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. For a discussion of the Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 3 of our 2017 Annual Report on Form 10-K.

Quantitative Disclosure by Fair Value Hierarchy

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



(In millions)	March 31, 2018
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale: ¹
U.S. Treasury, agencies and corporations	$	25	$	13,542	$	—	$	13,567
Municipal securities			1,305				1,305
Other debt securities			24				24
Total Available-for-sale	25		14,871		—		14,896
Trading account	35		108				143
Other noninterest-bearing investments:
Bank-owned life insurance			509				509
Private equity investments					100		100
Other assets:
Agriculture loan servicing and interest-only strips					18		18
Deferred compensation plan assets	107						107
Derivatives:
Interest rate swaps and forwards			1				1
Interest rate swaps for customers			21				21
Foreign currency exchange contracts	6						6
Total Assets	$	173	$	15,510	$	118	$	15,801
LIABILITIES
Securities sold, not yet purchased	$	96	$	—	$	—	$	96
Other liabilities:
Deferred compensation plan obligations	107						107
Derivatives:
Interest rate swaps for customers			52				52
Foreign currency exchange contracts	4						4
Total Liabilities	$	207	$	52	$	—	$	259

¹ We used a third-party pricing service to measure fair value for approximately 91% of our AFS Level 2 securities.



(In millions)	December 31, 2017
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale: ¹
U.S. Treasury, agencies and corporations	$	25	$	13,706	$	—	$	13,731
Municipal securities			1,334				1,334
Other debt securities			24				24
Money market mutual funds and other	71		1				72
Total Available-for-sale	96		15,065		—		15,161
Trading account			148				148
Other noninterest-bearing investments:
Bank-owned life insurance			507				507
Private equity investments					95		95
Other assets:
Agriculture loan servicing and interest-only strips					18		18
Deferred compensation plan assets	102						102
Derivatives:
Interest rate swaps and forwards			1				1
Interest rate swaps for customers			28				28
Foreign currency exchange contracts	9						9
Total Assets	$	207	$	15,749	$	113	$	16,069
LIABILITIES
Securities sold, not yet purchased	$	95	$	—	$	—	$	95
Other liabilities:
Deferred compensation plan obligations	102						102
Derivatives:
Interest rate swaps for customers			33				33
Foreign currency exchange contracts	7						7
Total Liabilities	$	204	$	33	$	—	$	237

¹ We used a third-party pricing service to measure fair value for approximately 92% of our AFS Level 2 securities.

Level 3 Valuations

Private Equity Investments

Private equity investments (“PEIs”) are generally measured under Level 3. Certain investments that have converted to being publicly traded are measured under Level 1. The majority of these PEIs are held in Zions’ Small Business Investment Company (“SBIC”) and are early-stage venture investments. The fair value measurements of these investments are updated at least on a quarterly basis, including whenever a new round of financing occurs. Certain of these investments are measured using multiples of operating performance. The fair value measurements of PEIs 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 5. Certain restrictions apply for the redemption of these investments and certain investments are prohibited by the Volcker Rule. See discussions in Note 5.

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 Small Business Administration (“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.

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
	Three Months Ended
	March 31, 2018				March 31, 2017
(In millions)	Private equity investments		Ag loan svcg and int-only strips		Private equity investments			Ag loan svcg and int-only strips

Balance at beginning of period	$	95	$	18	$	73		$	20
Securities gains, net	—		—		3			—
Purchases	5		—		7			—
Redemptions and paydowns	—		—		(5		)	—
Balance at end of period	$	100	$	18	$	78		$	20

No transfers of assets or liabilities occurred among Levels 1, 2 or 3 for the three months ended March 31, 2018 and 2017.

The reconciliation of Level 3 instruments includes the following realized gains in the statement of income:



(In millions)	Three Months Ended March 31,
	Three Months Ended March 31,
	2018		2017

Securities gains, net	$	—	$	3

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 millions)	Fair value at March 31, 2018								Fair value at December 31, 2017
(In millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
ASSETS
Private equity investments	$	—	$	—	$	—	$	—	$	—	$	—	$	1	$	1
Impaired loans	—		22		—		22		—		9		—		9
Other real estate owned	—		1		—		1		—		—		—		—
Total	$	—	$	23	$	—	$	23	$	—	$	9	$	1	$	10

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.



	Gains (losses) from fair value changes
(In millions)	Three Months Ended March 31,
(In millions)	2018			2017
ASSETS
Private equity investments	$	—		$	(1	)
Impaired loans	(4		)	(1		)
Other real estate owned	(1		)	—
Total	$	(5	)	$	(2	)

During the three months ended March 31, we recognized an insignificant amount of net gains in 2018 and 2017 from the sale of other real estate owned (“OREO”) properties that had a carrying value at the time of sale of approximately $1 million and $2 million during the three months ended March 31, 2018 and 2017, respectively. Previous to their sale in these periods, we recognized impairment on these properties of an insignificant amount in 2018 and 2017.

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 $10 million at March 31, 2018 and December 31, 2017. Amounts of other noninterest-bearing investments carried at cost were $373 million at March 31, 2018 and $338 million at December 31, 2017, which were comprised of Federal Reserve and Federal Home Loan Bank (“FHLB”) stock. Private equity investments accounted for using the equity method were $35 million at March 31, 2018 and $36 million at December 31, 2017.

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. For additional information regarding the measurement of fair value for impaired loans, collateral-dependent loans, and OREO, see Note 3 of our 2017 Annual Report on Form 10-K.

Fair Value of Certain Financial Instruments

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



	March 31, 2018					December 31, 2017
(In millions)	Carrying value		Estimated fair value		Level	Carrying value		Estimated fair value		Level
Financial assets:
HTM investment securities	$	768	$	752	2	$	770	$	762	2
Loans and leases (including loans held for sale), net of allowance	44,700		43,802		3	44,306		44,226		3
Financial liabilities:
Time deposits	3,581		3,554		2	3,115		3,099		2
Other short-term borrowings	4,450		4,450		2	3,600		3,600		2
Long-term debt	383		384		2	383		402		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. With the adoption of ASU 2016-01, we have updated our process for estimating the fair value for our loans and leases, net of allowance. Our updated process identifies an exit price using current origination rates, making certain adjustments based on credit and utilizing publicly available rates and indices. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value, see Note 3 of our 2017 Annual Report on Form 10-K.