FAIR VALUE

Fair Value Measurement

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

Level 1 – Quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access;

Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in less active markets, observable inputs other than quoted prices that are used in the valuation of an asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined by pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measure in its entirety. Market activity is presumed to be orderly in the absence of evidence of forced or disorderly sales, although such sales may still be indicative of fair value. Applicable accounting guidance precludes the use of blockage factors or liquidity adjustments due to the quantity of securities held by an entity.

We use fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. Fair value is used on a nonrecurring basis to measure certain assets when adjusting carrying values, such as the application of lower of cost or fair value accounting, including recognition of impairment on assets. Fair value is also used when providing required disclosures for certain financial instruments.

Fair Value Policies and Procedures

We have various policies, processes and controls in place to ensure that fair values are reasonably developed, reviewed and approved for use. These include a Securities Valuation Committee SVC comprised of executive management appointed by the Board of Directors. The Securities Valuation Committee reviews and approves on a quarterly basis the key components of fair value estimation, including critical valuation assumptions for Level 3 modeling. A Model Risk Management Group conducts model validations, including internal models, and sets policies and procedures for revalidation, including the timing of revalidation.

Third Party Service Providers

We use a third party pricing service to measure fair value for approximately 91% of our AFS Level 2 securities. Fair value measurements for other AFS Level 2 securities generally use certain inputs corroborated by market data and include standard discounted cash flow analysis.

For Level 2 securities, the third party pricing service provides documentation on an ongoing basis that presents market corroborative data, including detail pricing information and market reference data. The documentation includes benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data, including information from the vendor trading platform. We review, test and validate this information as appropriate. Absent observable trade data, we do not adjust prices from our third party sources.

The following describes the hierarchy designations, valuation methodologies, and key inputs to measure fair value on a recurring basis for designated financial instruments:

Available-for-Sale

U.S. Treasury, Agencies and Corporations

U.S. Treasury securities are measured under Level 1 using quoted market prices when available. U.S. agencies and corporations are measured under Level 2 generally using the previously discussed third party pricing service.

Municipal Securities

Municipal securities are measured under Level 2 generally using the third party pricing service or an internal model. Valuation inputs include Baa municipal curves, as well as FHLB and LIBOR swap curves. Our valuation methodology for non-rated municipal securities changed at year-end of 2015 to utilize more observable inputs, primarily municipal market yield curves, compared to our previous valuation method. The resulting values were determined to be Level 2.

Money Market Mutual Funds and Other

Money market mutual funds and other securities are measured under Level 1 or Level 2. For Level 1, quoted market prices are used which may include NAVs or their equivalents. Level 2 valuations generally use quoted prices for similar securities.

Trading Account

Securities in the trading account are generally measured under Level 2 using third party pricing service providers as described previously.

Bank-Owned Life Insurance

Bank-owned life insurance (“BOLI”) is measured under Level 2 according to CSVs of the insurance policies that are provided by a third party service. Nearly all policies are general account policies with CSVs based on the Company’s claims on the assets of the insurance companies. The insurance companies’ investments include predominantly fixed income securities consisting of investment-grade corporate bonds and various types of mortgage instruments. Management regularly reviews its BOLI investment performance, including concentrations among insurance providers.

Private Equity Investments

Private equity investments are measured under Level 3. The majority of these investments are held in Zions’ Small Business Investment Company and are early stage venture investments. The fair value measurements of these investments are reviewed on a quarterly basis by the Securities Valuation Committee. The Equity Investments Committee, consisting of executives familiar with the investments, reviews periodic financial information, including audited financial statements when available.

Certain valuation analytics may be employed that include current and projected financial performance, recent financing activities, economic and market conditions, market comparables, market liquidity, sales restrictions, and other factors. A significant change in the expected performance of the individual investment would result in a change in the fair value measurement of the investment. The amount of unfunded commitments to invest is disclosed in Note 17. Certain restrictions apply for the redemption of these investments and certain investments are prohibited by the Volcker Rule. See discussions in Notes 5 and 17.

Agriculture Loan Servicing

This asset results from our servicing of agriculture loans approved and funded by Federal Agricultural Mortgage Corporation (“FAMC”). We provide this servicing under an agreement with FAMC for loans they own. The asset’s fair value represents our projection of the present value of future cash flows measured under Level 3 using discounted cash flow methodologies.

Interest-Only Strips

Interest-only strips are created as a by-product of the securitization process. When the guaranteed portions of SBA 7(a) loans are pooled, interest-only strips may be created in the pooling process. The asset’s fair value represents our projection of the present value of future cash flows measured under Level 3 using discounted cash flow methodologies.

Deferred Compensation Plan Assets and Obligations

Invested assets in the deferred compensation plan consist of shares of registered investment companies. These mutual funds are valued under Level 1 at quoted market prices, which represents the NAV of shares held by the plan at the end of the period.

Derivatives

Derivatives are measured according to their classification as either exchange-traded or over-the-counter. Exchange-traded derivatives consist of foreign currency exchange contracts measured under Level 1 because they are traded in active markets. Over-the-counter derivatives, including those for customers, consist of interest rate swaps and options. These derivatives are measured under Level 2 using third party services. Observable market inputs include yield curves (the LIBOR swap curve and relevant overnight index swap curves), foreign exchange rates, commodity prices, option volatilities, counterparty credit risk, and other related data. Credit valuation adjustments are required to reflect nonperformance risk for both the Company and the respective counterparty. These adjustments are determined generally by applying a credit spread to the total expected exposure of the derivative.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased, included in “Federal funds and other short-term borrowings” on the balance sheet, are measured under Level 1 using quoted market prices. If not available, quoted prices under Level 2 for similar securities are used.

Quantitative Disclosure by Fair Value Hierarchy

Assets and liabilities measured at fair value by class on a recurring basis are summarized as follows:



(In thousands)	December 31, 2016
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury, agencies and corporations	$	—	$	12,009,676	$	—	$	12,009,676
Municipal securities			1,154,210				1,154,210
Other debt securities			23,892				23,892
Money market mutual funds and other	183,699		717				184,416
	183,699		13,188,495		—		13,372,194
Trading account			114,803				114,803
Other noninterest-bearing investments:
Bank-owned life insurance			497,466				497,466
Private equity investments					128,654		128,654
Other assets:
Agriculture loan servicing and interest-only strips					20,248		20,248
Deferred compensation plan assets	91,040						91,040
Derivatives:
Interest rate related and other			4,165				4,165
Interest rate swaps for customers			48,754				48,754
Foreign currency exchange contracts	11,276						11,276
	11,276		52,919		—		64,195
	$	286,015	$	13,853,683	$	148,902	$	14,288,600
LIABILITIES
Securities sold, not yet purchased	$	25,321	$	—	$	—	$	25,321
Other liabilities:
Deferred compensation plan obligations	91,040						91,040
Derivatives:
Interest rate related and other			1,499				1,499
Interest rate swaps for customers			49,050				49,050
Foreign currency exchange contracts	8,672						8,672
	8,672		50,549		—		59,221
	$	125,033	$	50,549	$	—	$	175,582



(In thousands)	December 31, 2015
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury, agencies and corporations	$	—	$	7,100,844	$	—	$	7,100,844
Municipal securities			418,695				418,695
Other debt securities			22,941				22,941
Money market mutual funds and other	61,807		38,829				100,636
	61,807		7,581,309		—		7,643,116
Trading account			48,168				48,168
Other noninterest-bearing investments:
Bank-owned life insurance			485,978				485,978
Private equity investments					120,027		120,027
Other assets:
Agriculture loan servicing and interest-only strips					13,514		13,514
Deferred compensation plan assets	84,570						84,570
Derivatives:
Interest rate related and other			5,966				5,966
Interest rate swaps for customers			51,353				51,353
Foreign currency exchange contracts	20,824						20,824
	20,824		57,319		—		78,143
	$	167,201	$	8,172,774	$	133,541	$	8,473,516
LIABILITIES
Securities sold, not yet purchased	$	30,158	$	—	$	—	$	30,158
Other liabilities:
Deferred compensation plan obligations	84,570						84,570
Derivatives:
Interest rate related and other			835				835
Interest rate swaps for customers			53,843				53,843
Foreign currency exchange contracts	17,761						17,761
	17,761		54,678		—		72,439
	$	132,489	$	54,678	$	—	$	187,167

Reconciliation of Level 3 Fair Value Measurements

The following reconciles the beginning and ending balances of assets and liabilities that are measured at fair value by class on a recurring basis using Level 3 inputs:



	Level 3 Instruments
	Year Ended December 31, 2016
(In thousands)	Municipal securities		Trust preferred – banks and insurance		Other		Private equity investments			Ag loan svcg and int-only strips			Derivatives and other liabilities

Balance at December 31, 2015	$	—	$	—	$	—	$	120,027		$	13,514		$	—
Total net gains (losses) included in:
Statement of income:
Dividends and other investment loss							(1,340		)
Equity securities gains, net							5,325
Other noninterest income										7,549
Purchases							19,174			368
Sales							(3,673		)
Redemptions and paydowns							(10,859		)	(1,183		)
Balance at December 31, 2016	$	—	$	—	$	—	$	128,654		$	20,248		$	—



	Level 3 Instruments
	Year Ended December 31, 2015
(In thousands)	Municipal securities			Trust preferred – banks and insurance			Other			Private equity investments			Ag loan svcg and int-only strips			Derivatives and other liabilities

Balance at December 31, 2014	$	4,164		$	393,007		$	4,761		$	97,649		$	12,227		$	(12	)
Total net gains (losses) included in:
Statement of income:
Accretion of purchase discount on securities available-for-sale	3			471
Dividends and other investment loss										(3,657		)
Equity securities gains, net										7,270
Fixed income securities losses, net	(344		)	(136,691		)	(606		)
Other noninterest income													1,480
Other noninterest expense																12
Other comprehensive income (loss)	687			141,547			(74		)
Fair Value of HTM securities reclassified as AFS				57,308
Purchases										24,898			993
Sales	(2,651		)	(440,055		)	(4,081		)	(4,107		)
Redemptions and paydowns	(1,859		)	(15,587		)				(2,026		)	(1,186		)
Balance at December 31, 2015	$	—		$	—		$	—		$	120,027		$	13,514		$	—


¹	Real Estate Investment Trust

No transfers of assets or liabilities occurred among Levels 1, 2 or 3 for 2016 and 2015.

The preceding reconciling amounts using Level 3 inputs include the following realized gains/losses in the statement of income:



(In thousands)	Year Ended December 31,
(In thousands)	2016		2015

Dividends and other investment loss	$	—	$	(2	)
Equity securities gains (losses), net	5,727		(11,311		)
Fixed income securities losses, net	—		(137,641		)

Nonrecurring Fair Value Measurements

Included in the balance sheet amounts are the following amounts of assets that had fair value changes measured on a nonrecurring basis:



(In thousands)	Fair value at December 31, 2016								Gains (losses) from fair value changes Year Ended December 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Total
ASSETS
Private equity investments, carried at cost	$	—	$	—	$	1,297	$	1,297	$	(522	)
Impaired loans	—		51,842		—		51,842		(36,276		)
Other real estate owned	—		871		—		871		(1,871		)
	$	—	$	52,713	$	1,297	$	54,010	$	(38,669	)



(In thousands)	Fair value at December 31, 2015								Gains (losses) from fair value changes Year Ended December 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Total
ASSETS
Private equity investments, carried at cost	$	—	$	—	$	10,707	$	10,707	$	(5,119	)
Impaired loans	—		10,991		—		10,991		(12,039		)
Other real estate owned	—		2,388		—		2,388		(2,467		)
	$	—	$	13,379	$	10,707	$	24,086	$	(19,625	)

The previous fair values may not be current as of the dates indicated, but rather as of the date the fair value change occurred, such as a charge for impairment. Accordingly, carrying values may not equal current fair value.

We recognized net gains of $3.7 million in 2016 and $4.0 million in 2015 from the sale of OREO properties that had a carrying value at the time of sale of approximately $12.8 million in 2016 and $19.2 million in 2015. Previous to their sale in these years, we recognized impairment on these properties of $0.2 million in 2016 and $0.6 million in 2015.

Private equity investments carried at cost were measured at fair value for impairment purposes according to the methodology previously discussed for these investments. Amounts of PEIs carried at cost were $13.3 million and $25.3 million at December 31, 2016 and 2015, respectively. Amounts of other noninterest-bearing investments carried at cost were $211.4 million and $191.5 million at December 31, 2016 and 2015, respectively, which were comprised of Federal Reserve and FHLB stock.

Impaired (or nonperforming) loans that are collateral-dependent were measured at fair value based on the fair value of the collateral. OREO was measured initially at fair value based on collateral appraisals at the time of transfer and subsequently at the lower of cost or fair value.

Measurement of fair value for collateral-dependent loans and OREO was based on third party appraisals that utilize one or more valuation techniques (income, market and/or cost approaches). Any adjustments to calculated fair value were made based on recently completed and validated third party appraisals, third party appraisal services, automated valuation services, or our informed judgment. Evaluations were made to determine that the appraisal process met the relevant concepts and requirements of applicable accounting guidance.

Automated valuation services may be used primarily for residential properties when values from any of the previous methods were not available within 90 days of the balance sheet date. These services use models based on market, economic, and demographic values. The use of these models has only occurred in a very few instances and the related property valuations have not been sufficiently significant to consider disclosure under Level 3 rather than Level 2.

Impaired loans that are not collateral-dependent were measured based on the present value of future cash flows discounted at the expected coupon rates over the lives of the loans. Because the loans were not discounted at market interest rates, the valuations do not represent fair value and have been excluded from the nonrecurring fair value balance in the preceding schedules.

Fair Value of Certain Financial Instruments

Following is a summary of the carrying values and estimated fair values of certain financial instruments:



	December 31, 2016					December 31, 2015
(In thousands)	Carrying value		Estimated fair value		Level	Carrying value		Estimated fair value		Level
Financial assets:
HTM investment securities	$	867,904	$	850,473	2	$	545,648	$	552,088	2
Loans and leases (including loans held for sale), net of allowance	42,253,677		42,110,544		3	40,193,374		39,535,365		3
Financial liabilities:
Time deposits	2,756,810		2,743,885		2	2,130,680		2,129,742		2
Foreign deposits	—		—		2	294,391		294,321		2
Other short-term borrowings	500,000		500,000		2	—		—		2
Long-term debt (less fair value hedges)	534,850		551,881		2	812,366		838,796		2

This summary excludes financial assets and liabilities for which carrying value approximates fair value and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash and due from banks, money market investments, demand, savings and money market deposits, federal funds purchased and other short-term borrowings, and security repurchase agreements. The estimated fair value of demand, savings and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately.

HTM investment securities primarily consist of municipal securities. They were measured at fair value according to the methodology previously discussed.

Loans are measured at fair value according to their status as nonimpaired or impaired. For nonimpaired loans, fair value is estimated by discounting future cash flows using the LIBOR yield curve adjusted by a factor which reflects the credit and interest rate risk inherent in the loan. These future cash flows are then reduced by the estimated “life-of-the-loan” aggregate credit losses in the loan portfolio. These adjustments for lifetime future credit losses are derived from the methods used to estimate the ALLL for our loan portfolio and are adjusted quarterly as necessary to reflect the most recent loss experience. Impaired loans that are collateral-dependent are already considered to be held at fair value. Impaired loans that are not collateral-dependent have future cash flows reduced by the estimated “life-of-the-loan” credit loss derived from methods used to estimate the ALLL for these loans. See Impaired Loans in Note 6 for details on the impairment measurement method for impaired loans. Loans, other than those held for sale, are not normally purchased and sold by the Company, and there are no active trading markets for most of this portfolio.

Time and foreign deposits, and any other short-term borrowings, are measured at fair value by discounting future cash flows using the LIBOR yield curve to the given maturity dates.

Long-term debt is measured at fair value based on actual market trades (i.e., an asset value) when available, or discounting cash flows to maturity using the LIBOR yield curve adjusted for credit spreads.

These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding current economic conditions, future expected loss experience, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and cannot be determined with precision. Changes in these methodologies and assumptions could significantly affect the estimates.