial services industry, as well as banking regulation, may be further affected by various legislative and regulatory measures currently under consideration. Such measures include, inter alia, legislation designed to permit increased affiliations between commercial and financial firms (including securities firms) and federally-insured banks, reduce regulatory burdens on financial institutions, impose a moratorium on the application of federal regulations and establish standards for federal supervision of derivative activities of insured institutions. It is impossible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what the effect of their adoption will be on Zions Bancorporation or its subsidiaries.
There are many other regulations requiring detailed compliance procedures which increase costs and require additional time commitments of employees. Regulators and the Congress continue to put in place rules and laws to protect consumers, which have a cumulative additional impact on the cost of doing business. At this point, management cannot completely assess how much earnings might be reduced from these consumer laws.
Deposit Insurance Assessments
The insured bank subsidiaries of Zions Bancorporation are required to pay semi-annual deposit insurance assessments to the Bank Insurance Fund ("BIF"). FDICIA requires the FDIC to establish a schedule to increase the reserve ratio of the BIF to 1.25% of insured deposits (or such higher ratio as the FDIC determines to be justified for any year by circumstances raising a significant risk of substantial future losses) over a 15-year period, and to increase the assessment rate on banks, if necessary, to achieve that ratio. FDICIA also requires the FDIC to establish a risk-based assessment system for deposit insurance which will take into account the probability that the deposit insurance fund will incur a loss with respect to an institution, the likely amount of such loss and the revenue needs of the deposit insurance fund.
The FDIC revised, effective October 1, 1993, its deposit insurance regulation to establish a permanent risk-based assessment system. Each insured bank's insurance assessment rate is determined by the risk assessment classification into which it has been placed by the FDIC. The FDIC places each insured bank in one of nine risk assessment classifications based upon its level of capital and supervisory evaluations by its regulators: "well-capitalized" banks, "adequately capitalized" banks or "less-than-adequately capitalized" banks, with each category of banks divided into subcategories of banks which are either "healthy," of "supervisory concern" or of "substantial supervisory concern." An eight-basis point spread exists between the assessment rate established for the highest and lowest risk classification, so that banks classified as strongest by the FDIC are subject to a rate of .23% (the same rate as under the previous flat-rate assessment system) while those classified as weakest by the FDIC are subject to a rate of .31% (with intermediate rates of .26,%, .29%, and .30%). The FDIC is authorized to increase assessment rates beyond those currently in effect if, in the judgment of its Board of Directors, the condition of the BIF so requires. The FDIC also possesses authority to impose special assessments from time to time. Implementation of the permanent risk-based deposit insurance assessment system has not had a material adverse impact on the financial condition or results of operations of Zions Bancorporation or upon those of its bank subsidiaries.
Premiums paid to the FDIC have been an increasing burden on bank earnings. In recognition of this trend, the FDIC may, when the BIF reaches a target ratio of 1.25% of insured deposits, reduce insurance premiums. The Board of Directors of the FDIC is currently considering a proposal under which the assessment rate payable by the healthiest banks would be reduced from .23% to .04% as such time as the target ratio is achieved; other assessment rates, depending on an institution's supervisory risk group, would be .07%, .14%, .21%, .28% and .31%. The proposal would also establish a procedure for adjusting assessment rates semiannually within a range of up to five basis points without seeking public comment. The FDIC is also considering whether the deposit assessment base, against which the applicable assessment rate is multiplied in determining the deposit insurance assessment to be paid by each insured institution, should be redefined in light of the adoption of the risk-based assessment system and certain statutory and other developments effecting insured depository institutions. Currently, the assessment base is defined to include the total domestic deposits of each insured institution as adjusted for certain elements. Depending upon the nature of the changes, if any, made by the FDIC to the definition of the assessment base, the aggregate liabilities of each insured institution subject to assessment could increase or could be reduced, or an assessment base consisting of other than bank liabilities could be adopted, thereby potentially affecting the earning of each institution. Until the nature of the changes to be adopted by the FDIC to the assessment base definition are known, Zions Bancorporation cannot predict their effect upon its overall financial condition or results of operations or upon those of its bank subsidiaries.
Interstate Banking
Existing laws and various regulatory developments have allowed financial institutions to conduct significant activities on an interstate basis for a number of years. During recent years, a number of financial institutions have expanded their out-of-state activities and various states have enacted legislation intended to allow certain interstate banking combinations which otherwise would be prohibited by federal law.
Under the laws of Utah, Nevada, an Arizona, respectively, any out-of-state bank or bank holding company may acquire a Utah, Nevada, or Arizona bank or bank holding company upon the approval of the bank supervisor of the state. There is no requirement that the laws of the state in which the out-of-state bank or bank holding company's operations are principally conducted afford reciprocal privileges to Utah-, Nevada - or Arizona-based acquirers.
The Riegle-Neal Act dramatically affects interstate banking activities. As discussed previously, the Riegle-Neal Act allows the Federal Reserve Board to approve the acquisition by a bank holding company of control or substantial assets of a bank located outside the bank holding company's home state as of September 29, 1995. Beginning on June 1, 1997, and earlier if permitted by applicable state law, an insured bank may apply to the appropriate federal agency for permission to merge with an out-of-state bank and convert its offices into branches of the resulting bank. States retain the option to prohibit out-of-state mergers if they enact a statute specifically barring such mergers before June 1, 1997 and such law applies equally to all out-of-state banks.
Interstate mergers authorized by the Riegle-Neal Act are subject to conditions and requirements, including, inter alia, adequate capitalization and management of the acquiring bank or bank holding company, existence of the acquired bank for up to five years before purchase where required under state law, and limitations on control by the acquiring bank holding company of not more than 10% of the total amount of deposits in insured depository institutions in the United States or not more than 30% of the deposits in insured depository institutions within that state. States may impose lower deposit concentration limits, so long as those limits apply to all bank holding companies equally. Additional requirements placed on mergers include conformity with state law branching requirements and compliance with "host state" merger filing requirements to the extent that those requirements do not discriminate against out-of-state banks or out-of-state bank holding companies.
The Riegle-Neal Act also permits banks to establish and operate a "de novo branch" in any state that expressly permits all out-of-state banks to establish de novo branches in such state, if the law applies equally to all banks. (A "de novo branch" is a branch office of a national bank or state bank that is originally established as a branch and does not become a branch as a result of an acquisition, conversion, merger, or consolidation.) Utilization of this authority is conditioned upon satisfaction of most of the conditions applicable to interstate mergers under the Riegle-Neal Act, including, inter alia, adequate capitalization and management of the branching institution, satisfaction with certain filing and notice requirements imposed under state law and receipt of federal regulatory approvals.
Because important components of the Riegle-Neal Act have not yet become effective, Zions Bancorporation cannot predict the effects of the Act's implementation upon its operations or earnings or upon those of its subsidiaries.
The commercial banking subsidiaries are supervised and regularly examined by various federal and state regulatory agencies. Deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, mergers and consolidations, electronic funds transfers, management practices, and other aspects of operations are subject to regulation. In addition, numerous federal, state, and local regulations set forth specific restrictions and procedural requirements with respect to the extension of credit, credit practices, the disclosure of credit terms, and discrimination in credit transactions. The various regulatory agencies, as an integral part of their examination process, periodically review the banking subsidiaries' allowances for loan losses. Such agencies may require the banking subsidiaries to recognize additions to such allowances based on their judgments using information available to them at the time of their examinations.
As a consequence of the extensive regulation of the commercial banking business, the Company cannot yet assess the impact of these legislative and regulatory mandates on the commercial banking industry which may increase the cost of doing business that are not required of the industry's nonbank competitors.
Federal and state legislation affecting the banking industry have played, and will continue to play, a significant role in shaping the nature of the financial service industry. Various legislation, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds, is from time to time introduced. The Company cannot determine the ultimate effect that FDICIA and the implementing regulations to be adopted thereunder, or any other potential legislation, if enacted, would have upon its financial condition or operations.
In addition, there are cases pending before federal and state courts that seek to expand or restrict interpretations of existing laws and their accompanying regulations affecting bank holding companies and their subsidiaries. It is not possible to predict the extent to which Zions Bancorporation and its subsidiaries may be affected by any of these initiatives.
Government Monetary Policies and Economic Controls
The earnings and business of the Company are affected by general economic conditions. In addition, fiscal or other policies that are adopted by various regulatory authorities of the United States and by agencies can have important consequences on the financial performance of the Company. The Company is particularly affected by the policies of the Federal Reserve Board which regulate the national supply of bank credit. The instruments of monetary policy available to the Federal Reserve Board include open-market operations in United States government securities; changing the discount rates of member bank borrowings; imposing or changing reserve requirements against member bank deposits; and imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying combinations to influence the overall growth of bank loans, investments and deposits, and the interest rates charged on loans or paid for deposits.
However, in view of changing conditions in the economy and the effect of the credit policies of monetary authorities, it is difficult to predict future changes in loan demand, deposit levels and interest rates, or their effect on the business and earnings of Zions Bancorporation and its subsidiaries. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.
Competition
Zions Bancorporation and its subsidiaries operate in a highly competitive environment. The banking subsidiaries compete with other banks, thrift institutions, credit unions and money market, and other mutual funds for deposits and other sources of funds. In addition, Zions Bancorporation and its bank and nonbank subsidiaries face increased competition with respect to the diverse financial services and products they offer. Competitors include not only other banks, thrift institutions, and mutual funds, but also leasing companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as are bank holding companies and banks such as Zions Bancorporation and its banking subsidiaries.
The Company expects that competitive conditions will continue to intensify as a result of technological advances. Technological advances have, for example, made it possible for nondepository institutions to offer customers automatic transfer systems and other automated-payment systems services that have been traditional banking products.
Employees
The Company employs approximately 2,754 full- and part-time people with approximately 2,573 being employed by the banking subsidiaries. The Company had 2,695 full-time equivalent employees at December 31, 1994, compared to 2,761 at December 31, 1993. Banking subsidiaries had 2,506 full-time equivalent employees at the end of 1994, compared to 2,573 a year earlier. The Company believes that it enjoys good employee relations. In addition to competitive salaries and wages, Zions Bancorporation and its subsidiaries contribute to group medical plans, group insurance plans, pension, stock ownership and profit sharing plans.
Supplementary Information
The following supplementary information, which is required under Guide 3 (Statistical Disclosure by Bank Holding Companies), is found in this report on the pages indicated below, and should be read in conjunction with the related financial statements and notes thereto.
ITEM 2.



ITEM 2. PROPERTIES
In Utah, fifty (50) of Zions First National Bank's eighty-six (86) offices are located in buildings owned by the Company and the other thirty-six (36) are on leased premises. In Nevada, four (4) of Nevada State Bank's twenty-one (21) offices are located in buildings owned and the other seventeen (17) are on leased premises, and in Arizona, National Bank of Arizona owns three (3) offices and leases seven (7) offices. The annual rentals under long-term leases for such banking premises are determined under various formulas and include as various factors, operating costs, maintenance and taxes.
Zions Bancorporation is lessee under a 25-year lease, of which 23 years have expired, of a 14-story building in downtown Salt Lake City, Utah. The Company's subsidiaries have leased the ground floor and two other floors. The J.C. Penney Company, Inc., has subleased nine floors for offices. The remaining two floors are sublet to various tenants.
The Company's subsidiaries conducting lease financing, insurance, mortgage servicing, and discount brokerage activities operate from leased premises.
For information regarding rental payments, see note 9 of Notes to Consolidated Financial Statements, which appears in Part II, Item 8, on page 57 of this report.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
During 1988, a lawsuit was brought in the United States District Court, Utah District, against Zions First National Bank in connection with its performance of duties as an indenture trustee for certain investors in real estate and other syndication projects. In September 1992, a motion was granted allowing an amended complaint containing allegations that plaintiffs intend to proceed as a class action to recover approximately $23 million, prejudgment interest, attorneys' fees, and additional amounts under certain statutory provisions and common law. No motion to certify the classes has been filed, and the Bank intends to vigorously oppose such motion and to defend the entire action. Although no assurances can be given as to the outcome, the Company continues to believe that it has meritorious defenses to such lawsuit, and that there is insurance coverage for a substantial portion of the amount claimed.
The Company is also the defendant in various other legal proceedings arising in the normal course of business. The Company does not believe that the outcome of any of such proceedings, including the lawsuit discussed in the preceding paragraph, will have a material adverse effect on its consolidated financial position.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions, and backgrounds of the Company's executive officers as of February 27, 1995, are set forth as follows:
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Principal market where common stock is traded:
Nasdaq National Market Symbol "ZION"
High and low bid quotations on quarterly basis for past three years:
Number of common shareholders of record as of latest practicable date:
3,926 common shareholders as of February 27, 1995
Frequency and amount of dividends paid during three years:
Description of any restrictions on the issuer's present or future ability to pay dividends:
Funds for the payment of dividends by Zions Bancorporation have been obtained primarily from dividends paid by the commercial banking and other subsidiaries. In addition to certain statutory limitations on the payment of dividends, approval of federal and/or state banking regulators may be required in some instances for any dividend to Zions Bancorporation by its banking subsidiaries. The payment of future dividends therefore is dependent upon earnings and the financial condition of the Company and its subsidiaries as well as other factors.
ITEM 6.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is derived from the audited consolidated financial statements of the Company. It should be read in conjunction with the Company's consolidated financial statements and the related notes and with management's discussion and analysis of financial condition and results of operations and other detailed information included elsewhere herein.
(Dollars in thousands, except per share and ratio data)
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the Company's financial condition and results of operations as of and for the years ended December 31, 1994, 1993, and 1992 should be read in conjunction with the consolidated financial statements of the Company and detailed information presented elsewhere herein.
OPERATING RESULTS
Zions Bancorporation's consolidated net income rose to $63.8 million in 1994 as compared to net income of $58.2 million in 1993 and $47.2 million in 1992. Net income per common share in 1994 was $4.37 as compared to $4.08 in 1993 and $3.42 in 1992. Financial results have been restated for prior periods to reflect the pooling-of-interests acquisition of National Bancorp of Arizona during the first quarter of 1994. Earnings results for 1993 were positively affected in the net amount of $1,659,000 or $.12 per share due to the cumulative effect of changes in accounting principles implemented during the first quarter of the year. The Company's earnings for the year ended December 31, 1993 were also negatively affected by a one-time expense of $6,022,000 included in noninterest expenses related to early extinguishment of certain long-term debt.
The earnings results for 1994 represent a historic high for income before income taxes and net income. Some of the factors affecting the increase in earnings (excluding the aforementioned net benefit resulting from the cumulative effect of changes in accounting principles and the expense relating to the early extinguishment of debt) were a $23.9 million (13.7%) increase in net interest income, a $.8 million (27.1%) decrease in the provision for loan losses, a $1.2 million (5.2%) increase in service charges on deposit accounts and a $.6 million (2.9%) increase in service charges, commissions and fees. These increased contributions to income were partially offset by a $1.5 million (63.4%) decrease in trading account income, a $6.9 million (32.0%) decrease in loan sales and servicing income, a $7.8 million (9.1%) increase in salaries and benefits, a $3.2 million (34.8%) increase in furniture and equipment expense, a $2.2 million (3.2%) increase in all remaining noninterest expenses, and a $1.3 million (4.6%) increase in income taxes.
EARNINGS PERFORMANCE
Net Interest Income, Margin, and Interest Rate Spreads
Net interest income is the difference between the total interest income generated by earning assets and the total interest cost of the funds used to finance assets. Net interest income is the largest component of the Company's revenue. The Company's taxable-equivalent net interest income increased by 13.8% to $203.3 million in 1994 as compared to $178.6 million in 1993. The increased level of taxable-equivalent net interest income was influenced primarily by the increase in average earning assets. The Company attempts to minimize interest rate movement sensitivity through the management of interest rate maturities, and to a lesser extent, the use of off-balance sheet arrangements such as interest rate caps, floors, and interest rate exchange contract agreements. During 1994, the Company had income, net of expense, of $967,000 from the use of such off-balance sheet arrangements compared to $291,000 in 1993 and $9,000 in 1992. The Company intends to continue to use such off-balance sheet arrangements to the extent necessary to minimize its exposure to changes in prevailing interest rates.
Net interest margin is a measure of the Company's ability to generate net interest income and is computed by expressing net interest income (stated on a fully taxable-equivalent basis) as a percentage of earning assets. The Company's net interest margin was 4.07% for 1994 as compared to 4.23% in 1993. The decrease in the margin was due primarily to securitized sales of loans and the expansion of investments in security resell agreements. Securitized sales of loans convert net interest income from loans to noninterest income. The security resell agreements are primarily in U.S. government and U.S. government agency securities which offer low yields but represent low risk to the Company and requires lower consolidated "risk-based" capital. The Company decreased its activity in security resell arrangements during the fourth quarter of 1994.
The spread on average interest-bearing funds is the difference between the yield on earning assets and the cost of interest-bearing funds. The Company's spread on average interest-bearing funds was 3.49% for 1994 as compared to 3.71% in 1993. The spread on average interest-bearing funds has also been reduced by securitized sales of loans and investment in security resell arrangements.
Consolidated average balances, the amount of interest earned or paid, the applicable interest rate for the various categories of earning assets and interest-bearing funds which represent the components of net interest income for the year 1994 and the previous four years; and interest differentials on a taxable-equivalent basis and the effect on net interest income of changes due to volume and rates for the years 1994 and 1993, are shown in tables on pages which follow. Income computed on a taxable-equivalent basis is income adjusted to make income and earning yields on assets exempt from income taxes comparable to other taxable income. The incremental tax rate used for calculating the taxable-equivalent adjustment was 30% in 1994 and 32% in 1993 and each of the years prior.
Distribution of Assets, Liabilities, and Shareholders' Equity, Average Balance Sheets, Yields and Rates
(1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
Distribution of Assets, Liabilities, and Shareholders' Equity, Average Balance Sheets, Yields And Rates
(1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
Distribution of Assets, Liabilities, and Shareholders' Equity, Average Balance Sheets, Yields And Rates
(1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
Analysis of Interest Changes Due to Volume and Rates
(1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
In the tables on the preceeding pages, the principal amounts of nonaccrual and renegotiated loans have been included in the average loan balances used to determine the rate earned on loans. Interest income on nonaccrual loans is included in income only to the extent that cash payments have been received and not applied to principal and is accrued on restructured loans at the reduced rates. Certain restructured loan agreements call for additional interest to be paid on a deferred or contingent basis. Such interest is taken into income only as collected.
In the analysis of interest changes due to volume and rates, the changes due to the volume/rate variance have been allocated to volume. When volume and rate have both increased, the variance has been allocated proportionately to both volume and rate, and when the rate has increased and volume has decreased, the variance has been allocated to rate.
Provision For Loan Losses
The provision for loan losses in 1994 decreased by 27.1% to $2,181,000 in 1994 as compared to $2,993,000 in 1993, and $10,929,000 in 1992. The decrease in loan loss provisions resulted from improved credit risk management and an improved economy which have produced decreases in nonperforming assets.
Noninterest Income
The Company's noninterest income decreased by 8.4% to $73.2 million in 1994 as compared to $79.9 million in 1993 and $62.8 million in 1992. Service charges on deposits increased by 5.2% in 1994 to $24.1 million, primarily as a result of price increases and higher volumes in 1994. Other service charges, commissions, and fees increased by 2.9% in 1994 to $22.0 million primarily as a result of increased fees relating to commercial loan originations. Such increased fees were partially offset by a decline in fees generated through sales of investment products through the Company's discount brokerage operations and personal investment officers, as well as fees from mortgage loan originations during 1994. Trading account income decreased by 63.4% to $.9 million in 1994 as compared to $2.4 million in 1993. Loan sales and servicing income decreased 32.0% to $14.6 million in 1994 primarily as a result of decreased income on real estate loans sold in 1994 and lower excess servicing fees during 1994 on securitized loans sold resulting from competitive pressures, particularly in the indirect consumer loan market. The Company does not recognize an initial gain on the sale of loans but recognizes the income over the servicing life of the sale. Other income increased by 6.4% in 1994 to $7.6 million primarily as a result of gains on the sale of mortgage-servicing rights.
The following table presents the components of noninterest income for the years indicated and a year-to-year comparison expressed in terms of percent changes.
Noninterest Income
Noninterest Expenses
Noninterest expenses increased by 4.3% in 1994 to $174.9 million as compared to $167.8 million in 1993, and $139.1 million in 1992. Salaries and employee benefits increased by 9.1% in 1994 to $93.3 million, primarily as a result of additional salaries and benefits from an acquisition accounted for as a purchase; increased staffing in investment activities; general salary increases; and bonuses, commissions, and profit sharing costs related to increased profitability. Furniture and equipment expenses increased 34.8% in 1994 to $12.5 million, primarily as a result of the expansion of the ATM network and the installation of personal computers and local area networks.
The Company benefited by a decrease of 119.6% in other real estate expense to $(.1) million in 1994 as holding costs declined through the continued sales of other real estate owned properties during 1994. Also, values received in the sales of other real estate owned continued to improve in 1994. F.D.I.C. premiums increased by 4.0% in 1994 to $7.5 million as compared to $7.3 million in 1993 due to higher deposit levels. Telecommunication costs increased 25.4% to $3.8 million as a result of acquisitions and the expansion of ATM and other networks. All other expenses increased 5.9% to $27.6 million in 1994 as compared to $26.1 million in 1993 primarily due to increased ATM network service costs, amortization of investments in community development companies and investment activity expenses. The Company recognized a loss on early extinguishment of debt in the amount of $6.0 million during 1993. This expense consisted of marking to market an interest rate exchange agreement entered into several years ago in conjunction with the issuance of long term floating rate notes, and writing off deferred costs associated with the notes and industrial revenue bonds redeemed.
The following table presents the components of noninterest expenses for the years indicated and a year-to-year comparison expressed in terms of percent changes.
Noninterest Expenses
The following table presents full-time equivalent employees and banking offices at December 31, for the years indicated:
Full-Time Equivalent Employees
Income Taxes
The Company's income taxes increased 13.4% to $30.9 million in 1994 compared to $27.2 million in 1993 and $22.9 million in 1992 primarily due to the increase in income before income taxes. The Company's effective tax rate was 32.6% during 1994 as compared to 32.5% in 1993.
Quarterly Summary
The following table presents a summary of earnings and end-of-period balances by quarter for the years ended December 31, 1994, 1993, and 1992:
Summary of Quarterly Financial Information (Unaudited)
ANALYSIS OF FINANCIAL CONDITION
Liquidity
Liquidity represents the Company's ability to provide adequate funds to meet its financial obligations, including withdrawals by depositors, debt service requirements and operating needs. Liquidity is primarily provided by the regularly scheduled maturities of the Company's investment and loan portfolios. In addition, the Company's liquidity is enhanced by the fact that cash, money market securities, and liquid investments, net of short-term or "purchased" liabilities and wholesale deposits, totaled $1,423.6 million or 41.3% of core deposits at December 31, 1994.
The Company's core deposits, consisting of demand, savings, and money market deposits, and small certificates of deposit, constituted 93.0% of total deposits at December 31, 1994, as compared to 95.6% at December 31, 1993.
Maturing balances in loan portfolios provide flexibility in managing cash flows. Maturity management of those funds is an important source of medium- to long-term liquidity. The Company's ability to raise funds in the capital markets through the "securitization" process and by debt issuances allows the Company to take advantage of market opportunities to meet funding needs at reasonable cost.
The Company manages its liquidity position in order to assure its ability to meet maturing obligations. Through an ongoing review of the Company's levels of interest-sensitive assets and liabilities, efforts are made to structure portfolios in such a way as to minimize the effects of fluctuating interest rate levels on net interest income.
The parent company's cash requirements consist primarily of principal and interest payments on its borrowings, dividend payments to shareholders, and cash operating expenses. The parent company's cash needs are routinely satisfied through payments by subsidiaries of dividends, proportionate shares of current income taxes, management and other fees, and principal and interest payments on subsidiary borrowings from the parent company.
Interest Rate Sensitivity
Interest rate sensitivity measures the Company's financial exposure to changes in interest rates. Interest rate sensitivity is, like liquidity, affected by maturities of assets and liabilities. Interest rate sensitivity is measured in terms of "gaps," defined as the difference between volumes of assets and liabilities whose interest rates are subject to reset within specified periods of time, and "duration," a measure of the weighted average expected lives of the cash flows from assets and liabilities.
The Company, through the management of interest rate "maturities" and the use of off-balance sheet arrangements such as interest rate caps, floors, futures, options, and interest rate exchange agreements, attempts to be reasonably close to neutral. The Company's management exercises its best judgment in making assumptions with respect to prepayments, early withdrawals and other noncontrollable events in managing the Company's exposure to changes in interest rates.
Information as to the Company's sensitivity is presented in a table that follows. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals, after considering the effect of off-balance sheet hedging financial instruments. Since these gaps are actively managed and change daily as the interest rate environment changes, positions at the end of any period may not be reflective of the Company's interest rate position in subsequent periods.
The following table presents information as to the Company's interest rate sensitivity at December 31, 1994:
Maturities and Interest Rate Sensitivity at December 31, 1994
Earning Assets
Average earning assets increased 18.3% to $4,990.4 million in 1994 as compared to the 1993 level of $4,220.1 million and the 1992 level of $3,501.7 million. Earning assets comprised 91.5% of total average assets in 1994 compared with 90.9% in 1993, with average loans representing 51.6% of earning assets in 1994 compared to 52.7% in 1993.
The volume of liquid money market investments increased 10.3% to $869.7 million in 1994 from $788.7 million in 1993. Average securities increased 27.8% to $1,545.7 million in 1994 from $1,209.2 million in 1993. Average loan volume increased 15.9% to $2,575.0 million in 1994 as compared to $2,222.2 million in 1993.
The following table sets forth the composition of average earning assets for the years indicated:
Average Earning Assets
Investment Securities Portfolio
Investment securities prior to December 31, 1993 were held to maturity and carried at amortized cost. At December 31, 1993 the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and segregated the portfolio for securities held to maturity carried at amortized cost, and securities available for sale carried at market. The following table presents the Company's year-end investment securities portfolio.
Investment Securities Portfolio
Maturities and Average Yields of Investment Securities
The following table presents by maturity range and type of security, the average yield of the investment portfolio at December 31, 1994. The average yield is based on effective rates on amortized cost at the end of the year.
Maturities and Average Yields of Investment Securities at December 31, 1994
* An effective tax rate of 30% was used to adjust tax-exempt securities yields to rates comparable to those on fully taxable securities.
At December 31, 1994, the value of the Accessor Funds Inc. and the Federal Home Loan Bank of Seattle stock each exceeded ten percent of shareholders' equity.
Loan Portfolio
During 1994, the Company consummated securitized loan sales of SBA loans, home equity loans, credit card receivables and automobile loans totaling approximately $703.0 million leading to a $322.4 million net increase in securitized receivables outstanding, excluding long-term residential mortgages. After these sales, loans and leases at December 31, 1994 totaled $2,416.1 million, a slight decrease of 3.7% compared to $2,508.2 million at December 31, 1993. Loans held for sale, commercial, financial and agriculture loans, and lease financing declined 54.4%, 3.2%, and .7%, respectively, while real estate and consumer loans increased 3.6% and 3.3%, respectively.
The table below sets forth the amount of loans outstanding by type at December 31 for the years indicated:
Loan Portfolio
The Company has no foreign loans in its loan portfolio.
Loans Serviced
In recent years, many banks and other financial institutions have had an increasing tendency to "securitize" loans by pooling and selling them to investors, with the servicing responsibilities and residual income in excess of financing costs, servicing expenses, and loan losses accruing to the originating institution. The securitization of receivables can assist an institution in effectively utilizing its capital and enhancing its liquidity while at the same time limiting its exposure to loss. The Company's participation in the securitization process, as well as its participation in originating and selling mortgage loans and student loans, has increased in recent years. During 1994, the Company securitized and sold SBA 504 first mortgage loans totaling $43.7 million, home equity credit line receivables totaling $192.4 million, credit card receivables totaling $163.1 million, and automobile loans totaling $303.8 million. At December 31, 1994, real estate loans serviced for others amounted to $1,760.1 million compared to $1,650.4 million at December 31, 1993, and $1,252.8 million at December 31, 1992. Securitized loans serviced for investors at December 31, 1994 totaled $786.6 million compared to $464.2 million at December 31, 1993 and $267.9 million at December 31, 1992.
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table shows maturity distribution and sensitivity to changes in interest rates of the loan portfolio at December 31, 1994:
Loan Maturities and Sensitivity to Changes in Interest Rates
Credit Risk Management
Management of credit risk is a primary objective in maintaining a safe and sound institution. To accomplish this task, the Company has written and placed in effect loan policies to govern each of its loan portfolios. Loan policies assist the Company in providing a framework for consistency in the acceptance of credit and a basis for sound credit decisions. Generally, the Company makes its credit decisions based upon debtor cash flow and available collateral. The Company has structured its organization to separate the lending function from the credit administration function to strengthen the control and independent evaluation of credit activities. In addition, the Company has well-defined standards for grading its loan portfolio, and maintains an internal Credit Examination Department which periodically conducts examinations of the quality, documentation, and administration of the Company's lending departments, and submits reports thereon to a committee of the Board of Directors. Emphasis is placed on early detection of potential problem credits so that action plans can be developed on a timely basis to mitigate losses.
Loan Risk Elements
The following table shows the principal amounts of nonaccrual, past due 90 days or more, restructured loans, and potential problem loans at December 31 for each year indicated:
Includes loans held for sale.
Impact of Nonperforming Loans on Interest Income
The following table presents the gross interest income on nonaccrual and restructured loans that would have been recorded if these loans had been current in accordance with their original terms (interest at original rates), and the amount of interest income on these loans that was included in income for each year indicated:
Potential problem loans consist primarily of commercial loans and commercial real estate loans of $1 million. Management reviews loans graded "special mention" and monitors the status of such loans for becoming potential problem loans and their likelihood of becoming nonperforming loans. At December 31, 1994, management considered no loans as potential problem loans compared to two loans totaling $1,114,000, at December 31, 1993 and three loans totaling $6,263,000 at December 31, 1992. Management believes that for the near future, potential problem loans should remain at a relatively low level.
Another aspect of the Company's credit risk management strategy is the diversification of the loan portfolio. At year-end, the Company had 4% of its portfolio in loans held for sale, 21% in commercial loans, 53% in real estate loans, 16% in consumer loans, and 6% in lease financing and other. The Company's real estate portfolio is also diversified. Of the total portfolio, 9% is in real estate construction loans, 2% is in home equity credit lines, 19% is in 1-4 family residential loans and 23% is in commercial loans secured by real estate. In addition, the Company attempts to avoid the risk of an undue concentration of credits in a particular industry or trade group, as indicated by the commercial loan and lease portfolio being allocated over more than 17 major industry classifications. At year-end, the largest concentration in the commercial loan and leasing portfolios was in the manufacturing group which comprised approximately 17% of the portfolio. The manufacturing group was also well diversified over several subcategories. Agricultural and mining loans comprise less than 7% of total commercial loans. The Company has no significant exposure to highly leveraged transactions and has no foreign credits in its loan portfolio.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, restructured loans, and other real estate owned. Loans are generally placed on nonaccrual status when the loan is 90 days or more past due as to principal or interest, unless the loan is in the process of collection and well-secured. Consumer loans are not placed on a nonaccrual status inasmuch as they are generally charged off when they become 120 days past due. Loans are restructured to provide a reduction or deferral of interest or principal payments when the financial condition of the borrower deteriorates and requires that the borrower be given temporary or permanent relief from the contractual terms of the credit. Other real estate owned is acquired through or in lieu of foreclosure on credits that are secured by real estate.
Nonperforming assets totaled $18.9 million as of December 31, 1994, a decrease of 38.2% from $30.6 million as of December 31, 1993. Nonperforming assets totaled $31.5 million at December 31, 1992. Nonperforming assets represented .79% of net loans and leases, other real estate owned and other nonperforming assets at December 31, 1994, as compared to 1.23% and 1.49% at December 31, 1993 and 1992, respectively. Nonperforming assets as a percentage of net loans and leases, other real estate owned, and other nonperforming assets at December 31, 1994 are at their lowest levels since at least 1985, the period during which records have been maintained using the present definitions.
Accruing loans past due 90 days or more totaled $3.0 million as of December 31, 1994, as compared to $10.8 million at December 31, 1993. These loans equal .13% of net loans and leases at December 31, 1994, as compared to .44% at December 31, 1993.
Continuous efforts have been made to reduce nonperforming loans and to liquidate real estate owned properties in such a manner as to recover the greatest value possible. Significant steps have been taken during the last few years to strengthen the Company's credit culture by implementing a number of initiatives designed to increase internal controls and improve early detection and resolution of problem loans.
The following table sets forth the composition of nonperforming assets at December 31 for the years indicated:
Nonperforming Assets
Nonperforming Assets (continued)
*Includes loans held for sale.
Allowance For Loan Losses
The Company's allowance for loan losses was 2.80% of net loans and leases at December 31, 1994, as compared to 2.75% as of December 31, 1993 and 2.84% as of December 31, 1992. Loan charge-offs increased 32.5% and recoveries decreased 51.7% in 1994 as compared to 1993, which resulted in a ratio of net charge-offs to average loans and leases of .19% in 1994, compared to (.23)% in 1993, and .44% in 1992. The allowance for loan and lease losses relative to problem loans continued to strengthen in 1994. The allowance, as a percentage of noncurrent loans, was 401.9% in 1994 as compared to 200.3% in 1993, and 213.9% in 1992. Noncurrent loans are defined as loans on which interest is not accrued, plus loans ninety days or more past due on which interest continues to accrue.
In analyzing the adequacy of the allowance for loan and lease losses, management utilizes a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of independent internal and external credit reviews, historical charge-off experience, and changes in the composition and volume of the portfolio. Other factors, such as general economic conditions and collateral values, are also considered. Larger problem credits are individually evaluated to determine appropriate reserve allocations. Additions to the allowance are based upon the resulting risk profile of the portfolio developed through the evaluation of the above factors.
Summary Of Loan Loss Experience
The following table shows the changes in the allowance for losses for each year indicated.
*Includes loans held for sale.
Review of nonperforming loans and evaluation of the quality of the loan portfolio, as previously mentioned, results in the identification of certain loans with risk characteristics which warrant specific reserve allocations in the determination of the amount of the allowance for loan losses. The allowance is not allocated among all loan categories, and amounts allocated to specific categories are not necessarily indicative of future charge-offs. An amount in the allowance not specifically allocated by loan category is necessary in view of the fact that, while no loans were made with the expectation of loss, some loan losses inevitably occur. The following is a categorization of the allowance for loan losses for each year indicated:
Deposits
Total average deposits increased 12.7% to $3,583.1 million in 1994 from $3,178.9 million in 1993. Total deposits increased 8.0% to $3,706.0 million at December 31, 1994 compared to $3,432.3 million at December 31, 1993. The Company's demand deposits increased .7% and savings and money market accounts, increased 9.7% comparing December 31, 1994 to December 31, 1993, while certificates of deposit under $100,000 decreased 4.0%. Domestic deposits over $100,000 increased 52.6% to $123.5 million and foreign deposits increased 95.6% to $134.1 million at December 31, 1994.
The following table presents the average amount and the average rate paid on each of the following categories for each year indicated:
Average Deposit Amounts and Average Rates
Most foreign deposits are in denominations of $100,000 or more.
Short-term Borrowings
The following table sets forth data pertaining to the Company's short-term borrowings for each year indicated:
(In thousands, except rates)
At December 31,
(a) Federal funds purchased and security repurchase agreements are primarily on an overnight or demand basis. Rates on overnight funds reflect current market rates. Rates on fixed-maturity borrowings are set at the time of the borrowings.
(b) Federal Home Loan Bank advances less than one year are overnight and reflect current market rates or reprice monthly based on a one-month LIBOR as set by the Federal Home Loan Bank of Seattle. Other borrowings are primarily variable rate and reprice based on changes in the prime rate which reflect current market.
Return on Equity and Assets
Capital Resources
IAt year end, there were two measures of capital adequacy in use for commercial banks and bank holding companies, as follows:
1. Risk-based Capital
Risk-based capital guidelines require varying amounts of capital to be maintained against different categories of assets, depending on the general level of risk inherent in the assets. A capital allocation is also required for off-balance sheet exposures such as letters of credit, loan commitment, and interest rate contracts. The Company's total risk-based capital ratio was 14.96% at December 31, 1994 and 14.12% at December 31, 1993. The minimum regulatory requirement is an 8% total risk-based capital ratio of which 4% must be comprised of core capital. The minimum risk-based capital ratio for a bank to be considered "well-capitalized" under the regulatory definitions is 10%.
2. Tier I Leverage
Under the risk-based capital guidelines, a bank holding company could, in theory, significantly leverage its capital by investing in assets with little or no credit risk. The guidelines place a limit on such leverage through the establishment of a minimum level of tangible equity as a percentage of average total assets. The Company's Tier I leverage ratio was 6.24% at December 31, 1994 and 5.44% at December 31, 1993, compared to the minimum regulatory requirement of 3%.
The following table presents the regulatory risk-based capital at December 31 for the years indicated:
Regulatory Risk-Based Capital at December 31
* Limited to 1.25% of risk-weighted assets. ** Limited to 50% of core capital and reduced by 20% per year during an instrument's last five years before maturity.
Dividends
The Company's quarterly dividend rate was $.30 per share for the third and fourth quarters of 1994, $.28 per share for the first and second quarters of 1994 and the third and fourth quarters of 1993, $.21 for the first and second quarters of 1993 and the fourth quarter of 1992, and $.18 per share for all other quarterly periods during 1992. The annual dividend rate was $1.16 for 1994, $.98 for 1993, and $.75 for 1992. During the years 1990 through 1994 there was no preferred stock outstanding.
The following table sets forth dividends paid by the Company of each year indicated:
Dividends Paid
Foreign Operations
Zions First National Bank opened a foreign office located in Grand Cayman, Grand Cayman Islands, B.W.I. in 1980. This office has no foreign loans outstanding. The office accepts Eurodollar deposits from qualified customers of the Bank and places deposits with foreign banks and foreign branches of other U.S. banks. Foreign deposits at December 31 totaled $134,132,000 in 1994, $68,563,000 in 1993, and $52,777,000 in 1992; and averaged $108,383,000 for 1994, $55,823,000 for 1993, and $86,479,000 for 1992.
ITEM 8


ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors and Shareholders Zions Bancorporation:
We have audited the accompanying consolidated balance sheets of Zions Bancorporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings, and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zions Bancorporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 12 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (Statement) No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions. As discussed in notes 1 and 6, the Company also changed its method of accounting for income taxes in 1993 to adopt the provisions of Statement No. 109, Accounting for Income Taxes. As discussed in notes 1 and 3, the Company also changed its method of accounting for investments to adopt the provisions of Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities on December 31, 1993.
KPMG Peat Marwick LLP
Salt Lake City, Utah January 24, 1995
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
(In thousands, except share amounts)
See accompanying notes to consolidated financial statements.
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1994, 1993, and 1992
(In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows Years ended December 31, 1994, 1993, and 1992
(In thousands)
See accompanying notes to consolidated financial statements.
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Retained Earnings
Years ended December 31, 1994, 1993, and 1992
(In thousands)
See accompanying notes to consolidated financial statements.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1994, 1993, and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Zions Bancorporation (the Parent) is a multibank holding company organized under the laws of Utah in 1955, which provides a full range of banking and related services through its subsidiaries located primarily in Utah, Nevada, and Arizona.
Basis of Financial Statement Presentation - The consolidated financial statements include the accounts of Zions Bancorporation and its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the 1994 presentation.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.
Investment Securities - The Company adopted the provisions of Statement of Financial Accounting Standards (Statement) No. 115, Accounting for Certain Investments in Debt and Equity Securities on December 31, 1993. Under Statement No. 115, the Company classifies its investment securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale.
Trading securities (including futures and options used to hedge trading positions against interest rate risk) and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities from held-to-maturity to available-for-sale are recorded as a separate component of shareholders' equity. The unrealized holding gains or losses included in the separate component of equity for securities transferred from available-for-sale to held-for-maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific-identification method of determining the cost of securities sold.
Loan Fees - Nonrefundable fees and related direct costs associated with the origination of loans are deferred. The net deferred fees and costs are recognized in interest income over the loan term using methods that generally produce a level yield on the unpaid loan balance. Other nonrefundable fees related to lending activities other than direct loan origination are recognized as other operating income over the period the related service is provided. Bankcard discounts and fees charged to merchants for processing transactions through the Company are shown net of interchange discounts and fees expense, and are included in other service charges, commissions, and fees.
Mortgage Loan Servicing - Mortgage loan servicing fees are based on a stipulated percentage of the outstanding loan principal balances being serviced and are included in income as related loan payments from mortgagors are collected. Costs associated with the acquisition of loan servicing rights through the purchase of servicing contracts or bulk loan purchases are deferred and amortized over the lives of loans being serviced in proportion to the estimated net loan servicing income.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Allowance for Loan Losses - The allowance for loan losses is based on management's periodic evaluation of the loan portfolio and reflects an amount that, in management's opinion, is adequate to absorb losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the loan portfolio, and management's estimate of anticipated credit losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.
Premises and Equipment - Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation, computed on the straight-line method, is charged to operations over the estimated useful lives of the properties. Leasehold improvements are amortized over the terms of respective leases or the estimated useful lives of the improvements, whichever is shorter. As of December 31, 1994 and 1993, accumulated depreciation and amortization totaled $70,520,000 and $61,932,000, respectively.
Nonperforming Assets - Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, loans for which the terms have been renegotiated to less than market rates due to a weakening of the borrower's financial condition (restructured loans), and other real estate acquired primarily through foreclosure that is awaiting disposition.
Loans are generally placed on a nonaccrual status when principal or interest is past due 90 days or more unless the loan is both well secured and in the process of collection, or when in the opinion of management, full collection of principal or interest is unlikely. Generally, consumer loans are not placed on a nonaccrual status inasmuch as they are generally charged off when they become 120 days past due.
Other real estate owned is carried at the lower of cost or net realizable value. Real estate may be considered to be in substance foreclosed and included herein when specific criteria are met. When property is acquired through foreclosure, or substantially foreclosed, any excess of the related loan balance over net realizable value is charged to the allowance for loan losses. Subsequent write downs or losses upon sale, if any, are charged to other real estate expense.
Amounts Paid in Excess of Net Assets of Acquired Businesses (Goodwill) - The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds.
Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable.
The credit risk associated with these commitments is considered in management's determination of the allowance for loan losses.
Interest Rate Exchange Contracts and Cap and Floor Agreements - The Company enters into interest rate exchange contracts (swaps) and cap and floor agreements in the management of interest rate risk. The objective of these financial instruments is to match estimated repricing periods of interest-sensitive assets and liabilities in order to reduce interest rate exposure. These instruments are used only to hedge asset and liability portfolios and are not used for speculative purposes. Therefore, these instruments are not marked to market. Fees associated with these financial instruments are accreted into interest income or amortized to interest expense on a straight-line basis over the lives of the contracts and agreements. Gains or losses on early termination of a swap are amortized on the remaining term of the contract when the underlying assets or liabilities still exist. Otherwise, such gains or losses are fully expensed or recorded as income at the termination of the contract. The net interest received or paid on these contracts is reflected on a current basis in the interest expense or income related to the hedged obligation or asset.
Statements of Cash Flows - For purposes of the statements of cash flows, the Company considers due from banks to be cash equivalents.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company paid interest of $156.1 million, $120.8 million, and $125.5 million, respectively, and income taxes of $27.9 million, $26.3 million, and $16.9 million, respectively, for the years ended December 31, 1994, 1993, and 1992. Loans transferred to other real estate owned totaled $3.3 million, $1.2 million, and $4.9 million, respectively, for the years ended December 31, 1994, 1993, and 1992.
Income Taxes - Effective January 1, 1993, the Company adopted the provisions of Statement No. 109, Accounting for Income Taxes, and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of income. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Pension and Other Postretirement Plans - The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and employees' compensation levels. The cost of this program is being funded currently. The Company has other trustee retirement plans covering all qualified employees who have at least one year of service (see note 12).
The Company sponsors a defined benefit health care plan for substantially all retirees and employees. Effective January 1, 1993, the Company adopted Statement No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, which establishes a new accounting principle for the cost of retiree health care and other postretirement benefits (see note 12). Prior to 1993, the Company recognized these benefits on the pay-as-you-go method (i.e., cash basis). The cumulative effect of the change in method of accounting for postretirement benefits other than pensions is reported in the 1993 consolidated statement of income.
Trust Assets - Assets held by the Company in a fiduciary or agency capacity for customers are not included in the consolidated financial statements as such items are not assets of the Company.
Stock Options - Proceeds from the sale of stock issued under options are credited to common stock. The Company makes no charges against earnings with respect to stock options issued under its qualified stock option plan. The Company charges income for the difference between the option price and market value on the date of grant with respect to stock options issued under its nonqualified stock option plan.
Net Income Per Common Share - Net income per common share is based on the weighted average outstanding common shares during each year, including common stock equivalents, if applicable.
Stock Split - On December 18, 1992, the Company's Board of Directors approved a two-for-one split of the common stock. This action was effective on January 26, 1993 for shareholders of record as of January 5, 1993. A total of 6,139,227 shares of common stock were issued and recorded in the form of a stock dividend. All references to the number of common shares and per common share amounts have been restated to reflect the split.
Accounting Standard Not Adopted - In May 1993, the Financial Accounting Standards Board issued Statement No. 114, Accounting by Creditors for Impairment of a Loan. Statement No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Statement No. 114 is effective for fiscal years beginning after December 15, 1994. Management does not expect Statement No. 114 to have a significant impact on the Company's financial position or results of operations.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. MERGERS AND ACQUISITIONS
On January 14, 1994, the Company and National Bancorp of Arizona Inc. (NBA) consummated their agreement and plan of reorganization whereby the Company issued 1,456,408 shares of its common stock for 100 percent of the outstanding common stock of NBA. The consolidated financial statements of the Company give effect to the merger, which has been accounted for as a pooling of interests. Accordingly, the accounts of NBA have been combined with those of the Company for all periods presented. Separate results of operations of the combining entities for 1993 and 1992 are as follows (in thousands):
Also during 1994, the Company acquired Rio Salado Bancorp (Rio) for 328,000 shares of common stock. This acquisition was not material to the Company's consolidated financial position and was accounted for as a purchase. The difference between the purchase price and the net book value of Rio of $7.6 million is included in goodwill.
On August 11, 1993, the Company acquired all of the capital stock of Discount Corporation of New York (Discount) for approximately $65.7 million in cash. The acquisition has been accounted for as a purchase. The difference between the purchase price and the net book value of Discount of $9.4 million ($8 million as of December 31, 1994) is included in deferred tax assets (grouped with other assets) in the accompanying consolidated balance sheets.
On October 29, 1993, Wasatch Bancorp (Wasatch) was merged into the Company. The Company issued 373,335 shares of its common stock for 100 percent of the outstanding common stock of Wasatch. The acquisition has been accounted for as a pooling of interests. The consolidated financial statements of the Company for 1993 and 1992 have not been restated inasmuch as the historical operations of Wasatch are not significant to the Company. Also, during 1993, the Company acquired a 25 percent interest in Bennington Capital Management, Inc., a Seattle-based investment advisor which manages the AccessorTM family of mutual funds. This acquisition is accounted for on the equity method.
3. INVESTMENT SECURITIES
Investment securities as of December 31, 1994, are summarized as follows (in thousands):
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company adopted Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities on December 31, 1993. The Company recognized a net unrealized holding loss on securities available-for-sale of $5,866,000, after related tax effect, at December 31, 1994 and an unrealized holding gain on securities available-for-sale of $415,000, after related tax effect, at December 31, 1993.
Investment securities as of December 31, 1993, are summarized as follows (in thousands):
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of investment securities as of December 31, 1994, by contractual maturity, excluding mortgage-backed and equity securities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties (in thousands):
Gross gains of $367,000, $104,000, and $468,000 and gross losses of $666,000, $121,000, and $141,000 were realized on sales of investment securities for the years ended December 31, 1994, 1993, and 1992, respectively. Such amounts include gains of $102,000, $10,000, and $105,000, and losses of $66,000, $32,000, and $17,000, respectively, for sales of mortgage-backed securities.
As of December 31, 1994 and 1993, securities with an amortized cost of $210,149,000 and $110,262,000, respectively, were pledged to secure public and trust deposits, advances, and for other purposes as required by law. In addition, the Federal Home Loan Bank stock is pledged as security on the related advances (note 7).
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows (in thousands):
As of December 31, 1994 and 1993, loans with a carrying value of $121,886,000 and $302,530,000, respectively, were pledged as security for Federal Home Loan Bank advances (note 7).
During 1994, 1993, and 1992, the Company purchased mortgage servicing rights totaling $590 thousand, $1.7 million, and $1.4 million, respectively. Amortization of purchased mortgage servicing rights totaled $1.7 million, $2.6 million, and $2.6 million for the years ended December 31, 1994, 1993, and 1992, respectively.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1994, 1993, and 1992, consumer and other loan securitizations totaled $703 million, $609 million, and $159 million, respectively. Loan sales income related thereto is recognized on the basis of cash flows received from the securitized assets. Loan sales income, excluding servicing, amounted to $11.7 million in 1994, $14.7 million in 1993, and $1.7 million in 1992.
The allowance for loan losses is summarized as follows (in thousands):
Included in the allowance for loan losses is an allocation for unused commitments and letters of credit (note 9) that as of December 31, 1994 and 1993, amounted to $3,674,000 and $1,972,000, respectively.
Nonperforming loans, leases, and related interest foregone are summarized as follows (in thousands):
5. DEPOSITS
Deposits are summarized as follows (in thousands):
Interest expense on deposits is summarized as follows (in thousands):
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. INCOME TAXES
The Company adopted Statement No. 109, Accounting for Income Taxes, as of January 1, 1993. The cumulative effect of this adoption was an increase in net income of $7,419,000, as reported in 1993.
Income taxes are summarized as follows (in thousands):
A reconciliation between income tax expense computed using the statutory federal income tax rate (35 percent in 1994 and 1993, and 34 percent in 1992), and actual income tax expense is as follows (in thousands):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1994 and 1993, are presented below (in thousands):
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. As of January 1, 1993, the Company established a valuation allowance for the net capital loss carryforwards as a result of some uncertainty of realizing offsetting capital gains. Subsequently, the Company realized capital gains sufficient to reduce the valuation allowance by $972,000 in 1994 and $1,137,000 in 1993.
The Company has net operating loss carryforwards totaling $27,535,000 that expire in the years 2006 and 2007.
7. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank advances and other borrowings as of December 31, 1994 and 1993, include $101,571,000 and $252,109,000, respectively, borrowed by Zions First National Bank, a wholly owned subsidiary, (the Bank) under its line of credit with the Federal Home Loan Bank of Seattle. The line of credit provides for borrowing of amounts up to ten percent of total assets. The line of credit is secured under a blanket pledge whereby the Bank maintains unencumbered security with par value, which has been adjusted using a pledge requirement percentage based upon the types of securities pledged, equal to at least 100 percent of outstanding advances, and, Federal Home Loan Bank stock. There are no withdrawal and usage restrictions or compensating balance requirements.
Substantially all Federal Home Loan Bank advances reprice with changes in market interest rates or have short terms to maturity. The carrying value of such indebtedness is deemed to approximate market value (note 15).
Maturities of outstanding advances in excess of one year are as follows (in thousands):
8. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
Subordinated notes includes $50,000,000 of 8-5/8 percent notes that mature in 2002. These notes are not redeemable prior to maturity. In addition, the Company has $4,000,000 of 9 percent subordinated notes that mature in full on November 1, 1998 and may be called, at the option of the Company, on or after November 1, 1996 at par. The subordinated notes are unsecured and require semiannual interest payments.
The industrial revenue bonds require mandatory sinking fund redemption in various principal amounts through 1995. The bonds bear interest at a rate of 7.50 percent. The bonds are secured by an assignment of a lease on a banking facility.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities and sinking fund requirements on long-term debt for each of the succeeding five years are as follows (in thousands):
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors, interest rate exchange contracts, and commitments to purchase and sell securities. Those instruments involve, to varying degrees, elements of credit, market, and interest rate risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate caps, floors, and exchange contract transactions, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.
Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk.
Notional values of financial instruments are summarized as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Commitments totaling $936,671,000 expire in 1995. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Standby letters of credit include commitments in the amount of $73,980,000 expiring in 1995 and $1,592,000 expiring thereafter through 2005. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds marketable securities and cash equivalents as collateral supporting those commitments for which collateral is deemed necessary.
The Company enters into interest rate contracts, including interest rate caps, floors, futures, options, and interest rate exchange contract agreements in managing its interest rate exposure. Interest rate caps and floors obligate one of the parties to the contract to make payments to the other if an interest rate index exceeds a specified upper "capped" level or if the index falls below a specified "floor" level. A futures contract is an agreement to buy or sell a quantity of a financial instrument or commodity at a predetermined future date and rate or price. An option contract is an agreement that conveys to the purchaser the right, but not the obligation, to buy or sell a quantity of a financial instrument or commodity at a predetermined rate or price at a time in the future. Interest rate exchange contract agreements involve the exchange of fixed and variable rate interest payments based upon a notional amount and maturity. Interest rate caps and exchange contracts to which the Company is a party at December 31, 1994, have remaining terms of 5 to 20 years and 2 to 68 months, respectively. The fair value of interest rate contracts are obtained from deal quotes, or discounted cash flow analyses. The values represent the estimated amount the Company would receive or pay for comparable contracts, taking into account current interest rates. Notional values of interest rate contracts are summarized as follows (in thousands):
The contract or notional amount of financial instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the actual level of risk. As of December 31, 1994 and 1993, the regulatory risk-weighted values assigned to all off-balance sheet financial instruments described herein totaled $177,347,000 and $134,315,000, respectively. See note 4 for consideration of financial instruments in management's determination of the allowance for loan losses.
During 1988, a lawsuit was brought in the United States District Court, Utah District, against the Bank in connection with its performance of duties as an indenture trustee for certain investors in real estate and other syndication projects. In September 1992, a motion was granted allowing an amended complaint containing allegations that plaintiffs intend to proceed as a class action to recover approximately $23 million, prejudgment interest, attorneys' fees, and additional amounts under certain statutory provisions and common law. No motion to certify the classes has been filed, and the Bank intends to vigorously oppose such motion and to defend the entire action. Although no assurances can be given as to the outcome, the Company continues to believe that it has meritorious defenses to such lawsuit, and that there is insurance coverage for a substantial portion of the amount claimed.
The Company is also the defendant in various other legal proceedings arising in the normal course of business. The Company does not believe that the outcome of any of such proceedings, including the lawsuit discussed in the preceding paragraph, will have a material adverse effect on its consolidated financial position.
In connection with loans sold to (or serviced for) others, the Company is subject to recourse obligations on approximately $22.5 million as of December 31, 1994.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has commitments for leasing premises and equipment under the terms of noncancelable leases expiring from 1994 to 2005. Future aggregate minimum rental payments under existing noncancelable leases at December 31, 1994 are as follows (in thousands):
Future aggregate minimum rental payments have been reduced by noncancelable subleases as follows: 1995, $689,000; 1996, $485,000; and 1997, $4,000. Aggregate rental expense on operating leases amounted to $4,841,000, $3,946,000, and $3,335,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
10. STOCK OPTIONS
The Company has a qualified stock option plan adopted in 1981, under which stock options are granted to key employees; and a nonqualified plan under which options are granted to certain key employees. Under the nonqualified plan, options expire five to ten years from the date of grant. Under the qualified plan, 506,000 shares of common stock were reserved. Qualified options are granted at a price not less than 100 percent of the fair market value of the stock at the date of grant. Options granted are generally exercisable in increments from one to six years after the date of grant and expire six years after the date of grant.
Transactions and other information relating to stock options are summarized as follows:
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1994, there are 176,000 options exercisable at prices from $9.47 to $47.25 per share. For the year ended December 31, 1994, shares obtained through exercise of options had a cumulative average market value of $1,739,000 at the date of exercise.
11. COMMON STOCK
Changes in common stock are summarized as follows (amount in thousands):
12. RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan for eligible employees. Plan benefits are based on years of service and employees' compensation levels. Benefits vest under the plan upon completion of five years of service. Plan assets consist principally of corporate equity and debt securities, government fixed income securities, and cash investments.
The components of the net pension cost for the years ended December 31, 1994 and 1993, are as follows (in thousands):
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Primary actuarial assumptions used in determining the net pension cost are as follows:
In addition to the Company's defined benefit pension plan, the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time employees hired before January 1, 1993, who meet minimum age and service requirements. The plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. Plan coverage is provided by self-funding or health maintenance organizations (HMOs) options. The accounting for the plan anticipates future cost-sharing changes to the written plan, including the Company's expressed intent to increase the retiree contribution rate annually from 30 percent and 40 percent in 1993 for normal and early retirees, respectively, to 50 percent for both in 1996. The Company's retiree premium contribution rate is frozen at 50 percent of 1996 dollar amounts. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management.
The Company adopted Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, as of January 1, 1993. The cumulative effect of this adoption was an after-tax decrease in net income of $5,760,000, as reported in 1993.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1994 and 1993, as follows (in thousands):
For measurement purposes, an annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) of 11.55 percent and 9 percent were assumed for the self-funded and HMOs options, respectively, for 1994. The HMOs rate was assumed to decrease gradually to 5 percent by the year 2000 and remain at that level thereafter. The self-funded rate was assumed to decrease gradually to 5.8 percent by the year 2001, and decline to 5.01 percent over the remaining life expectancy of the participants. The health care cost trend rate assumption does not have a significant effect on amounts reported because the Company has capped its retiree premium contribution rates.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.75 and 7.50 percent, respectively, at December 31, 1994 and 1993.
The Company has an Employee Stock Savings Plan and an Employee Investment Savings Plan (formerly known as the Salary Reduction Arrangement Plan) (PAYSHELTER). Under PAYSHELTER, employees select from a nontax-deferred or tax-deferred plan and four investment alternatives. Employees can contribute from 1 to 15 percent of compensation, which is matched 50 percent by the Company for contributions up to 5 percent and 25 percent for contributions greater than 5 percent up to 10 percent. Contributions to the plans amounted to $1,319,000, $1,176,000, and $793,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
During 1992, the Company formed an employee profit sharing plan. Contributions to the plan are determined per a formula based on the Company's annual return on equity (required minimum return of 14 percent). Contributions to the plan amounted to $1,096,000, $948,000, and $914,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial information by quarter for the three years ended December 31, 1994 is as follows (in thousands, except per share amounts):
14. CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentration of credit risk (whether on or off balance sheet) that arise from financial instruments exists for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have significant exposure to any individual customer or counterparty.
Most of the Company's business activity is with customers located within the states of Utah, Nevada, and Arizona. The commercial loan portfolio is well diversified, consisting of more than 17 industry classifications groupings. As of December 31, 1994, the largest concentration of risk in the commercial loan and leasing portfolio is represented by the manufacturing industry grouping, which comprises approximately 17 percent of the portfolio. The manufacturing industry grouping is also well diversified over several subcategories. The Company has minimal credit exposure from lending transactions with highly leveraged entities and has no foreign loans.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying value and estimated fair value of principal financial instruments as of December 31, 1994 are summarized as follows (in thousands):
Financial assets and financial liabilities other than investment securities of the Company are not traded in active markets. The above estimates of fair value require subjective judgments, and are approximate. Changes in the following methodologies and assumptions could significantly affect the estimates.
Financial Assets - The estimated fair value approximates the carrying value of cash and due from banks and money market investments. For securities, the fair value is based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or using a discounted cash flow model based on established market rates. The fair value of fixed rate loans is estimated by discounting future cash flows using the London Interbank Offered Rate (LIBOR) yield curve adjusted by a factor which reflects the credit and interest rate risk inherent in the loan. Variable rate loans reprice with changes in market rates. As such their carrying amounts are deemed to approximate fair value. The fair value of the allowance for loan losses of $67,018,000 is the present value of estimated net charge-offs.
Financial Liabilities - The estimated fair value of demand and savings deposits, and federal funds purchased and security repurchase agreements approximates the carrying value. The fair value of time and foreign deposits is estimated by discounting future cash flows using the LIBOR yield curve. Substantially all FHLB advances reprice with changes in market interest rates or have short terms to maturity. The carrying value of such indebtedness is deemed to approximate market value. Other borrowings are not significant. The estimated fair value of the subordinated notes is based on a quoted market price. The remaining long-term debt is not significant.
Off-Balance Sheet Financial Instruments - The carrying and fair values of off-balance sheet financial instruments represented by interest rate exchange contracts (swaps) and caps as of December 31, 1994 is as follows (in thousands):
The fair value of the swaps and caps reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date based upon pricing or valuation models applied to current market information, thereby taking into account the current unrealized gains or losses of open contracts.
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of commitments to extend credit and letters of credit, based on fees currently charged for similar commitments, is not significant. See note 9 to the consolidated financial statements.
16. DIVIDEND RESTRICTION AND CONDENSED PARENT-ONLY FINANCIAL INFORMATION
Dividends declared by the Company's banking subsidiaries in any calendar year may not, without the approval of the appropriate federal regulator, exceed their net earnings for that year combined with their retained net earnings for the preceding two years. At December 31, 1994, the Company's subsidiaries had approximately $112,994,000 available for the payment of dividends under the foregoing restrictions. In addition, the banking subsidiaries must meet various requirements and restrictions under the laws of the United States and state laws, including requirements to maintain cash reserves against deposits and limitations on loans and investments with affiliated companies. During 1994, cash reserve balances held with the Federal Reserve banks averaged approximately $78.3 million.
Condensed financial information of Zions Bancorporation (parent only) follows:
ZIONS BANCORPORATION
Condensed Balance Sheets
December 31, 1994 and 1993
(In thousands)
ZIONS BANCORPORATION
Condensed Statements of Income
Years ended December 31, 1994, 1993, and 1992
(In thousands)
ZIONS BANCORPORATION
Condensed Statements of Cash Flows
Years ended December 31, 1994, 1993, and 1992
(In thousands)
The parent company paid interest of $7,245,000, $8,577,000, and $7,940,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
ZIONS BANCORPORATION
Condensed Statements of Retained Earnings
Years ended December 31, 1994, 1993, and 1992
(In thousands)
The selected quarterly financial data information required by this item appears on pages 24 and 61 under the caption "QUARTERLY FINANCIAL INFORMATION (UNAUDITED)."
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, to the extent not included under the caption "Executive officers of the registrant" in Part I of this report, will appear on pages 1 through 6 of the definitive Proxy Statement. Information relating to the directors and executive officers on pages 1 through 6, and information required by Item 405 of Regulation S-K as set forth beginning in the last paragraph on page 7 of the definitive Proxy Statement relating to the 1995 Annual Meeting of Shareholders to be held April 28, 1995, is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appearing on pages 8 through 21 of the definitive Proxy Statement relating to the 1995 Annual Meeting of Shareholders to be held April 28, 1995, is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appearing on pages 6 and 7 of the definitive Proxy Statement relating to the 1995 Annual Meeting of Shareholders to be held April 28, 1995, is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appearing on page 21 of the definitive Proxy Statement relating to the 1995 Annual Meeting of Shareholders to be held April 28, 1995, is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are part of this report and appear on the pages indicated:
(2) Financial Statement Schedules:
Schedules are omitted because the information is either not required, not applicable, or is included in Part II, Items 6-8 of this report.
(3) Exhibits:
The exhibits listed on the Exhibit Index on page 71 of this report are filed or are incorporated herein by reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December 31, 1994.
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1993, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8 Nos. 33-52878 (filed on October 2, 1992) and 33-52796 (filed on October 2, 1992).
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 21, 1995 ZIONS BANCORPORATION
By /s/ Harris H. Simmons ------------------------------- HARRIS H. SIMMONS, President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
EXHIBIT INDEX FILED AS PART OF THIS REPORT ON FORM 10-K
(Pursuant to Item 601 of Regulations S-K)
EXHIBIT INDEX FILED AS PART OF THIS REPORT ON FORM 10-K (continued)
(Pursuant to Item 601 of Regulations S-K)
* incorporated by reference.