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EX-32 - CERTIFICATION BY CEO AND CFO - ZIONS BANCORPORATION, NATIONAL ASSOCIATION /UT/zion-20170331xex32.htm
EX-31.2 - CERTIFICATION BY CFO - ZIONS BANCORPORATION, NATIONAL ASSOCIATION /UT/zion-20170331xex312.htm
EX-31.1 - CERTIFICATION BY CEO - ZIONS BANCORPORATION, NATIONAL ASSOCIATION /UT/zion-20170331xex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to                         
COMMISSION FILE NUMBER 001-12307
ZIONS BANCORPORATION
(Exact name of registrant as specified in its charter)
UTAH
87-0227400
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
One South Main, 15th Floor
Salt Lake City, Utah
84133
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (801) 844-7637
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, without par value, outstanding at April 28, 2017
202,629,299 shares



ZIONS BANCORPORATION AND SUBSIDIARIES
Table of Contents



2


PART I.
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Statements in this Quarterly Report on Form 10-Q that are based on other than historical data are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:
statements with respect to the beliefs, plans, objectives, goals, targets, commitments, designs, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Zions Bancorporation (“the Parent”) and its subsidiaries (collectively “the Company,” “Zions,” “we,” “our,” “us”); and
statements preceded by, followed by, or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “target,” “commit,” “design,” “plan,” “projects,” or similar expressions.
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in Management’s Discussion and Analysis. Factors that might cause such differences include, but are not limited to:
the Company’s ability to successfully execute its business plans, manage its risks, and achieve its objectives, including its restructuring and efficiency initiatives;
changes in local, national and international political and economic conditions, including without limitation the political and economic effects of the economic and fiscal imbalances in the United States and other countries, potential or actual downgrades in ratings of sovereign debt issued by the United States and other countries, and other major developments, including wars, military actions, and terrorist attacks;
changes in financial and commodity market prices and conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including without limitation rates of business formation and growth, commercial and residential real estate development, real estate prices, and oil and gas-related commodity prices;
changes in markets for equity, fixed income, commercial paper and other securities, including availability, market liquidity levels, and pricing, including the actual amount and duration of declines in the price of oil and gas;
any impairment of our goodwill or other intangibles, or any adjustment of valuation allowances on our deferred tax assets due to adverse changes in the economic environment, declining operations of the reporting unit, or a change to the corporate statutory tax rate or other similar changes if and as implemented by local and national governments, or other factors;
changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;
acquisitions and integration of acquired businesses;
increases in the levels of losses, customer bankruptcies, bank failures, claims, and assessments;
changes in fiscal, monetary, regulatory, trade and tax policies and laws, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the OCC, the Board of Governors of the Federal Reserve Board System, the FDIC, the SEC, and the CFPB; 
the impact of executive compensation rules under the Dodd-Frank Act and banking regulations which may impact the ability of the Company and other American financial institutions to retain and recruit executives and other personnel necessary for their businesses and competitiveness;

3


ZIONS BANCORPORATION AND SUBSIDIARIES

the impact of the Dodd-Frank Act and Basel III, and rules and regulations thereunder, on our required regulatory capital and liquidity levels, governmental assessments on us (including, but not limited to, the Federal Reserve reviews of our annual capital plan), the scope of business activities in which we may engage, the manner in which we engage in such activities, the fees we may charge for certain products and services, and other matters affected by the Dodd-Frank Act and these international standards;
continuing consolidation in the financial services industry;
new legal claims against the Company, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;
success in gaining regulatory approvals, when required;
changes in consumer spending and savings habits;
increased competitive challenges and expanding product and pricing pressures among financial institutions;
inflation and deflation;
technological changes and the Company’s implementation of new technologies;
the Company’s ability to develop and maintain secure and reliable information technology systems;
legislation or regulatory changes which adversely affect the Company’s operations or business;
the Company’s ability to comply with applicable laws and regulations;
changes in accounting policies or procedures as may be required by the FASB or regulatory agencies; and
costs of deposit insurance and changes with respect to FDIC insurance coverage levels.
Except to the extent required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.
GLOSSARY OF ACRONYMS
ASC
Accounting Standards Codification
DTA
Deferred Tax Asset
ASU
Accounting Standards Update
DFAST
Dodd-Frank Act Stress Test
AOCI
Accumulated Other Comprehensive Income
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
ACL
Allowance for Credit Losses
EVE
Economic Value of Equity at Risk
ALLL
Allowance for Loan and Lease Losses
EITF
Emerging Issues Task Force
Amegy
Amegy Bank, a division of ZB, N.A.
ERM
Enterprise Risk Management
ALCO
Asset/Liability Committee
ERMC
Enterprise Risk Management Committee
AFS
Available-for-Sale
FAMC
Federal Agricultural Mortgage Corporation, or “Farmer Mac”
BHC
Bank Holding Company
FDIC
Federal Deposit Insurance Corporation
BOLI
Bank-Owned Life Insurance
FDICIA
Federal Deposit Insurance Corporation Improvement Act
bps
basis points
FHLB
Federal Home Loan Bank
CB&T
California Bank & Trust, a division of ZB, N.A.
FRB
Federal Reserve Board
CMC
Capital Management Committee
FASB
Financial Accounting Standards Board
CSV
Cash Surrender Value
FTP
Funds Transfer Pricing
CLTV
Combined Loan-to-Value Ratio
GAAP
Generally Accepted Accounting Principles
CRE
Commercial Real Estate
GNMA
Government National Mortgage Association, or “Ginnie Mae”
COSO
Committee of Sponsoring Organizations of the Treadway Commission
HTM
Held-to-Maturity
CET1
Common Equity Tier 1 (Basel III)
HQLA
High-Quality Liquid Assets
CRA
Community Reinvestment Act
HECL
Home Equity Credit Line
CCAR
Comprehensive Capital Analysis and Review
HCR
Horizontal Capital Review
CFPB
Consumer Financial Protection Bureau
IFRS
International Financial Reporting Standards
CSA
Credit Support Annex
LCR
Liquidity Coverage Ratio

4


ZIONS BANCORPORATION AND SUBSIDIARIES

LIBOR
London Interbank Offered Rate
RSU
Restricted Stock Unit
MD&A
Management’s Discussion and Analysis
ROC
Risk Oversight Committee
NBAZ
National Bank of Arizona, a division of ZB, N.A.
SEC
Securities and Exchange Commission
NAV
Net Asset Value
SNC
Shared National Credit
NIM
Net Interest Margin
SBA
Small Business Administration
NSFR
Net Stable Funding Ratio
SBIC
Small Business Investment Company
NSB
Nevada State Bank, a division of ZB, N.A.
S&P
Standard and Poor's
OCC
Office of the Comptroller of the Currency
TCBO
The Commerce Bank of Oregon, a division of ZB, N.A.
OCI
Other Comprehensive Income
TCBW
The Commerce Bank of Washington, a division of ZB, N.A.
OREO
Other Real Estate Owned
TDR
Troubled Debt Restructuring
OTTI
Other-Than-Temporary Impairment
Vectra
Vectra Bank Colorado, a division of ZB, N.A.
PPNR
Pre-provision Net Revenue
ZB, N.A.
ZB, National Association
PEI
Private Equity Investment
Parent
Zions Bancorporation
PCI
Purchased Credit-Impaired
Zions Bank
Zions Bank, a division of ZB, N.A.
RULC
Reserve for Unfunded Lending Commitments
ZMSC
Zions Management Services Company
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Company has made no significant changes in its critical accounting policies and significant estimates from those disclosed in its 2016 Annual Report on Form 10-K.
GAAP to NON-GAAP RECONCILIATIONS
This Form 10-Q presents non-GAAP financial measures, in addition to GAAP financial measures, to provide investors with additional information. The adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are presented in the following schedules. The Company considers these adjustments to be relevant to ongoing operating results and provide a meaningful base for period-to-period and company-to-company comparisons. These non-GAAP financial measures are used by management to assess the performance and financial position of the Company and for presentations of Company performance to investors. The Company further believes that presenting these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management.
Non-GAAP financial measures have inherent limitations, and are not required to be uniformly applied by individual entities. Although non-GAAP financial measures are frequently used by stakeholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.
The following are the non-GAAP financial measures presented in this Form 10-Q and a discussion of why management uses these non-GAAP measures:
Tangible Return on Average Tangible Common Equity – this schedule also includes “net earnings applicable to common shareholders, excluding the effects of the adjustments, net of tax” and “average tangible common equity.” Tangible return on average tangible common equity is a non-GAAP financial measure that management believes provides useful information about the Company’s use of equity. Management believes the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income.
Tangible Equity Ratio, Tangible Common Equity Ratio, and Tangible Book Value per Common Share – this schedule also includes “tangible equity,” “tangible common equity,” and “tangible assets.” Tangible equity ratio, tangible common equity ratio, and tangible book value per common share are non-GAAP financial measures that management believes provides additional useful information about the levels of tangible assets and tangible equity between each other and in relation to outstanding shares of common stock. Management believes the use

5


ZIONS BANCORPORATION AND SUBSIDIARIES

of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income.
Efficiency Ratio – this schedule also includes “adjusted noninterest expense,” “taxable-equivalent net interest income,” “adjusted tax-equivalent revenue,” and “adjusted pre-provision net revenue (“PPNR”).” The methodology of determining the efficiency ratio may differ among companies. Management makes adjustments to exclude certain items as identified in the subsequent schedule which management believes allows for more consistent comparability among periods. Management believes the efficiency ratio provides useful information regarding the cost of generating revenue. Adjusted noninterest expense provides a measure as to how well the Company is managing its expenses, and adjusted PPNR enables management and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle. Taxable-equivalent net interest income allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The efficiency ratio and adjusted noninterest expense are the key metrics to which the Company announced it would hold itself accountable in its June 1, 2015 efficiency initiative, and to which executive compensation is tied.
TANGIBLE RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)
 
 
Three Months Ended
(Dollar amounts in millions)
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
 
 
 
 
 
 
 
Net earnings applicable to common shareholders (GAAP)
 
$
129

 
$
125

 
$
79

Adjustment, net of tax:
 
 
 
 
 
 
Amortization of core deposit and other intangibles
 
1

 
1

 
1

Net earnings applicable to common shareholders, excluding the effects of the adjustment, net of tax (non-GAAP)
(a)
$
130

 
$
126


$
80

Average common equity (GAAP)
 
$
6,996

 
$
6,998

 
$
6,787

Average goodwill
 
(1,014
)
 
(1,014
)
 
(1,014
)
Average core deposit and other intangibles
 
(8
)
 
(10
)
 
(15
)
Average tangible common equity (non-GAAP)
(b)
$
5,974

 
$
5,974

 
$
5,758

Number of days in quarter
(c)
90

 
92

 
91

Number of days in year
(d)
365

 
366

 
366

Tangible return on average tangible common equity (non-GAAP)
(a/b/c)*d
8.83
%
 
8.39
%
 
5.59
%
TANGIBLE EQUITY (NON-GAAP) AND TANGIBLE COMMON EQUITY (NON-GAAP)
(Dollar amounts in millions)
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
 
 
 
 
 
 
 
Total shareholders’ equity (GAAP)
 
$
7,730

 
$
7,634

 
$
7,625

Goodwill
 
(1,014
)
 
(1,014
)
 
(1,014
)
Core deposit and other intangibles
 
(7
)
 
(8
)
 
(14
)
Tangible equity (non-GAAP)
(a)
6,709

 
6,612

 
6,597

Preferred stock
 
(710
)
 
(710
)
 
(828
)
Tangible common equity (non-GAAP)
(b)
$
5,999

 
$
5,902

 
$
5,769

Total assets (GAAP)
 
$
65,463

 
$
63,239

 
$
59,180

Goodwill
 
(1,014
)
 
(1,014
)
 
(1,014
)
Core deposit and other intangibles
 
(7
)
 
(8
)
 
(14
)
Tangible assets (non-GAAP)
(c)
$
64,442

 
$
62,217

 
$
58,152

Common shares outstanding (thousands)
(d)
202,595

 
203,085

 
204,544

Tangible equity ratio (non-GAAP)
(a/c)
10.41
%
 
10.63
%
 
11.34
%
Tangible common equity ratio (non-GAAP)
(b/c)
9.31
%
 
9.49
%
 
9.92
%
Tangible book value per common share (non-GAAP)
(b/d)
$
29.61

 
$
29.06

 
$
28.20


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ZIONS BANCORPORATION AND SUBSIDIARIES

EFFICIENCY RATIO (NON-GAAP) AND ADJUSTED PRE-PROVISION NET REVENUE (NON-GAAP)
(Dollar amounts in millions)
 
Three Months Ended
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
 
 
 
 
 
 
 
Noninterest expense (GAAP)
(a)
$
414

 
$
404

 
$
396

Adjustments:
 
 
 
 
 
 
Severance costs
 
5

 
1

 
4

Other real estate expense, net
 

 

 
(1
)
Provision for unfunded lending commitments
 
(5
)
 
3

 
(6
)
Amortization of core deposit and other intangibles
 
2

 
2

 
2

Restructuring costs1
 
1

 
3

 
1

Total adjustments
(b)
3

 
9

 

Adjusted noninterest expense (non-GAAP)
(a-b)=(c)
$
411

 
$
395

 
$
396

Net interest income (GAAP)
(d)
$
489

 
$
480

 
$
453

Fully taxable-equivalent adjustments
(e)
8

 
8


5

Taxable-equivalent net interest income (non-GAAP)1
(d+e)=f
497

 
488

 
458

Noninterest income (GAAP)
g
132

 
128

 
117

Combined income
(f+g)=(h)
629

 
616

 
575

Adjustments:
 
 
 
 
 
 
Fair value and nonhedge derivative income (loss)
 

 
7

 
(3
)
Securities gains (losses), net
 
5

 
(3
)
 

Total adjustments
(i)
5

 
4

 
(3
)
Adjusted taxable-equivalent revenue (non-GAAP)
(h-i)=(j)
$
624

 
$
612

 
$
578

Pre-provision net revenue (PPNR)
(h)-(a)
$
215

 
$
212

 
$
179

Adjusted PPNR (non-GAAP)
(j-c)
213

 
217

 
182

Efficiency ratio (non-GAAP)
(c/j)
65.9
%
 
64.5
%
 
68.5
%
1The restructuring costs in the fourth quarter of 2016 are primarily related to the termination of the Zions Direct auction platform and changes to simplify operational processes for small business lending.
RESULTS OF OPERATIONS
Executive Summary
Net earnings applicable to common shareholders for the first quarter of 2017 were $129 million, or $0.61 per diluted common share, compared with net earnings applicable to common shareholders of $79 million, or $0.38 per diluted common share for the first quarter of 2016. Net income benefited primarily from a $40 million or 8.4% increase in interest income due to the Company’s redeployment of funds from lower-yielding money market investments and use of short-term borrowings to purchase agency securities. We also provided $19 million less for loan losses in the first quarter of 2017 than we did in the same prior year period, primarily due to improvement in the oil and gas-related portfolio. Net interest income improved 7.9% to $489 million in the first quarter of 2017 from $453 million in the same prior year period. Net interest margin (“NIM”) was 3.38% compared with 3.35% in the first quarters of 2017 and 2016, respectively.
Performance Against Previously Announced Initiatives
In June 2015, we announced several initiatives to improve operational and financial performance along with some key financial targets. Our initiatives are designed to improve customer experience, to simplify the corporate structure and operations, and to make the Company a more efficient organization. Following is a brief discussion regarding current performance against these key financial targets.
Achieve an adjusted efficiency ratio in the low 60s for fiscal year 2017. In 2016 our efficiency ratio was 65.8%, which met our goal to keep the efficiency ratio under 66% for the year. Our adjusted efficiency ratio for the first quarter of 2017 was 65.9%, a 264 bps improvement over the same prior year period efficiency ratio of 68.5%.

7


ZIONS BANCORPORATION AND SUBSIDIARIES

Small increases in adjusted noninterest expense items between the quarters were more than offset by a large improvement in interest income, due to loan growth and securities purchases in 2016. Despite this positive year-over-year improvement, the adjusted efficiency ratio increased from 64.5% in the fourth quarter of 2016, which was primarily driven by several seasonal factors in the first quarter of 2017. Salary and employee benefits expense, up $21 million in the first quarter of 2017 compared with the fourth quarter of 2016, is consistently higher in the first quarter, due to stock-based compensation related to equity grants to retirement-eligible employees, payroll taxes again become effective for all employees, and the Company matches in the employee 401(k) plan contributions concurrent with bonus payouts. The increase in this expense outweighed the impact of higher interest income between the linked quarters. See “GAAP to Non-GAAP Reconciliations” on page 5 for more information regarding the calculation of the adjusted efficiency ratio and why management uses this non-GAAP measure.
Maintain adjusted noninterest expense at less than $1.58 billion in 2016, with a modest increase in 2017. We met our target for fiscal year 2016, keeping adjusted noninterest expense to $1.579 billion. In the first quarter of 2017, adjusted noninterest expense was $411 million, which, when annualized and considering the seasonal expenses in the first quarter of 2017, is consistent with our goal to limit noninterest expense growth to less than 3% in 2017.
Areas Experiencing Strength in the First Quarter of 2017
Net interest income, which is more than three-quarters of our revenue, increased by $36 million, or 7.9%, in the first quarter of 2017 due to our efforts to change the mix of interest-earning assets from lower-yielding money market investments into higher-yielding investment securities and loans and to reduce interest expense related to long-term debt. The average investment securities portfolio for the first quarter of 2017 grew by $6.2 billion compared with the same prior year period, which resulted in a $32 million increase in taxable-equivalent interest income on investment securities over the same quarters. Interest expense remained relatively stable due to early calls and maturities of long-term debt, despite the average balance of short-term borrowings increasing $2.7 billion. These actions should improve both the Company’s revenue stability under future stressful economic scenarios and current earnings as compared to the alternative of holding money market investments.
Adjusted PPNR of $213 million for the first quarter of 2017 was down $4 million, or 1.8%, from the prior quarter primarily as a result of seasonal increases in certain expenses, but increased $29 million, or 17.0%, compared with the first quarter of 2016. The increase from the same prior year period reflects operating leverage improvement resulting from securities and loan growth, and a more profitable earning assets mix. The higher adjusted PPNR in the first quarter of 2017 compared with the same prior year period drove an improvement in the Company’s efficiency ratio from 68.5% in the first quarter of 2016 to 65.9% in the current quarter. See “GAAP to Non-GAAP Reconciliations” on page 5 for more information regarding the calculation of adjusted PPNR.
Asset quality for the total lending portfolio improved between the first quarter of 2016 and the first quarter of 2017. Criticized, classified, and nonaccrual loans all improved as a percentage of outstanding loan balances by 48 bps, 27 bps, and 2 bps respectively. Credit quality measures in the non-oil and gas-related portfolio remained stable throughout 2016 and continued to be strong during the first quarter of 2017. Asset quality in the oil and gas-related portfolio, which represents less than 5% of outstanding loan balances as of March 31, 2017, declined during 2016; however, annualized net charge-offs in the oil and gas-related portfolio declined to 2.72% in the first quarter of 2017 from 5.45% in the same prior year period. Further, outstanding loan balances in the oil and gas-related portfolio have decreased to $2.1 billion in the first quarter of 2017 from $2.6 billion in the same prior year period. Active management of the portfolio has helped mitigate the impact of lower energy prices on credit quality in the total loan portfolio, and has been partially responsible for a lower provision for credit losses between the first quarters of 2017 and 2016.
We continue to increase the return on and of capital. Tangible return on average tangible common equity was 8.83%, up 44 bps from the prior quarter and up 324 bps from the same prior year period. The Company has repurchased 3.9 million shares of common stock since July 31, 2016. Dividends per common share increased to $0.08 in the first quarter of 2017, compared with $0.06 for the same prior year period.

8


ZIONS BANCORPORATION AND SUBSIDIARIES

Areas Experiencing Challenges in the First Quarter of 2017
Net loans and leases increased $1.3 billion or 3.2% between the first quarter of 2016 and March 31, 2017; however, the loan growth was relatively flat when compared with the fourth quarter of 2016 as we continue to be challenged to grow loans at a faster rate than they pay down, pay off, and mature. Annualized loan growth in the first quarter of 2017 was 0.9% and the portfolio has only grown at an average annualized rate of 0.8% for the past three quarters. Average yields on loans remained stable at 4.14% in both the first quarters of 2016 and 2017. Although rate increases have helped improve loan yields, several factors muted some of the natural asset sensitivity (which refers to the impact to net interest income as a result of a changes in the interest rate environment) of the Company, including a decrease in prepayment income, attrition in revenue from loans purchased from the FDIC in 2009, and a shift in the asset mix within the portfolio. Certain of our variable-rate loans have not yet contractually repriced to their respective indices since the steepening of the yield curve that occurred in late 2016, and some variable-rate loans are still below their floors. Further detail on interest rate risk is discussed in “Interest Rate and Market Risk Management” on page 29. Over the next 12 months, we expect mid-single digit growth in our loan portfolio.
Noninterest expense increased to $414 million from $396 million for the same prior year period, representing a 4.5% increase. Higher FDIC premiums, and increased rent and depreciation expense will continue to cause expense to be higher in 2017 when compared with 2016. Adjusted noninterest expense, which excludes severance and some other items as explained in the “GAAP to Non-GAAP Reconciliations” section on page 5, increased 3.8% over the same period. Management is committed to restricting growth in adjusted noninterest expense in 2017 to less than 3% when compared with 2016. As previously discussed, first quarter 2017 adjusted noninterest expense of $411 million, which, when annualized and considering the seasonal expenses in the first quarter of 2017, is consistent with our goal to limit noninterest expense growth to less than 3% in 2017.
Net Interest Income, Margin and Interest Rate Spreads
Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Taxable-equivalent net interest income is the largest portion of our revenue. For the first quarter of 2017, taxable-equivalent net interest income was $497 million, compared with $488 million for the fourth quarter of 2017 and $458 million for the first quarter of 2016. The $39 million increase in taxable-equivalent net interest income in the first quarter of 2017 compared to the first quarter of 2016 was primarily driven by the larger securities portfolio.
Net interest margin in 2017 vs. 2016
The NIM was 3.38% and 3.35% for the first quarter of 2017 and 2016, respectively, and 3.37% for the fourth quarter of 2017. The increased NIM for the first quarter, compared with the same prior year period, resulted from the combination of several factors. The largest positive driver was a change in the mix of interest-earning assets by moving funds from lower-yielding money market investments and using wholesale borrowings in order to purchase available-for-sale (“AFS”) investment securities and grow loans. Although this strategy has helped the NIM and net interest income, several items have tempered its impact, including lower yields on shorter maturity held-to-maturity (“HTM”) securities; changes in the composition of the loan portfolio itself, with growth in lower-yielding consumer and less growth in higher-yielding commercial and industrial loans; and the recent use of wholesale borrowing to fund securities purchases.
The average loan portfolio increased $1.6 billion between the first quarter of 2017 and the first quarter of 2016. The average yield was flat over the same period. The Federal Reserve raised interest rates in both December 2016 and March 2017. Although the most recent increase occurred late in the first quarter, and had little effect on loan interest income, we experienced some improvement in interest income as a result of the December 2016 increase. Our natural asset sensitivity to the rate increases was somewhat muted however, for various reasons, including lower collections of prepayment penalties, when compared with the same prior year period. Additionally, as the balance of purchased credit-impaired (FDIC assisted) loans declines, we have not been able to replace these high yielding assets with loans of comparably high yield, which creates a drag on NIM expansion from rising rates. Further, a portion of our variable-rate loans contain floors on rate indices that are higher than current rates and therefore were not affected by the change in the indices.

9


ZIONS BANCORPORATION AND SUBSIDIARIES

Taxable-equivalent interest income on AFS securities for the first quarter of 2017 increased by $30 million compared with the same prior year period, due to a substantial $5.9 billion increase in average balances as well as a slight increase of 3 bps in the yield.
Average noninterest-bearing demand deposits provided us with low cost funding and comprised 44.9% of average total deposits for the first quarter of 2017, compared with 44.2% for the first quarter of 2016. Average interest-bearing deposits increased by 3.9% in the first quarter of 2017, compared with the same prior year period, and the average rate paid increased 2 bps. Although we consider a wide variety of sources when determining our funding needs, we benefit from access to deposits from a significant number of small to mid-sized business customers, particularly noninterest-bearing deposits, that provide us with a low cost of funds and have a positive impact on our NIM. A significant decrease in the amount of noninterest-bearing deposits would likely have a negative impact on our NIM.
The average balance of long-term debt was $288 million lower for the first quarter of 2017 compared with the same prior year period, as a result of early calls and maturities. The average interest rate paid on long-term debt increased by 90 bps between the same periods due to the reduced balance of debt that was at a lower rate than that of the portfolio. Short-term borrowings increased $2.7 billion. Further changes in short-term borrowing will be driven by balancing changes in deposits and loans as we do not foresee significant shifts in security balances. Despite this significant increase of $2.4 billion in total borrowed funds, interest expense increased only $4 million between the two periods.
Refer to the “Liquidity Risk Management” section beginning on page 33 for more information on how we manage liquidity risk.
See “Interest Rate and Market Risk Management” on page 29 for further discussion of how we manage the portfolios of interest-earning assets, interest-bearing liabilities, and the associated risk.
Interest rate spreads
The spread on average interest-bearing funds was 3.23% and 3.20% for the first quarters of 2017 and 2016, respectively. The spread on average interest-bearing funds for these periods was affected by the same factors that had an impact on the NIM. Over the next 12 months, we expect mid-single digit growth in our loan portfolio. We anticipate this growth will be partially offset by continued attrition in the NRE and oil and gas-related portfolios, although we expect the rate of attrition to be slower than it was in 2016. Average yields on the loan portfolio may continue to experience modest downward pressure due to competitive pricing and growth in lower-yielding residential mortgages; however, we expect average yields on the loan portfolio to benefit from short-term rate increases.
Although security purchases have reduced the level of asset sensitivity, we expect to remain asset-sensitive with regard to interest rate risk. During the first quarter of 2017, we purchased high-quality liquid assets (“HQLA”) securities of $2.6 billion at amortized cost, increasing HQLA securities by $2.5 billion after paydowns and payoffs during the quarter. In the near term, we anticipate that the level of investment securities as a percent of assets will remain relatively stable.
Our estimates of the Company’s actual interest rate risk position are highly dependent upon a number of assumptions regarding the repricing behavior of various deposit and loan types in response to changes in both short-term and long-term interest rates, balance sheet composition, and other modeling assumptions, as well as the actions of competitors and customers in response to those changes. In addition, our modeled projections for noninterest-bearing demand deposits, which are a substantial portion of our deposit balances, are particularly reliant on assumptions for which there is little historical experience due to the prolonged period of very low interest rates. Further detail on interest rate risk is discussed in “Interest Rate and Market Risk Management” on page 29.
The following schedule summarizes the average balances, the amount of interest earned or incurred, and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities that generate taxable-equivalent net interest income.

10


ZIONS BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
(Unaudited)
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
(Dollar amounts in millions)
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
 
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Money market investments
$
1,983

 
$
5

 
0.93
%
 
$
5,122

 
$
7

 
0.55
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
847

 
8

 
3.90

 
562

 
7

 
4.86

Available-for-sale
14,024

 
73

 
2.14

 
8,109

 
43

 
2.11

Trading account
61

 
1

 
3.75

 
53

 

 
3.56

Total securities 2
14,932

 
82

 
2.24

 
8,724

 
50

 
2.30

Loans held for sale
132

 
1

 
3.22

 
140

 
1

 
3.95

Loans and leases 3
 
 
 
 
 
 
 
 
 
 
 
Commercial
21,606

 
225

 
4.22

 
21,624

 
226

 
4.20

Commercial real estate
11,241

 
118

 
4.27

 
10,556

 
111

 
4.23

Consumer
9,719

 
92

 
3.82

 
8,823

 
85

 
3.90

Total loans and leases
42,566

 
435

 
4.14

 
41,003

 
422

 
4.14

Total interest-earning assets
59,613

 
523

 
3.56

 
54,989

 
480

 
3.51

Cash and due from banks
974

 
 
 
 
 
728

 
 
 
 
Allowance for loan losses
(566
)
 
 
 
 
 
(600
)
 
 
 
 
Goodwill
1,014

 
 
 
 
 
1,014

 
 
 
 
Core deposit and other intangibles
8

 
 
 
 
 
15

 
 
 
 
Other assets
2,952

 
 
 
 
 
2,680

 
 
 
 
Total assets
$
63,995

 
 
 
 
 
$
58,826

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings and money market
$
25,896

 
$
9

 
0.14
%
 
$
25,350

 
$
10

 
0.15
%
Time
2,856

 
4

 
0.59

 
2,088

 
2

 
0.44

Foreign

 

 


 
235

 

 
0.26

Total interest-bearing deposits
28,752

 
13

 
0.19

 
27,673

 
12

 
0.17

Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Federal funds and other short-term borrowings
2,924

 
5

 
0.71

 
268

 

 
0.18

Long-term debt
521

 
8

 
5.92

 
809

 
10

 
5.02

Total borrowed funds
3,445

 
13

 
1.50

 
1,077

 
10

 
3.82

Total interest-bearing liabilities
32,197

 
26

 
0.33

 
28,750

 
22

 
0.31

Noninterest-bearing deposits
23,460

 
 
 
 
 
21,882

 
 
 
 
Other liabilities
632

 
 
 
 
 
579

 
 
 
 
Total liabilities
56,289

 
 
 
 
 
51,211

 
 
 
 
Shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred equity
710

 
 
 
 
 
828

 
 
 
 
Common equity
6,996

 
 
 
 
 
6,787

 
 
 
 
Total shareholders’ equity
7,706

 
 
 
 
 
7,615

 
 
 
 
Total liabilities and shareholders’ equity
$
63,995

 
 
 
 
 
$
58,826

 
 
 
 
Spread on average interest-bearing funds
 
 
 
 
3.23%

 
 
 
 
 
3.20%

Taxable-equivalent net interest income and net yield on interest-earning assets
 
 
$
497

 
3.38%

 
 
 
$
458

 
3.35%

1 
Taxable-equivalent rates used where applicable.
2 
Interest on total securities includes $29 million and $19 million of premium amortization, as of March 31, 2017 and March 31, 2016, respectively.
3 
Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.

11


ZIONS BANCORPORATION AND SUBSIDIARIES

Provisions for Credit Losses
The provision for credit losses is the combination of both the provision for loan losses and the provision for unfunded lending commitments. The provision for loan losses is the amount of expense that, in our judgment, is required to maintain the allowance for loan and lease losses (“ALLL”) at an adequate level based on the inherent risks in the loan portfolio. The provision for unfunded lending commitments is used to maintain the reserve for unfunded lending commitments (“RULC”) at an adequate level based on the inherent risks associated with such commitments. In determining adequate levels of the ALLL and RULC, we perform periodic evaluations of our various loan portfolios, the levels of actual charge-offs, credit trends, and external factors. See Note 6 of the Notes to Consolidated Financial Statements and “Credit Risk Management” on page 19 for more information on how we determine the appropriate level for the ALLL and the RULC.
The provision for loan losses was $23 million in the first quarter of 2017, compared with $42 million in the same prior year period. Most of the provision in the first quarter of 2017 was due to charge-offs related to an isolated event with a single, non-oil and gas-related borrower, who is subject to a government investigation and seizure of assets. The provision was higher in the first quarter of 2016 due to incurred losses in the oil and gas-related portfolio. Net charge-offs were $46 million in the first quarter of 2017, compared with $36 million in the same prior year period. The increase was mainly due to the isolated charge-off discussed previously. Net charge-offs decreased $22 million in the oil and gas-related portfolio in the first quarter of 2017, when compared with the same prior year period.
Criticized and classified loans decreased by $138 million and $68 million, respectively, between the first quarters of 2016 and 2017. Nonaccrual loans increased $10 million over the same period, but decreased as a percentage of the outstanding loan balance by 2bps. Although asset quality in the oil and gas-related portfolio, representing almost 5% of our total loan portfolio, deteriorated through much of 2016, it has improved for two straight quarters.
During the first quarter of 2017, we recorded a $(5) million provision for unfunded lending commitments, compared with a $(6) million provision in the first quarter of 2016. The negative provision recognized in the first quarter of 2017 is a result of credit quality improvement in the oil and gas-related portfolio. From quarter to quarter, the provision for unfunded lending commitments may be subject to sizable fluctuations due to changes in the timing and volume of loan commitments, originations, fundings, and changes in credit quality.
The allowance for credit losses (“ACL”), which is the combination of both the ALLL and the RULC, decreased $77 million when compared with the first quarter of 2016. Declines in credit quality and increased charge-offs in the oil and gas-related portfolio were more than offset by improvements in the rest of the loan portfolio. Further, declining oil and gas-related exposure and increasing residential real estate and Commercial Real Estate (“CRE”) term exposure improved the risk profile of the portfolio.
Net charge-offs in the non-oil and gas-related portfolio (95% of total loans) were $32 million in the first quarter of 2017, $30 million of which was from the isolated charge-off previously described. We also continued to benefit from credit improvement in the oil and gas-related portfolio, which is not currently experiencing meaningful deterioration or negative migration. We expect the provision for credit losses throughout 2017 to be generally consistent with fiscal year 2016, particularly if energy prices remain at or near current levels. Refer to the “Oil and Gas-Related Exposure” section on page 21 for more information.
Noninterest Income
Noninterest income represents revenues we earn for products and services that have no associated interest rate or yield. For the first quarter of 2017 noninterest income increased to $132 million, compared with $117 million for the first quarter of 2016. The major drivers for the improvement in year-over-year noninterest income were securities gains and investment income, which increased a combined $12 million over the same prior period. Both items were heavily driven by gains recognized from an individual equity security, which is present in multiple company-owned Small Business Investment Company (“SBIC”) investments. This investee went public in 2016 and has experienced some volatility in stock price since its IPO. We are unwinding our position in the stock, which will reduce some of the observed variance; however, we are subject to certain limitations on the amount we can sell

12


ZIONS BANCORPORATION AND SUBSIDIARIES

each quarter. Gains or losses on equity securities may increase or decrease due to market factors or the performance of individual securities.
We believe a subtotal of customer-related fees provides a better view of income over which we have more direct control. It excludes items such as dividends, insurance-related income, mark-to-market adjustments on certain derivatives, and securities gains and losses. Customer-related fees increased to $115 million from $112 million in the same prior year period and decreased from $118 million in the fourth quarter of 2016. Steady positive progress in fee income during 2016 was somewhat offset by a reduction in sales of interest rate swaps to clients and fewer loan originations during the most recent quarter, resulting in lower loan fees. Compared with the same prior year period, credit card interchange fees and wealth management fees have seen strong growth, and the Company has also benefitted from gains in foreign currency trading.
Noninterest Expense
Noninterest expense increased by $18 million, or 4.5%, to $414 million in the first quarter of 2017, compared with the same prior year period. Expense increases were driven mainly by the higher cost of labor and other employee-related costs, higher occupancy costs and FDIC premiums. Expenses increased slightly between the two quarters in several other areas, but increases have been expected as communicated by our target to limit adjusted noninterest expense growth to less than 3%, which was $1.579 billion. We believe we are on track to successfully achieving this goal. The following are major components of noninterest expense line items impacting the first quarter change.
Salaries and employee benefits expense was up $4 million or 1.6% compared with the first quarter of 2016. Base salaries increased from overtime and contract work due to significant progress being made towards the Company’s technology initiatives, and we also had a larger amount of severance expense in the current quarter as we continue to consolidate and streamline operations where possible. We had larger insurance costs in the Company’s self-funded medical plans and also a larger amount of retirement expense between the two quarters. These increases were partially offset by a $4 million reduction in salary expense, primarily driven by our accounting estimation process for deferred fees and costs related to loan originations.
Occupancy expense increased $3 million or 10.0% in the first quarter of 2017 compared with the same prior year period. We recently placed a newly constructed office building into operation in Houston and the increase in occupancy expense was primarily due to transition expenses incurred this quarter.
FDIC premium expense increased $5 million or 71.4% from the first quarter of 2016 due to a higher deposit base and the FDIC surcharge. The FDIC approved a change in deposit insurance assessments that implements a Dodd-Frank Act provision requiring banks with over $10 billion in assets to be responsible for recapitalizing the FDIC insurance fund to 1.35% over an eight-quarter period, after it reaches a 1.15% reserve ratio. The 1.15% threshold was reached at the end of the second quarter of 2016 and the premium has been effective since then, although this has been somewhat offset by a reduction in the Company’s overall FDIC charges resulting from the consolidation of the individual bank charters and successfully lowering the risk profile of the Bank.
Our goal is to limit adjusted noninterest expense growth to less than 3% in 2017. For the first three months of 2017 adjusted noninterest expense was $411 million. To arrive at adjusted noninterest expense, GAAP noninterest expense is adjusted to exclude certain expense items which are the same as those items excluded in arriving at the efficiency ratio (see “GAAP to Non-GAAP Reconciliations” on page 5 for more information regarding the calculation of the efficiency ratio).
Income Taxes
Income tax expense for the first quarter of 2017 was $45 million compared with $41 million for the same year ago period. The effective tax rates, including the effects of noncontrolling interests, for the first three months of 2017 and 2016 were 24.5% and 31.1%, respectively. The tax expense rate for both these quarters benefited primarily from the non-taxability of certain income items; however, the 2017 effective tax rate was further reduced by other adjustments. In the first quarter of 2017 we re-evaluated our state tax positions which resulted in a one-time $14

13


ZIONS BANCORPORATION AND SUBSIDIARIES

million benefit to tax expense, in addition to a $4 million benefit from the implementation of new accounting guidance related to stock-based compensation.
We had a net deferred tax asset (“DTA”) balance of $231 million at March 31, 2017, compared with $250 million at December 31, 2016. The decrease in the DTA resulted primarily from net charge-offs exceeding the provision for loan losses, the payout of accrued compensation, and the reduction of unrealized losses in other comprehensive income (“OCI”) related to securities. A decrease in deferred tax liabilities during the first quarter of 2017, which related to premises and equipment and the deferred gain on a prior period debt exchange, offset some of the overall decrease in DTA.
Preferred Dividends
Our preferred dividends decreased $2 million in the first quarter of 2017 when compared with the first quarter of 2016, due to the successful tender offer in the second quarter of 2016 to purchase $119 million of preferred stock. On April 27, 2017, the Company issued a press release announcing the planned redemption of all outstanding 7.90% Series F non-cumulative preferred stock. As a result, preferred dividends are expected to be $12 million, $8 million, and $10 million in the second, third, and fourth quarters of 2017, respectively, compared with $13 million, $10 million, and $12 million in the second, third, and fourth quarters of 2016, respectively.
BALANCE SHEET ANALYSIS
Interest-Earning Assets
Interest-earning assets are those assets that have interest rates or yields associated with them. One of our goals is to maintain a high level of interest-earning assets relative to total assets while keeping nonearning assets at a minimum. Interest-earning assets consist of money market investments, securities, loans, and leases.
Another goal is to maintain a higher-yielding mix of interest-earning assets, such as loans, relative to lower-yielding assets, while maintaining adequate levels of highly liquid assets. As a result of this goal we have been redeploying funds from lower-yielding money market investments, in addition to using wholesale borrowings, to purchase agency securities.
For information regarding the average balances of our interest-earning assets, the amount of revenue generated by them, and their respective yields see the average balance sheet on pages 12.
Average interest-earning assets were $59.6 billion for the first three months of 2017, compared with $55.0 billion for the first three months of 2016. Average interest-earning assets as a percentage of total average assets for the first three months of 2017 and 2016 were 93.2% and 93.5%, respectively.
Average loans were $42.6 billion and $41.0 billion for the first three months of 2017 and 2016, respectively. Average loans as a percentage of total average assets for the first three months of 2017 were 66.5%, compared with 69.7% in the corresponding prior year period.
Average money market investments, consisting of interest-bearing deposits, federal funds sold, and security resell agreements, decreased by 61.3% to $2.0 billion for the first three months of 2017, compared with $5.1 billion for the first three months of 2016. Average securities increased by 71.2% for the first three months of 2017, compared with the first three months of 2016.
Investment Securities Portfolio
We invest in securities to actively manage liquidity and interest rate risk, in addition to generating revenues for the Company. Refer to the “Liquidity Risk Management” section on page 33 for additional information on management of liquidity and funding and compliance with Basel III and Liquidity Coverage Ratio (“LCR”) requirements. The following schedule presents a profile of our investment securities portfolio. The amortized cost amounts represent the original cost of the investments, adjusted for related accumulated amortization or accretion of any yield

14


ZIONS BANCORPORATION AND SUBSIDIARIES

adjustments, and for impairment losses, including credit-related impairment. The estimated fair value measurement levels and methodology are discussed in Note 3 of the Notes to Consolidated Financial Statements.
INVESTMENT SECURITIES PORTFOLIO
 
March 31, 2017
 
December 31, 2016
(In millions)
Par value
 
Amortized
cost
 
Estimated
fair
value
 
Par value
 
Amortized
cost
 
Estimated
fair
value
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
815

 
$
815

 
$
803

 
$
868

 
$
868

 
$
850

 
815

 
815

 
803

 
868

 
868

 
850

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations:
 
 
 
 
 
 
 
 
 
 
 
Agency securities
1,859

 
1,858

 
1,853

 
1,847

 
1,846

 
1,839

Agency guaranteed mortgage-backed securities
9,819

 
10,060

 
9,961

 
7,745

 
7,986

 
7,883

Small Business Administration loan-backed securities
2,122

 
2,360

 
2,349

 
2,066

 
2,298

 
2,288

Municipal securities
1,151

 
1,299

 
1,285

 
1,048

 
1,182

 
1,154

Other debt securities
25

 
25

 
24

 
25

 
25

 
24

 
14,976

 
15,602

 
15,472

 
12,731

 
13,337

 
13,188

Money market mutual funds and other
134

 
134

 
134

 
184

 
184

 
184

 
15,110

 
15,736

 
15,606

 
12,915

 
13,521

 
13,372

Total
$
15,925

 
$
16,551

 
$
16,409

 
$
13,783

 
$
14,389

 
$
14,222

The amortized cost of investment securities at March 31, 2017 increased by 15.0% from the balances at December 31, 2016, primarily due to purchases of agency guaranteed mortgage-backed securities. There were additional increases in agency securities, municipal securities, and Small Business Administration (“SBA”) loan-backed securities.
The investment securities portfolio includes $626 million of net premium that is distributed across various asset classes as illustrated in the preceding schedule. Recent purchases of these securities have occurred at a premium to the respective par amount. The purchase premiums and discounts for both HTM and AFS securities are amortized and accreted at a constant effective yield to the contractual maturity date and no assumption is made concerning prepayments. As principal prepayments occur, the portion of the unamortized premium or discount associated with the principal reduction is recognized as interest income in the period the principal is reduced. For the first three months of 2017, premium amortization reduced the yield on securities by 83 bps, compared with a 100 bps impact for the linked quarter and a 92 bps impact for the first three months of 2016. The lower level of premium amortization was attributable to slower prepayment speeds. In addition, yields of floating-rate securities, primarily SBA loan-backed securities, benefited from increases in reference indices.
As of March 31, 2017, under the GAAP fair value accounting hierarchy, 0.9% of the $15.6 billion fair value of the AFS securities portfolio was valued at Level 1, 99.1% was valued at Level 2, and there were no Level 3 AFS securities. At December 31, 2016, 1.4% of the $13.4 billion fair value of AFS securities portfolio was valued at Level 1, 98.6% was valued at Level 2, and there were no Level 3 AFS securities. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of fair value accounting.
Exposure to State and Local Governments
We provide multiple products and services to state and local governments (referred together as “municipalities”), including deposit services, loans, and investment banking services, and we invest in securities issued by the municipalities.

15


ZIONS BANCORPORATION AND SUBSIDIARIES

The following schedule summarizes our exposure to state and local municipalities:
MUNICIPALITIES
(In millions)
March 31,
2017
 
December 31,
2016
 
 
 
 
Loans and leases
$
811

 
$
778

Held-to-maturity – municipal securities
815

 
868

Available-for-sale – municipal securities
1,285

 
1,154

Trading account – municipal securities
34

 
112

Unfunded lending commitments
192

 
182

Total direct exposure to municipalities
$
3,137

 
$
3,094

At March 31, 2017, one municipal loan with a balance of $1 million was on nonaccrual. A significant amount of the municipal loan and lease portfolio is secured by real estate and equipment, and 90.1% of the outstanding credits were originated by CB&T, Zions Bank, Vectra, and Amegy. See Note 6 of the Notes to Consolidated Financial Statements for additional information about the credit quality of these municipal loans.
Growth in municipal exposures came primarily from increases in the municipal AFS securities portfolio consistent with the Company’s initiative to increase securities. AFS securities generally consist of securities with investment-grade ratings from one or more major credit rating agencies.
Foreign Exposure and Operations
Our credit exposure to foreign sovereign risks and total foreign credit exposure is not significant. We also do not have significant foreign exposure to derivative counterparties. We had no foreign deposits at March 31, 2017 and December 31, 2016.
Loan Portfolio
For the first three months of 2017 and 2016, average loans accounted for 66.5% and 69.7%, respectively, of total average assets. As presented in the following schedule, commercial and industrial loans were the largest category and constituted 31.3% of our loan portfolio at March 31, 2017.

16


ZIONS BANCORPORATION AND SUBSIDIARIES

LOAN PORTFOLIO
 
March 31, 2017
 
December 31, 2016
(Dollar amounts in millions)
Amount
 
% of
total loans
 
Amount
 
% of
total loans
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
$
13,368

 
31.3
%
 
$
13,452

 
31.5
%
Leasing
404

 
0.9

 
423

 
1.0

Owner-occupied
6,973

 
16.3

 
6,962

 
16.3

Municipal
811

 
1.9

 
778

 
1.8

Total commercial
21,556

 
50.4

 
21,615

 
50.6

Commercial real estate:
 
 
 
 
 
 
 
Construction and land development
2,123

 
5.0

 
2,019

 
4.7

Term
9,083

 
21.2

 
9,322

 
21.9

Total commercial real estate
11,206

 
26.2

 
11,341

 
26.6

Consumer:
 
 
 
 
 
 
 
Home equity credit line
2,638

 
6.2

 
2,645

 
6.2

1-4 family residential
6,185

 
14.5

 
5,891

 
13.8

Construction and other consumer real estate
517

 
1.2

 
486

 
1.2

Bankcard and other revolving plans
459

 
1.1

 
481

 
1.1

Other
181

 
0.4

 
190

 
0.5

Total consumer
9,980

 
23.4

 
9,693

 
22.8

Total net loans
$
42,742

 
100.0
%
 
$
42,649

 
100.0
%
Loan portfolio growth during the first three months of 2017 was in line with the industry. Despite softening in some areas, we saw moderate growth in 1-4 family residential and commercial real estate construction and land development lending. During the first quarter of 2017, the Company also purchased $166 million of 1-4 family residential loans. The impact of these increases was partially offset by decreases in commercial real estate term and commercial and industrial loans.
Commercial owner-occupied loans also increased during the quarter; however, we experienced continued runoff and attrition of the National Real Estate portfolio at Zions Bank. The National Real Estate business is a wholesale business that depends on loan referrals from other community banking institutions. Due to generally soft loan demand nationally, many community banking institutions are retaining, rather than selling, their loan production.
Other Noninterest-Bearing Investments
In the first quarter of 2017, the Company increased its short-term borrowings with the FHLB by $2 billion. This increase required a further investment in FHLB activity stock, which consequently increased by $80 million in the quarter. Other noninterest-bearing investments remained relatively stable as set forth in the following schedule.
OTHER NONINTEREST-BEARING INVESTMENTS
(In millions)
March 31,
2017
 
December 31,
2016
 
 
 
 
Bank-owned life insurance
$
499

 
$
497

Federal Home Loan Bank stock
110

 
30

Federal Reserve stock
183

 
181

Farmer Mac stock
38

 
34

SBIC investments
126

 
124

Non-SBIC investment funds
14

 
15

Other
3

 
3

 
$
973

 
$
884


17


ZIONS BANCORPORATION AND SUBSIDIARIES

Premises and Equipment
Premises and equipment increased $27 million, or 2.6%, during the first three months of 2017 primarily due to capitalized costs associated with the development of a new corporate facility for Amegy Bank in Texas, a large software purchase, and the capitalization of eligible costs related to the development of new lending, deposit and reporting systems.
Deposits
Deposits, both interest-bearing and noninterest-bearing, are a primary source of funding for the Company. Average total deposits for the first three months of 2017 increased by 5.4%, compared with the first three months of 2016, with average interest-bearing deposits increasing by 3.9% and average noninterest-bearing deposits increasing by 7.2%. The increases in interest and noninterest-bearing deposits were driven by increases in both personal and business customer balances. The average interest rate paid for interest-bearing deposits was 2 bps higher during the first three months of 2017, compared with the first three months of 2016.
Deposits at March 31, 2017, excluding time deposits $100,000 and over and brokered deposits, decreased slightly to $51.3 billion from $51.4 billion at December 31, 2016. The decrease was mainly due to a decrease in interest-bearing domestic savings and money market deposits offset by an increase in noninterest-bearing deposits.
Demand and savings and money market deposits were 94.4% and 94.8% of total deposits at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017 and December 31, 2016, total deposits included $1.2 billion and $0.9 billion, respectively, of brokered deposits.
See “Liquidity Risk Management” on page 33 for additional information on funding and borrowed funds.
RISK ELEMENTS
Since risk is inherent in substantially all of the Company’s operations, management of risk is an integral part of its operations and is also a key determinant of its overall performance. The Board of Directors has appointed a Risk Oversight Committee (“ROC”) that consists of appointed Board members who oversee the Company’s risk management processes. The ROC meets on a regular basis to monitor and review Enterprise Risk Management (“ERM”) activities. As required by its charter, the ROC performs oversight for various ERM activities and approves ERM policies and activities as detailed in the ROC charter.
Management applies various strategies to reduce the risks to which the Company’s operations are exposed, including credit, interest rate and market, liquidity, and operational risks. These risks are overseen by the various management committees of which the Enterprise Risk Management Committee (“ERMC”) is the focal point for the monitoring and review of enterprise risk.
Credit Risk Management
Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risk arises primarily from our lending activities, as well as from off-balance sheet credit instruments.
The Board of Directors, through the ROC, is responsible for approving the overall credit policies relating to the management of the credit risk of the Company. In addition, the ROC oversees and monitors adherence to key credit policies and the credit risk appetite as defined in the Risk Appetite Framework. Additionally, the Board has established the Credit Administration Committee, chaired by the Chief Credit Officer and consisting of members of management, to which it has delegated the responsibility for managing credit risk for the Company and approving changes to the Company’s credit policies.
Centralized oversight of credit risk is provided through credit policies, credit risk management, and credit examination functions. We separate the lending function from the credit risk management function, which strengthens control over, and the independent evaluation of, credit activities. Formal credit policies and procedures

18


ZIONS BANCORPORATION AND SUBSIDIARIES

provide the Company with a framework for consistent underwriting and a basis for sound credit decisions at the local banking affiliate level. In addition, we have a well-defined set of standards for evaluating our loan portfolio, and we utilize a comprehensive loan risk-grading system to determine the risk potential in the portfolio. Furthermore, the internal credit examination department periodically conducts examinations of the Company’s lending departments and credit activities. These examinations are designed to review credit quality, adequacy of documentation, appropriate loan risk-grading administration, and compliance with credit policies. New, expanded, or modified products and services, as well as new lines of business, are approved by the New Initiative Review Committee.
Both the credit policy and the credit examination functions are managed centrally. Emphasis is placed on strong underwriting standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate any potential losses.
Our credit risk management strategy includes diversification of our loan portfolio. We attempt to avoid the risk of an undue concentration of credits in a particular collateral type or with an individual customer or counterparty. Generally, our loan portfolio is well diversified; however, due to the nature of our geographical footprint, there are certain significant concentrations primarily in CRE and oil and gas-related lending. We have adopted and adhere to concentration limits on various types of CRE lending, particularly construction and land development lending, leveraged lending, municipal lending, and oil and gas-related lending. All of these limits are continually monitored and revised as necessary. The recent growth in construction and land development loan commitments is within the established concentration limits. Our business activity is primarily with customers located within the geographical footprint of our banking affiliates.
As we continue to monitor our concentration risk, the composition of our loan portfolio has slightly changed. Oil and gas-related loans represented 4.8% of the total loan portfolio at March 31, 2017, compared with 5.1% at December 31, 2016. Total commercial and commercial real estate loans were 50.4% and 26.2% of the total portfolio at March 31, 2017, compared with 50.6% and 26.6%, at December 31, 2016, respectively. Consumer loans have grown to represent 23.4% of the total loan portfolio at March 31, 2017, compared with 22.8% at December 31, 2016.
Government Agency Guaranteed Loans
We participate in various guaranteed lending programs sponsored by U.S. government agencies, such as the SBA, Federal Housing Authority, Veterans’ Administration, Export-Import Bank of the U.S., and the U.S. Department of Agriculture. As of March 31, 2017, the principal balance of these loans was $548 million, and the guaranteed portion of these loans was $414 million. Most of these loans were guaranteed by the SBA.
The following schedule presents the composition of government agency guaranteed loans.
GOVERNMENT GUARANTEES
(Dollar amounts in millions)
March 31, 2017
 
Percent
guaranteed
 
December 31, 2016
 
Percent
guaranteed
 
 
 
 
 
 
 
 
Commercial
$
514

 
75
%
 
$
519

 
75
%
Commercial real estate
17

 
76

 
18

 
75

Consumer
17

 
92

 
17

 
92

Total loans
$
548

 
76

 
$
554

 
76

Commercial Lending
The following schedule provides selected information regarding lending concentrations to certain industries in our commercial lending portfolio.

19


ZIONS BANCORPORATION AND SUBSIDIARIES

COMMERCIAL LENDING BY INDUSTRY GROUP
 
March 31, 2017
 
December 31, 2016
(Dollar amounts in millions)
Amount
 
Percent
 
Amount
 
Percent
 
 
 
 
 
 
 
 
Real estate, rental and leasing
$
2,566

 
11.9
%
 
$
2,624

 
12.1
%
Retail trade 1
2,222

 
10.3

 
2,145

 
9.9

Manufacturing
2,102

 
9.8

 
2,161

 
10.0

Finance and insurance
1,510

 
7.0

 
1,462

 
6.8

Healthcare and social assistance
1,498

 
6.9

 
1,538

 
7.1

Wholesale trade
1,458

 
6.8

 
1,444

 
6.7

Mining, quarrying and oil and gas extraction
1,273

 
5.9

 
1,403

 
6.5

Transportation and warehousing
1,272

 
5.9

 
1,300

 
6.0

Construction
1,068

 
4.9

 
1,076

 
5.0

Accommodation and food services
932

 
4.3

 
925

 
4.3

Other services (except Public Administration)
909

 
4.2

 
881

 
4.1

Professional, scientific and technical services
902

 
4.2

 
875

 
4.0

Utilities 2
787

 
3.7

 
783

 
3.6

Other 3
3,057

 
14.2

 
2,998

 
13.9

Total
$
21,556

 
100.0
%
 
$
21,615

 
100.0
%
1 
At March 31, 2017, 81% of retail trade consist of auto and other motor vehicle dealers, gas stations, and grocery stores. For additional detail on our commercial real estate retail exposure, see the Commercial Real Estate Loans section on page 24.
2 
Includes primarily utilities, power, and renewable energy.
3 
No other industry group exceeds 3.5%.
Oil and Gas-Related Exposure
Various industries represented in the previous schedule, including mining, quarrying and oil and gas extraction, manufacturing, and transportation and warehousing, contain certain loans we categorize as oil and gas-related. At both March 31, 2017 and December 31, 2016, we had approximately $3.9 billion of total oil and gas-related credit exposure. The distribution of oil and gas-related loans by customer market segment is shown in the following schedule:

20


ZIONS BANCORPORATION AND SUBSIDIARIES

OIL AND GAS-RELATED EXPOSURE 1 
(Dollar amounts in millions)
March 31,
2017
 
December 31, 2016
 
March 31, 2016
Loans and leases
 
 
 
 
 
Upstream – exploration and production
$
685

 
$
733

 
$
859

Midstream – marketing and transportation
603

 
598

 
649

Downstream – refining
108

 
137

 
129

Other non-services
38

 
38

 
43

Oilfield services
466

 
500

 
734

Oil and gas service manufacturing
161

 
152

 
229

Total loan and lease balances 2
2,061

 
2,158

 
2,643

Unfunded lending commitments
1,886

 
1,722

 
2,021

Total oil and gas credit exposure
$
3,947

 
$
3,880

 
$
4,664

Private equity investments
$
6

 
$
7

 
$
12

Credit quality measures 2
 
 
 
 
 
Criticized loan ratio
38.0
%
 
37.8
%
 
37.5
%
Classified loan ratio
30.4
%
 
31.6
%
 
26.9
%
Nonaccrual loan ratio
14.8
%
 
13.6
%
 
10.8
%
Ratio of nonaccrual loans that are current
73.1
%
 
86.1
%
 
90.6
%
Net charge-off ratio, annualized 3
2.7
%
 
3.0
%
 
5.4
%
1 
Because many borrowers operate in multiple businesses, judgment has been applied in characterizing a borrower as oil and gas-related, including a particular segment of oil and gas-related activity, e.g., upstream or downstream; typically, 50% of revenues coming from the oil and gas sector is used as a guide.
2 Total loan and lease balances and the credit quality measures at March 31, 2017 do not include $21 million of oil and gas-related loans held for sale.
3 
Calculated as the ratio of annualized net charge-offs, for each respective period, to loan balances at each period end.
During the first quarter of 2017, our overall balance of oil and gas-related loans decreased by $97 million, or 4.5%, from year-end 2016, and decreased by $582 million, or 22.0%, from the first quarter of 2016. Oil and gas-related loans represented 4.8% of the total loan portfolio at March 31, 2017, compared with 5.1% at December 31, 2016 and 6.4% at March 31, 2016. Unfunded oil and gas-related lending commitments increased by $164 million, or 9.5%, during the first quarter of 2017, from year-end 2016, and declined by $135 million, or 6.7%, from the first quarter of 2016. The increase in unfunded oil and gas-related lending commitments was primarily in the midstream portfolio.
Classified oil and gas-related credits decreased to $626 million at March 31, 2017, from $681 million at December 31, 2016. Oil and gas-related loan net charge-offs were $14 million in the first quarter of 2017, predominantly in the upstream portfolio, compared with $16 million in the fourth quarter of 2016, which were predominantly in the oilfield services portfolio.
Nonaccruing oil and gas-related loans increased by $11 million from the fourth quarter of 2016, primarily in the upstream portfolio. Approximately 73% of oil and gas-related nonaccruing loans were current as to principal and interest payments at March 31, 2017, down from 86% at December 31, 2016.
Risk Management of the Oil and Gas-Related Portfolio
The oil and gas-related portfolio is comprised of three primary segments: upstream, midstream, and oil and gas services. Upstream exploration and productions loan borrowers have relatively balanced production between oil and gas. Midstream loans are made to companies that gather, transport, treat and blend oil and natural gas, or that provide services to similar companies. Oil and gas services loans, which include oilfield services and oil and gas service manufacturing, include borrowers that have a concentration of revenues in the oil and gas industry. However, many of these borrowers provide a broad range of products and services to the oil and gas industry and

21


ZIONS BANCORPORATION AND SUBSIDIARIES

are diversified geographically. For a more comprehensive discussion of these segments refer to our 2016 Annual Report on Form 10-K.
We apply concentration limits and disciplined underwriting to the entire oil and gas-related loan portfolio to limit our risk exposure. As an indicator of the diversity in the size of our oil and gas-related portfolio, the average amount of our commitments is approximately $6 million, with approximately 63% of the commitments less than $30 million. Additionally, there are instances where we have commitments to companies with a common sponsor, which, if combined, would result in higher commitment levels than $30 million. The portfolio contains only senior loans – no junior or second lien positions; additionally, we cautiously approach making first-lien loans to borrowers that employ excessive leverage through the use of junior lien loans or unsecured layers of debt. Approximately 88% of the total oil and gas-related portfolio is secured by reserves, equipment, real estate, and other collateral, or a combination of collateral types.
We participate as a lender in loans and commitments designated as Shared National Credits (“SNCs”), which generally consist of larger and more diversified borrowers that have better access to capital markets. SNCs are loans or loan commitments of at least $20 million that are shared by three or more federally supervised institutions. The percentage of SNCs is approximately 77% of the upstream portfolio, 70% of the midstream portfolio, and 45% of the oil and gas services portfolio. Our bankers have direct access and contact with the management of these SNC borrowers, and as such, are active participants. In many cases, we provide ancillary banking services to these borrowers, further evidencing this direct relationship. The results of the recent SNC exam are reflected in our financial statements.
As a secondary source of support, many of our oil and gas-related borrowers have access to capital markets and private equity sources. Private sponsors tend to be large funds, often with assets under management of more than $1 billion, managed by individuals with a great deal of oil and gas expertise and experience and who have successfully managed investments through previous oil and gas price cycles. The investors in the funds are primarily institutional investors, such as large pensions, foundations, trusts, and high net worth family offices.
When establishing the level of the ACL, we consider multiple factors, including reduced drilling activity and additional capital raises by borrowers and their sponsors. Consistent with the fourth quarter of 2016, the ACL related to the oil and gas portfolio continued to exceed 8% for the first quarter of 2017.

22


ZIONS BANCORPORATION AND SUBSIDIARIES

Commercial Real Estate Loans
Selected information indicative of credit quality regarding our CRE loan portfolio is presented in the following schedule.
COMMERCIAL REAL ESTATE PORTFOLIO BY LOAN TYPE AND COLLATERAL LOCATION
(Dollar amounts in millions)
 
Collateral Location
 
 
 
 
Loan type
 
As of
date
 
Arizona
 
California
 
Colorado
 
Nevada
 
Texas
 
Utah/
Idaho
 
Wash-ington
 
Other 1
 
Total
 
% of 
total
CRE
Commercial term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance outstanding
 
3/31/2017
 
$
1,195

 
$
2,986

 
$
396

 
$
615

 
$
1,672

 
$
1,309

 
$
343

 
$
567

 
$
9,083

 
81.1
%
% of loan type
 
 
 
13.2
%
 
32.9
%
 
4.3
%
 
6.8
%
 
18.4
%
 
14.4
%
 
3.8
%
 
6.2
%
 
100.0
%
 
 
Delinquency rates 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-89 days
 
3/31/2017
 
0.2
%
 
0.1
%
 
0.5
%
 
%
 
0.1
%
 
0.1
%
 
0.2
%
 
0.1
%
 
0.1
%
 
 
 
 
12/31/2016
 
0.1
%
 
%
 
%
 
0.7
%
 
%
 
0.1
%
 
0.2
%
 
0.1
%
 
0.1
%
 
 
≥ 90 days
 
3/31/2017
 
0.3
%
 
0.4
%
 
%
 
%
 
0.1
%
 
0.1
%
 
%
 
0.9
%
 
0.3
%
 
 
 
 
12/31/2016
 
0.2
%
 
0.4
%
 
%
 
%
 
%
 
0.1
%
 
%
 
1.0
%
 
0.2
%
 
 
Accruing loans past due 90 days or more
 
3/31/2017
 
$

 
$
11

 
$

 
$

 
$
1

 
$
2

 
$

 
$

 
$
14

 
 
 
 
12/31/2016
 

 
10

 

 

 

 
2

 

 

 
12

 
 
Nonaccrual loans
 
3/31/2017
 
$
8

 
$
10

 
$

 
$
2

 
$
9

 
$
1

 
$
1

 
$
7

 
$
38

 
 
 
 
12/31/2016
 
8

 
11

 

 
2

 
1

 

 
7

 

 
29

 
 
Residential construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance outstanding
 
3/31/2017
 
$
30

 
$
353

 
$
45

 
$
8

 
$
254

 
$
32

 
$
7

 
$
1

 
$
730

 
6.5
%
% of loan type
 
 
 
4.1
%
 
48.3
%
 
6.2
%
 
1.1
%
 
34.8
%
 
4.4
%
 
1.0
%
 
0.1
%
 
100.0
%
 
 
Delinquency rates 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-89 days
 
3/31/2017
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
 
 
 
12/31/2016
 
1.8
%
 
%
 
%
 
%
 
0.3
%
 
%
 
%
 
%
 
0.2
%
 
 
≥ 90 days
 
3/31/2017
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
 
 
 
12/31/2016
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
 
Accruing loans past due 90 days or more
 
3/31/2017
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
12/31/2016
 

 

 

 

 

 

 

 

 

 
 
Nonaccrual loans
 
3/31/2017
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
12/31/2016
 

 

 

 

 

 

 

 

 

 
 
Commercial construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance outstanding
 
3/31/2017
 
$
107

 
$
251

 
$
97

 
$
94

 
$
520

 
$
226

 
$
41

 
$
57

 
$
1,393

 
12.4
%
% of loan type
 
 
 
7.7
%
 
18.0
%
 
7.0
%
 
6.8
%
 
37.3
%
 
16.2
%
 
2.9
%
 
4.1
%
 
100.0
%
 
 
Delinquency rates 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-89 days
 
3/31/2017
 
%
 
%
 
%
 
%
 
0.6
%
 
0.1
%
 
%
 
%
 
0.2
%
 
 
 
 
12/31/2016
 
%
 
%
 
%
 
0.9
%
 
%
 
2.5
%
 
%
 
%
 
0.5
%
 
 
≥ 90 days
 
3/31/2017
 
%
 
%
 
%
 
%
 
0.3
%
 
2.2
%
 
%
 
%
 
0.5
%
 
 
 
 
12/31/2016
 
%
 
%
 
%
 
%
 
0.4
%
 
%
 
%
 
%
 
0.2
%
 
 
Accruing loans past due 90 days or more
 
3/31/2017
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
12/31/2016
 

 

 

 

 

 

 

 

 

 
 
Nonaccrual loans
 
3/31/2017
 
$

 
$

 
$

 
$

 
$
2

 
$
5

 
$