Document


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 September 30, 2016
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
¨
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 October 31, 2016
203,718,022 shares



ZIONS BANCORPORATION AND SUBSIDIARIES
Table of Contents


 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 

2


Table of Contents

PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS (Unaudited)
ZIONS BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
September 30,
2016
 
December 31,
2015
(Unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
553,152

 
$
798,319

Money market investments:
 
 
 
Interest-bearing deposits
1,489,134

 
6,108,124

Federal funds sold and security resell agreements
1,675,645

 
619,758

Investment securities:
 
 
 
Held-to-maturity, at amortized cost (approximate fair value $717,822 and $552,088)
715,279

 
545,648

Available-for-sale, at fair value
10,358,083

 
7,643,116

Trading account, at fair value
108,004

 
48,168

 
11,181,366

 
8,236,932

Loans held for sale
160,287

 
149,880

Loans and leases, net of unearned income and fees
42,539,720

 
40,649,542

Less allowance for loan losses
597,185

 
606,048

Loans held for investment, net of allowance
41,942,535

 
40,043,494

Other noninterest-bearing investments
894,110

 
848,144

Premises, equipment and software, net
986,553

 
905,462

Goodwill
1,014,129

 
1,014,129

Core deposit and other intangibles
10,329

 
16,272

Other real estate owned
8,358

 
7,092

Other assets
1,123,262

 
916,937

 
$
61,038,860

 
$
59,664,543

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
22,710,778

 
$
22,276,664

Interest-bearing:
 
 
 
Savings and money market
25,502,628

 
25,672,356

Time
2,516,493

 
2,130,680

Foreign
118,762

 
294,391

 
50,848,661

 
50,374,091

Federal funds and other short-term borrowings
1,115,561

 
346,987

Long-term debt
570,385

 
812,366

Reserve for unfunded lending commitments
61,615

 
74,838

Other liabilities
763,331

 
548,742

Total liabilities
53,359,553

 
52,157,024

Shareholders’ equity:
 
 
 
Preferred stock, without par value, authorized 4,400,000 shares
709,601

 
828,490

Common stock, without par value; authorized 350,000,000 shares; issued and outstanding 203,850,072 and 204,417,093 shares
4,747,912

 
4,766,731

Retained earnings
2,211,793

 
1,966,910

Accumulated other comprehensive income (loss)
10,001

 
(54,612
)
Total shareholders’ equity
7,679,307

 
7,507,519

 
$
61,038,860

 
$
59,664,543

See accompanying notes to consolidated financial statements.

3


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
436,424

 
$
419,981

 
$
1,290,675

 
$
1,256,378

Interest on money market investments
4,934

 
6,018

 
17,527

 
17,021

Interest on securities
49,337

 
30,231

 
144,346

 
86,513

Total interest income
490,695

 
456,230

 
1,452,548

 
1,359,912

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
12,549

 
12,542

 
36,263

 
36,967

Interest on short- and long-term borrowings
8,959

 
18,311

 
29,407

 
56,518

Total interest expense
21,508

 
30,853

 
65,670

 
93,485

Net interest income
469,187

 
425,377

 
1,386,878

 
1,266,427

Provision for loan losses
18,825

 
18,262

 
95,462

 
17,334

Net interest income after provision for loan losses
450,362

 
407,115

 
1,291,416

 
1,249,093

Noninterest income:
 
 
 
 
 
 
 
Service charges and fees on deposit accounts
44,490

 
43,196

 
127,859

 
126,006

Other service charges, commissions and fees
54,141

 
47,968

 
155,521

 
137,572

Wealth management income
9,973

 
7,496

 
26,715

 
23,271

Loan sales and servicing income
11,301

 
7,728

 
29,458

 
23,816

Capital markets and foreign exchange
5,726

 
6,624

 
15,938

 
19,400

Dividends and other investment income
9,045

 
8,449

 
19,910

 
27,164

Fair value and nonhedge derivative loss
(184
)
 
(1,555
)
 
(4,679
)
 
(799
)
Equity securities gains, net
8,441

 
3,630

 
10,600

 
11,822

Fixed income securities gains (losses), net
39

 
(53
)
 
92

 
(138,728
)
Other
1,915

 
2,461

 
5,951

 
9,076

Total noninterest income
144,887

 
125,944

 
387,365

 
238,600

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
242,251

 
242,023

 
741,930

 
736,675

Occupancy, net
33,536

 
29,477

 
92,936

 
88,911

Furniture, equipment and software, net
29,090

 
30,416

 
91,655

 
91,376

Other real estate expense, net
(137
)
 
(40
)
 
(1,993
)
 
(111
)
Credit-related expense
6,825

 
6,914

 
18,604

 
20,959

Provision for unfunded lending commitments
(3,165
)
 
1,428

 
(13,223
)
 
313

Professional and legal services
14,473

 
12,699

 
38,173

 
37,292

Advertising
5,985

 
6,136

 
16,881

 
19,622

FDIC premiums
11,673

 
8,500

 
28,407

 
25,228

Amortization of core deposit and other intangibles
1,951

 
2,298

 
5,944

 
6,974

Debt extinguishment cost

 

 
353

 
2,395

Other
60,810

 
51,429

 
161,092

 
153,620

Total noninterest expense
403,292

 
391,280

 
1,180,759

 
1,183,254

Income before income taxes
191,957

 
141,779

 
498,022

 
304,439

Income taxes
64,694

 
40,780

 
166,373

 
97,455

Net income
127,263

 
100,999

 
331,649

 
206,984

Dividends on preferred stock
(10,368
)
 
(16,761
)
 
(35,571
)
 
(48,567
)
Preferred stock redemption

 

 
(9,759
)
 

Net earnings applicable to common shareholders
$
116,895

 
$
84,238

 
$
286,319

 
$
158,417

Weighted average common shares outstanding during the period:
 
 
 
 
 
 
 
Basic shares
204,312

 
203,668

 
204,180

 
203,057

Diluted shares
204,714

 
204,155

 
204,425

 
203,511

Net earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.57

 
$
0.41

 
$
1.39

 
$
0.77

Diluted
0.57

 
0.41

 
1.39

 
0.77

See accompanying notes to consolidated financial statements.

4


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income for the period
$
127,263

 
$
100,999

 
$
331,649

 
$
206,984

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on investment securities
(10,711
)
 
11,268

 
54,316

 
4,460

Reclassification of held-to-maturity securities to available-for-sale securities

 

 

 
10,938

Reclassification to earnings for realized net fixed income securities losses (gains)
(24
)
 
33

 
(57
)
 
85,845

Net unrealized gains (losses) on other noninterest-bearing investments
2,158

 
(1,881
)
 
2,022

 
94

Net unrealized holding gains (losses) on derivative instruments
(3,336
)
 
10,607

 
14,415

 
12,941

Reclassification adjustment for increase in interest income recognized in earnings on derivative instruments
(1,738
)
 
(1,830
)
 
(5,418
)
 
(3,212
)
Pension and postretirement

 

 
(665
)
 

Other comprehensive income (loss)
(13,651
)
 
18,197

 
64,613

 
111,066

Comprehensive income
$
113,612

 
$
119,196

 
$
396,262

 
$
318,050

See accompanying notes to consolidated financial statements.

5


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands, except shares
and per share amounts)
Preferred
stock
 
Common stock
 
Retained earnings
 
Accumulated other
comprehensive income (loss)
 
Total
shareholders’ equity
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
828,490

 
204,417,093

 
$
4,766,731

 
$
1,966,910

 
 
$
(54,612
)
 
 
$
7,507,519

Net income for the period
 
 
 
 
 
 
331,649

 
 
 
 
 
331,649

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
64,613

 
 
64,613

Preferred stock redemption
(118,889
)
 
 
 
2,504

 
(9,759
)
 
 
 
 
 
(126,144
)
Common stock redeemed and retired
 
 
(1,468,800
)
 
(45,029
)
 
 
 
 
 
 
 
(45,029
)
Net activity under employee plans and related tax benefits
 
 
901,779

 
23,706

 
 
 
 
 
 
 
23,706

Dividends on preferred stock


 
 
 
 
 
(35,571
)
 
 
 
 
 
(35,571
)
Dividends on common stock, $0.20 per share
 
 
 
 
 
 
(41,298
)
 
 
 
 
 
(41,298
)
Change in deferred compensation
 
 
 
 
 
 
(138
)
 
 
 
 
 
(138
)
Balance at September 30, 2016
$
709,601

 
203,850,072

 
$
4,747,912

 
$
2,211,793

 
 
$
10,001

 
 
$
7,679,307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
1,004,011

 
203,014,903

 
$
4,723,855

 
$
1,769,705

 
 
$
(128,041
)
 
 
$
7,369,530

Net income for the period
 
 
 
 
 
 
206,984

 
 
 
 
 
206,984

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
111,066

 
 
111,066

Subordinated debt converted to preferred stock
148

 
 
 
(44
)
 
 
 
 
 
 
 
104

Net activity under employee plans and related tax benefits
 
 
1,263,691

 
32,477

 
 
 
 
 
 
 
32,477

Dividends on preferred stock


 
 
 
 
 
(48,567
)
 
 
 
 
 
(48,567
)
Dividends on common stock, $0.16 per share
 
 
 
 
 
 
(32,785
)
 
 
 
 
 
(32,785
)
Change in deferred compensation
 
 
 
 
 
 
(714
)
 
 
 
 
 
(714
)
Balance at September 30, 2015
$
1,004,159

 
204,278,594

 
$
4,756,288

 
$
1,894,623

 
 
$
(16,975
)
 
 
$
7,638,095

See accompanying notes to consolidated financial statements.

6


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2016
 
2015
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net income for the period
$
127,263

 
$
100,999

 
$
331,649

 
$
206,984

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Provision for credit losses
15,660

 
19,690

 
82,239

 
17,647

Depreciation and amortization
49,858

 
40,281

 
135,891

 
109,563

Fixed income securities losses (gains), net
(39
)
 
53

 
(92
)
 
138,728

Deferred income tax expense (benefit)
1,976

 
(10,027
)
 
(8,813
)
 
(51,056
)
Net decrease (increase) in trading securities
10,771

 
970

 
(59,836
)
 
(2,950
)
Net decrease (increase) in loans held for sale
(12,447
)
 
23,314

 
(9,190
)
 
3,263

Change in other liabilities
53,051

 
21,525

 
215,688

 
(14,738
)
Change in other assets
(4,477
)
 
31,178

 
(222,378
)
 
(1,991
)
Other, net
(13,337
)
 
(15,461
)
 
(2,313
)
 
(19,080
)
Net cash provided by operating activities
228,279

 
212,522

 
462,845

 
386,370

 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
 
Net decrease (increase) in money market investments
(389,351
)
 
1,181,378

 
3,563,103

 
680,209

Proceeds from maturities and paydowns of investment securities
held-to-maturity
33,312

 
26,875

 
65,763

 
87,785

Purchases of investment securities held-to-maturity
(35,206
)
 
(142
)
 
(235,508
)
 
(24,203
)
Proceeds from sales, maturities, and paydowns of investment securities available-for-sale
683,330

 
385,584

 
3,256,912

 
1,365,851

Purchases of investment securities available-for-sale
(1,606,852
)
 
(1,728,939
)
 
(5,973,805
)
 
(3,486,509
)
Loans purchased

 

 
(104,066
)
 

Net change in loans held for investment
(73,217
)
 
(122,868
)
 
(1,900,132
)
 
(74,974
)
Purchases of premises, equipment and software
(51,307
)
 
(38,747
)
 
(143,181
)
 
(106,115
)
Proceeds from sales of other real estate owned
6,405

 
8,019

 
15,146

 
16,592

Other, net
(23,654
)
 
17,610

 
(23,394
)
 
46,935

Net cash used in investing activities
(1,456,540
)
 
(271,230
)
 
(1,479,162
)
 
(1,494,429
)
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
 
Net increase (decrease) in deposits
576,129

 
(16,977
)
 
496,528

 
1,072,072

Net change in short-term funds borrowed
845,306

 
45,267

 
768,574

 
28,168

Cash paid for preferred stock redemption

 

 
(126,144
)
 

Repayments of long-term debt
(128,910
)
 
(111,477
)
 
(243,993
)
 
(164,082
)
Proceeds from the issuance of common stock
4,661

 
13,599

 
8,147

 
19,631

Dividends paid on common and preferred stock
(30,891
)
 
(27,420
)
 
(81,107
)
 
(79,699
)
Repurchases of company common stock through buyback program
(45,029
)
 

 
(45,029
)
 

Other, net
(115
)
 
172

 
(5,826
)
 
(7,279
)
Net cash provided by (used in) financing activities
1,221,151

 
(96,836
)
 
771,150

 
868,811

Net decrease in cash and due from banks
(7,110
)
 
(155,544
)
 
(245,167
)
 
(239,248
)
Cash and due from banks at beginning of period
560,262

 
758,238

 
798,319

 
841,942

Cash and due from banks at end of period
$
553,152

 
$
602,694

 
$
553,152

 
$
602,694

 
 
 
 
 
 
 
 
Cash paid for interest
$
18,243

 
$
22,162

 
$
61,295

 
$
73,219

Net cash paid for income taxes
52,510

 
8,679

 
153,938

 
100,505

See accompanying notes to consolidated financial statements.

7


Table of Contents

ZIONS BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2016
1.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Zions Bancorporation (“the Parent”) and its majority-owned subsidiaries (collectively “the Company,” “Zions,” “we,” “our,” “us”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. References to GAAP, including standards promulgated by the Financial Accounting Standards Board (“FASB”), are made according to sections of the Accounting Standards Codification (“ASC”). Changes to the ASC are made with Accounting Standards Updates (“ASU”) that include consensus issues of the Emerging Issues Task Force (“EITF”). In certain cases, ASUs are issued jointly with International Financial Reporting Standards (“IFRS”).
Operating results for the three and nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results that may be expected in future periods. In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated balance sheet at December 31, 2015 is from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s 2015 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform with the current period presentation. These reclassifications did not affect net income or shareholders’ equity.
Zions Bancorporation is a financial holding company headquartered in Salt Lake City, Utah, and with its subsidiaries, provides a full range of banking and related services. Following the close of business on December 31, 2015, the Company completed the merger of its subsidiary banks and other subsidiaries into a single bank, ZB, N.A. The Company continues to manage its banking operations through seven separately managed and branded segments in 11 Western and Southwestern states as follows: Zions Bank, in Utah, Idaho and Wyoming; Amegy Bank (“Amegy”), in Texas; California Bank & Trust (“CB&T”); National Bank of Arizona (“NBAZ”); Nevada State Bank (“NSB”); Vectra Bank Colorado (“Vectra”), in Colorado and New Mexico; and The Commerce Bank of Washington (“TCBW”), in Washington and Oregon. Pursuant to a Board resolution adopted November 21, 2014, The Commerce Bank of Oregon merged into TCBW following the close of business on March 31, 2015.


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ZIONS BANCORPORATION AND SUBSIDIARIES

2.
RECENT ACCOUNTING PRONOUNCEMENTS
Standard
 
Description
 
Date of adoption
 
Effect on the financial statements or other significant matters
 
 
 
 
 
 
 
Standards not yet adopted by the Company
 
 
 
 
 
 
 
ASU 2016-09, Stock Compensation (Topic 718): Improvements to Share-Based Payment Accounting
 
The standard requires entities to recognize the income tax effects of share-based payment awards in the income statement when the awards vest or are settled (i.e. the additional paid-in capital pools will be eliminated). The guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing. The standard also provides an entity the option to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.
 
January 1, 2017
 
We do not expect this guidance will have a material impact on the Company’s financial statements.
 
 
 
 
 
 
 
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
 
The standard provides revised accounting guidance related to the accounting for and reporting of financial instruments. Some of the main provisions include:
– Equity investments that do not result in consolidation and are not accounted for under the equity method would be measured at fair value through net income, unless they qualify for the proposed practicability exception for investments that do not have readily determinable fair values.
– Changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option would be recognized in other comprehensive income.
– Elimination of the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost. However it will require the use of exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes.
 
January 1, 2018
 
We do not currently expect this guidance will have a material impact on the Company’s financial statements.
 
 
 
 
 
 
 
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequent related ASUs


 
The core principle of the new guidance is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The banking industry does not expect significant changes because major sources of revenue are from financial instruments that have been excluded from the scope of the new standard, (including loans, derivatives, debt and equity securities, etc.). However, these new standards affect other fees charged by banks, such as asset management fees, credit card interchange fees, deposit account fees, etc. Adoption may be made on a full retrospective basis with practical expedients, or on a modified retrospective basis with a cumulative effect adjustment.
 
January 1, 2018
 
While we currently do not expect these standards will have a material impact on the Company’s financial statements, we are still in process of conducting our evaluation.
 
 
 
 
 
 
 
ASU 2016-02, Leases (Topic 842)
 
The standard requires that a lessee recognize assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, the standard will require both types of leases to be recognized on the balance sheet. It also requires disclosures to better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
 
January 1, 2019
 
We are currently evaluating the potential impact of this guidance on the Company’s financial statements.

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Table of Contents
ZIONS BANCORPORATION AND SUBSIDIARIES

Standard
 
Description
 
Date of adoption
 
Effect on the financial statements or other significant matters
 
 
 
 
 
 
 
Standards not yet adopted by the Company (continued)
 
 
 
 
 
 
 
ASU 2016-13,
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 
The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaces today’s “incurred loss” approach with an “expected loss” model for instruments such as loans and held-to-maturity securities that are measured at amortized cost. The standard requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses rather than a reduction of the carrying amount. It also changes the accounting for purchased credit-impaired debt securities and loans. The standard retains many of the current disclosure requirements in current GAAP and expands certain disclosure requirements. Early adoption of the guidance is permitted as of January 1, 2019.
 
January 1, 2020
 
While we expect this standard will have a material impact on the Company’s financial statements, we are still in process of conducting our evaluation.

 
 
 
 
 
 
 
Standards adopted by the Company
 
 
 
 
 
 
 
ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
 
The new standard changes certain criteria in the variable interest model and the voting model to determine whether certain legal entities are variable interest entities (“VIEs”) and whether they should be consolidated. Additional disclosures are required for entities not currently considered VIEs, but may become VIEs under the new guidance and may be subject to consolidation. Adoption may be retrospective or modified retrospective with a cumulative effect adjustment.
 
January 1, 2016
 
We currently do not consolidate any VIEs and our adoption of this standard did not have a material impact on the Company’s financial statements.
 
 
 
 
 
 
 
ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
 
The standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with debt discounts. Adoption is retrospective.
 
January 1, 2016
 
Our adoption of this standard did not have a material impact on the accompanying financial statements.
 
 
 
 
 
 
 
ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
 
The standard provides guidance to determine whether an arrangement includes a software license. If it does, the customer accounts for it the same way as for other software licenses. If no software license is included, the customer accounts for it as a service contract. Adoption may be retrospective or prospective.
 
January 1, 2016
 
We adopted this standard on a prospective basis and it did not have a material impact on the accompanying financial statements.
 
 
 
 
 
 
 
ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)
 
The guidance eliminates the current requirement to categorize within the fair value hierarchy investments whose fair values are measured at net asset value (“NAV”) using the practical expedient in ASC 820. Fair value disclosure of these investments will be made to facilitate reconciliation to amounts reported on the balance sheet. Other related disclosures will continue when the NAV practical expedient is used. Adoption is retrospective.
 
January 1, 2016
 
Our adoption of this standard did not have a material impact on the accompanying financial statements.

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3.
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash activities are summarized as follows:
(In thousands)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Loans held for investment transferred to other real estate owned
$
6,167

 
$
3,446

 
$
13,483

 
$
10,098

Loans held for sale reclassified to (from) loans held for investment, net
(40,017
)
 
22,299

 
(36,129
)
 
33,042

Adjusted cost of HTM securities reclassified as AFS securities

 

 

 
79,276

4.
OFFSETTING ASSETS AND LIABILITIES
Gross and net information for selected financial instruments in the balance sheet is as follows:
 
 
September 30, 2016
(In thousands)
 
 
 
 
 
 
 
Gross amounts not offset in the balance sheet
 
 
Description
 
Gross amounts recognized
 
Gross amounts offset in the balance sheet
 
Net amounts presented in the balance sheet
 
Financial instruments
 
Cash collateral received/pledged
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and security resell agreements
 
$
1,675,645

 
$

 
$
1,675,645

 
$

 
$

 
$
1,675,645

Derivatives (included in other assets)
 
129,065

 

 
129,065

 
(20,419
)
 
(83
)
 
108,563

 
 
$
1,804,710

 
$

 
$
1,804,710

 
$
(20,419
)
 
$
(83
)
 
$
1,784,208

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds and other short-term borrowings
 
$
1,115,561

 
$

 
$
1,115,561

 
$

 
$

 
$
1,115,561

Derivatives (included in other liabilities)
 
111,929

 

 
111,929

 
(20,419
)
 
(86,478
)
 
5,032

 
 
$
1,227,490

 
$

 
$
1,227,490

 
$
(20,419
)
 
$
(86,478
)
 
$
1,120,593

 
 
December 31, 2015
(In thousands)
 
 
 
 
 
 
 
Gross amounts not offset in the balance sheet
 
 
Description
 
Gross amounts recognized
 
Gross amounts offset in the balance sheet
 
Net amounts presented in the balance sheet
 
Financial instruments
 
Cash collateral received/pledged
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and security resell agreements
 
$
619,758

 
$

 
$
619,758

 
$

 
$

 
$
619,758

Derivatives (included in other assets)
 
77,638

 

 
77,638

 
(6,990
)
 

 
70,648

 
 
$
697,396

 
$

 
$
697,396

 
$
(6,990
)
 
$

 
$
690,406

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds and other short-term borrowings
 
$
346,987

 
$

 
$
346,987

 
$

 
$

 
$
346,987

Derivatives (included in other liabilities)
 
72,568

 

 
72,568

 
(6,990
)
 
(60,923
)
 
4,655

 
 
$
419,555

 
$

 
$
419,555

 
$
(6,990
)
 
$
(60,923
)
 
$
351,642

Security repurchase and reverse repurchase (“resell”) agreements are offset, when applicable, in the balance sheet according to master netting agreements. Security repurchase agreements are included with “Federal funds and other short-term borrowings.” Derivative instruments may be offset under their master netting agreements; however, for accounting purposes, we present these items on a gross basis in the Company’s balance sheet. See Note 7 for further information regarding derivative instruments.

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5.
INVESTMENTS
Investment Securities
Investment securities are summarized below. Note 10 discusses the process to estimate fair value for investment securities.
 
September 30, 2016
(In thousands)

Amortized
cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated
fair value
Held-to-maturity
 
 
 
 
 
 
 
Municipal securities
$
715,279

 
$
11,220

 
$
8,677

 
$
717,822

Available-for-sale
 
 
 
 
 
 
 
U.S. Government agencies and corporations:
 
 
 
 
 
 
 
Agency securities
1,834,034

 
23,104

 
687

 
1,856,451

Agency guaranteed mortgage-backed securities
5,438,880

 
42,437

 
7,028

 
5,474,289

Small Business Administration loan-backed securities
2,192,844

 
9,674

 
16,105

 
2,186,413

Municipal securities
768,875

 
10,575

 
1,205

 
778,245

Other debt securities
25,380

 
135

 
2,546

 
22,969

 
10,260,013

 
85,925

 
27,571

 
10,318,367

Money market mutual funds and other
39,607

 
109

 

 
39,716

 
10,299,620

 
86,034

 
27,571

 
10,358,083

Total
$
11,014,899

 
$
97,254

 
$
36,248

 
$
11,075,905

 
December 31, 2015
(In thousands) 

Amortized
cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated
fair value
Held-to-maturity
 
 
 
 
 
 
 
Municipal securities
$
545,648

 
$
11,218

 
$
4,778

 
$
552,088

Available-for-sale
 
 
 
 
 
 
 
U.S. Government agencies and corporations:
 
 
 
 
 
 
 
Agency securities
1,231,740

 
4,313

 
2,658

 
1,233,395

Agency guaranteed mortgage-backed securities
3,964,593

 
7,919

 
36,037

 
3,936,475

Small Business Administration loan-backed securities
1,932,817

 
12,602

 
14,445

 
1,930,974

Municipal securities
417,374

 
2,177

 
856

 
418,695

Other debt securities
25,454

 
152

 
2,665

 
22,941

 
7,571,978

 
27,163

 
56,661

 
7,542,480

Money market mutual funds and other
100,612

 
61

 
37

 
100,636

 
7,672,590

 
27,224

 
56,698

 
7,643,116

Total
$
8,218,238

 
$
38,442

 
$
61,476

 
$
8,195,204

CDO Sales and Paydowns
During the second quarter of 2015, we sold the remaining portfolio of our collateralized debt obligation (“CDO”) securities, or $574 million at amortized cost, and realized net losses of approximately $137 million. During the first quarter of 2015, we reclassified all of the remaining held-to-maturity (“HTM”) CDO securities, or approximately $79 million at amortized cost, to Available-for-Sale (“AFS”) securities. The reclassification resulted from increased risk weights for these securities under the new Basel III capital rules, and was made in accordance with applicable accounting guidance that allows for such reclassifications when increased risk weights of debt securities must be used for regulatory risk-based capital purposes. No gain or loss was recognized in the statement of income at the time of reclassification.
Maturities
The amortized cost and estimated fair value of investment debt securities are shown subsequently as of September 30, 2016 by expected timing of principal payments. Actual principal payments may differ from contractual or expected principal payments because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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Held-to-maturity
 
Available-for-sale
(In thousands)
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
 
 
 
 
 
 
 
 
Principal return in one year or less
$
71,532

 
$
71,842

 
$
1,379,980

 
$
1,388,748

Principal return after one year through five years
266,665

 
269,636

 
4,161,930

 
4,184,444

Principal return after five years through ten years
219,770

 
223,701

 
3,010,430

 
3,034,823

Principal return after ten years
157,312

 
152,643

 
1,707,673

 
1,710,352

 
$
715,279

 
$
717,822

 
$
10,260,013

 
$
10,318,367

The following is a summary of the amount of gross unrealized losses for investment securities and the estimated fair value by length of time the securities have been in an unrealized loss position:
 
September 30, 2016
 
Less than 12 months
 
12 months or more
 
Total
(In thousands)
 
Gross
unrealized
losses
 
Estimated
fair
value
 
Gross
unrealized
losses
 
Estimated
fair
value
 
Gross
unrealized
losses
 
Estimated
fair
value
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
7,911

 
$
261,162

 
$
766

 
$
11,845

 
$
8,677

 
$
273,007

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations:
 
 
 
 
 
 
 
 
 
 
 
Agency securities
215

 
230,565

 
472

 
122,379

 
687

 
352,944

Agency guaranteed mortgage-backed securities
2,646

 
695,513

 
4,382

 
358,066

 
7,028

 
1,053,579

Small Business Administration loan-backed securities
3,256

 
510,834

 
12,849

 
678,139

 
16,105

 
1,188,973

Municipal securities
907

 
180,804

 
298

 
12,585

 
1,205

 
193,389

Other

 

 
2,546

 
12,457

 
2,546

 
12,457

 
7,024

 
1,617,716

 
20,547

 
1,183,626

 
27,571

 
2,801,342

Mutual funds and other

 

 

 

 

 

 
7,024

 
1,617,716

 
20,547

 
1,183,626

 
27,571

 
2,801,342

Total
$
14,935

 
$
1,878,878

 
$
21,313

 
$
1,195,471

 
$
36,248

 
$
3,074,349

 
December 31, 2015
 
Less than 12 months
 
12 months or more
 
Total
(In thousands)
 
Gross
unrealized
losses
 
Estimated
 fair
 value
 
Gross
unrealized
losses
 
Estimated
 fair
 value
 
Gross
unrealized
losses
 
Estimated
 fair
 value
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
4,521

 
$
122,197

 
$
257

 
$
13,812

 
$
4,778

 
$
136,009

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations:
 
 
 
 
 
 
 
 
 
 
 
Agency securities
2,176

 
559,196

 
482

 
131,615

 
2,658

 
690,811

Agency guaranteed mortgage-backed securities
34,583

 
3,639,824

 
1,454

 
65,071

 
36,037

 
3,704,895

Small Business Administration loan-backed securities
5,348

 
567,365

 
9,097

 
535,376

 
14,445

 
1,102,741

Municipal securities
735

 
102,901

 
121

 
5,733

 
856

 
108,634

Other

 

 
2,665

 
12,337

 
2,665

 
12,337

 
42,842

 
4,869,286

 
13,819

 
750,132

 
56,661

 
5,619,418

Mutual funds and other
37

 
35,488

 

 

 
37

 
35,488

 
42,879

 
4,904,774

 
13,819

 
750,132

 
56,698

 
5,654,906

Total
$
47,400

 
$
5,026,971

 
$
14,076

 
$
763,944

 
$
61,476

 
$
5,790,915

At September 30, 2016 and December 31, 2015, respectively, 215 and 187 HTM and 814 and 709 AFS investment securities were in an unrealized loss position.

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Other-Than-Temporary Impairment
Ongoing Policy
We review investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). We assess whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date (the majority of the investment portfolio are debt securities). Under these circumstances, OTTI is considered to have occurred if (1) we have formed a documented intent to sell identified securities or initiated such sales; (2) it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.
Noncredit-related OTTI in securities we intend to sell is recognized in earnings as is any credit-related OTTI in securities, regardless of our intent. Noncredit-related OTTI on AFS securities not expected to be sold is recognized in other comprehensive income (“OCI”). The amount of noncredit-related OTTI in a security is quantified as the difference in a security’s amortized cost after adjustment for credit impairment, and its lower fair value. Presentation of OTTI is made in the statement of income on a gross basis with an offset for the amount of OTTI recognized in OCI.
OTTI Conclusions
Our 2015 Annual Report on Form 10-K describes in more detail our OTTI evaluation process. The following summarizes the conclusions from our OTTI evaluation by each security type that has significant gross unrealized losses at September 30, 2016:
Small Business Administration (“SBA”) Loan-Backed Securities: These securities were generally purchased at premiums with maturities from 5 to 25 years and have principal cash flows guaranteed by the SBA. Unrealized losses relate to changes in interest rates subsequent to purchase and are not attributable to credit. At September 30, 2016, we did not have an intent to sell identified SBA securities with unrealized losses or initiate such sales, and we believe it is not likely that we would be required to sell such securities before recovery of their amortized cost basis. Therefore, we did not record OTTI for these securities during the third quarter of 2016.
The following is a tabular rollforward of the total amount of credit-related OTTI in 2015. We did not record any credit-related OTTI in the three and nine months ended 2016.
(In thousands)

Three Months Ended
September 30,
 2015
 
Nine Months Ended
September 30, 2015
HTM
 
AFS
 
Total
 
HTM
 
AFS
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance of credit-related OTTI at beginning
of period
$

 
$

 
$

 
$
(9,079
)
 
$
(95,472
)
 
$
(104,551
)
Reductions for securities sold or paid off during the period

 

 

 

 
104,551

 
104,551

Reclassification of securities from HTM to AFS

 

 

 
9,079

 
(9,079
)
 

Balance of credit-related OTTI at end of period
$

 
$

 
$

 
$

 
$

 
$


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The following summarizes gains and losses, including OTTI, that were recognized in the statement of income:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(In thousands)
Gross gains
 
Gross
losses
 
Gross gains
 
Gross losses
 
Gross gains
 
Gross
losses
 
Gross gains
 
Gross
 losses
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
$
12

 
$

 
$

 
$

 
$
12

 
$

 
$
1

 
$

 
Available-for-sale
29

 
2

 
6

 
59

 
89

 
9

 
8,366

 
147,572

 
Other noninterest-bearing investments
8,803

 
362

 
14,267

 
10,637

 
14,701

 
4,101

 
23,870

 
11,571

 
 
8,844

 
364

 
14,273

 
10,696

 
14,802

 
4,110

 
32,237

 
159,143

 
Net gains (losses)
 
 
$
8,480

 
 
 
$
3,577

 
 
 
$
10,692

 
 
 
$
(126,906
)
 
Statement of income information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities gains, net
 
 
$
8,441

 
 
 
$
3,630

 
 
 
$
10,600

 
 
 
$
11,822

 
Fixed income securities gains (losses), net
 
 
39

 
 
 
(53
)
 
 
 
92

 
 
 
(138,728
)
 
Net gains (losses)
 
 
$
8,480

 
 
 
$
3,577

 
 
 
$
10,692

 
 
 
$
(126,906
)
Interest income by security type is as follows:
(In thousands)
Three Months Ended
September 30,
 2016
 
Nine Months Ended
September 30, 2016
 
Taxable
 
Nontaxable
 
Total
 
Taxable
 
Nontaxable
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
$
2,572

 
$
3,318

 
$
5,890

 
$
7,748

 
$
9,202

 
$
16,950

Available-for-sale
39,784

 
2,987

 
42,771

 
117,968

 
7,523

 
125,491

Trading
676

 

 
676

 
1,905

 

 
1,905

 
$
43,032

 
$
6,305

 
$
49,337

 
$
127,621

 
$
16,725

 
$
144,346

(In thousands)
Three Months Ended
September 30,
 2015
 
Nine Months Ended
September 30, 2015
 
Taxable
 
Nontaxable
 
Total
 
Taxable
 
Nontaxable
 
Total
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
$
3,031

 
$
2,629

 
$
5,660

 
$
9,716

 
$
8,265

 
$
17,981

Available-for-sale
23,427

 
699

 
24,126

 
64,832

 
2,047

 
66,879

Trading
445

 

 
445

 
1,653

 

 
1,653

 
$
26,903

 
$
3,328

 
$
30,231

 
$
76,201

 
$
10,312

 
$
86,513

Investment securities with a carrying value of $1.5 billion at September 30, 2016 and $2.3 billion at December 31, 2015 were pledged to secure public and trust deposits, advances, and for other purposes as required by law. Securities are also pledged as collateral for security repurchase agreements.
Private Equity Investments
Effect of Volcker Rule
The Volcker Rule, as published pursuant to the Dodd-Frank Act in December 2013 and amended in January 2014, significantly restricted certain activities by covered bank holding companies, including restrictions on certain types of securities, proprietary trading, and private equity investing. The Company’s private equity investments (“PEIs”) consist of Small Business Investment Companies (“SBICs”) and non-SBICs. Following the sales of its CDO securities, the only prohibited investments under the Volcker Rule requiring divestiture by the Company were certain of its PEIs. Of the recorded PEIs of $143 million at September 30, 2016, approximately $7 million remain prohibited by the Volcker Rule.
As of September 30, 2016 we have sold a total of $18 million of PEIs during 2016 and 2015 as follows: $9 million during 2016 and $9 million during 2015. All of these sales were related to prohibited PEIs and resulted in

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insignificant amounts of realized gains or losses. We will dispose of the remaining $7 million of prohibited PEIs before the required deadline, which has been extended to July 21, 2017. See other discussions in Notes 10 and 11.
As discussed in Note 11, we have $18 million at September 30, 2016 of unfunded commitments for PEIs, of which approximately $1 million relate to prohibited PEIs. Until we dispose of the prohibited PEIs, we expect to fund these commitments if and as the capital calls are made, as allowed under the Volcker Rule.
6.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans and Loans Held for Sale
Loans are summarized as follows according to major portfolio segment and specific loan class:
(In thousands)
September 30,
2016
 
December 31,
2015
 
 
 
 
Loans held for sale
$
160,287

 
$
149,880

 
 
 
 
Commercial:
 
 
 
Commercial and industrial
$
13,542,752

 
$
13,211,481

Leasing
438,933

 
441,666

Owner occupied
6,889,674

 
7,150,028

Municipal
752,960

 
675,839

Total commercial
21,624,319

 
21,479,014

Commercial real estate:
 
 
 
Construction and land development
2,147,212

 
1,841,502

Term
9,302,712

 
8,514,401

Total commercial real estate
11,449,924

 
10,355,903

Consumer:
 
 
 
Home equity credit line
2,581,068

 
2,416,357

1-4 family residential
5,784,583

 
5,382,099

Construction and other consumer real estate
453,235

 
385,240

Bankcard and other revolving plans
457,910

 
443,780

Other
188,681

 
187,149

Total consumer
9,465,477

 
8,814,625

Total loans
$
42,539,720

 
$
40,649,542

Loan balances are presented net of unearned income and fees, which amounted to $149.1 million at September 30, 2016 and $150.3 million at December 31, 2015.
Owner occupied and commercial real estate (“CRE”) loans include unamortized premiums of approximately $21.4 million at September 30, 2016 and $26.2 million at December 31, 2015.
Municipal loans generally include loans to municipalities with the debt service being repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.
Land development loans included in the construction and land development loan class were $295.1 million at September 30, 2016 and $288.0 million at December 31, 2015.
Loans with a carrying value of approximately $25.9 billion at September 30, 2016 have been pledged at the Federal Reserve and the Federal Home Loan Bank (“FHLB”) of Des Moines as collateral for current and potential borrowings compared to $19.4 billion at December 31, 2015 at the Federal Reserve and various FHLBs.
We sold loans totaling $413.2 million and $1,003.9 million for the three and nine months ended September 30, 2016, and $434.1 million and $1,070.2 million for the three and nine months ended September 30, 2015, respectively, that were classified as loans held for sale. The sold loans were derecognized from the balance sheet. Loans classified as loans held for sale primarily consist of conforming residential mortgages and the guaranteed portion of SBA loans. Amounts added to loans held for sale during these periods were $386.7 million and $979.3

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ZIONS BANCORPORATION AND SUBSIDIARIES

million for the three and nine months ended September 30, 2016, and $442.4 million and $1,111.0 million for the three and nine months ended September 30, 2015, respectively.
The principal balance of sold loans for which we retain servicing was approximately $1.2 billion at September 30, 2016 and $1.3 billion at December 31, 2015. Income from loans sold, excluding servicing, was $6.2 million and $15.1 million for the three and nine months ended September 30, 2016, and $5.0 million and $13.9 million for the three and nine months ended September 30, 2015, respectively.
Allowance for Credit Losses
The allowance for credit losses (“ACL”) consists of the allowance for loan and lease losses (“ALLL”) (also referred to as the allowance for loan losses) and the reserve for unfunded lending commitments (“RULC”).
Allowance for Loan and Lease Losses
The ALLL represents our estimate of probable and estimable losses inherent in the loan and lease portfolio as of the balance sheet date. Losses are charged to the ALLL when recognized. Generally, commercial and CRE loans are charged off or charged down when they are determined to be uncollectible in whole or in part, or when 180 days past due unless the loan is well secured and in process of collection. Consumer loans are either charged off or charged down to net realizable value no later than the month in which they become 180 days past due. Closed-end consumer loans that are not secured by residential real estate are either charged off or charged down to net realizable value no later than the month in which they become 120 days past due. We establish the amount of the ALLL by analyzing the portfolio at least quarterly, and we adjust the provision for loan losses so the ALLL is at an appropriate level at the balance sheet date.
We determine our ALLL as the best estimate within a range of estimated losses. The methodologies we use to estimate the ALLL depend upon the impairment status and loan portfolio. The methodology for impaired loans is discussed subsequently. For commercial and CRE loans with commitments equal to or greater than $750,000, we assign internal risk grades using a comprehensive loan grading system based on financial and statistical models, individual credit analysis, and loan officer experience and judgment. The credit quality indicators discussed subsequently are based on this grading system. Estimated losses for these commercial and CRE loans are derived from a statistical analysis of our historical default and loss given default (“LGD”) experience over the period of January 2008 through the most recent full quarter.
For consumer and small commercial and CRE loans with commitments less than $750,000, we primarily use roll rate models to forecast probable inherent losses. Roll rate models measure the rate at which these loans migrate from one delinquency category to the next worse delinquency category, and eventually to loss. We estimate roll rates for these loans using recent delinquency and loss experience by segmenting our loan portfolios into separate pools based on common risk characteristics and separately calculating historical delinquency and loss experience for each pool. These roll rates are then applied to current delinquency levels to estimate probable inherent losses.
The current status and historical changes in qualitative and environmental factors may not be reflected in our quantitative models. Thus, after applying historical loss experience, as described above, we review the quantitatively derived level of ALLL for each segment using qualitative criteria and use those criteria to determine our estimate within the range. We track various risk factors that influence our judgment regarding the level of the ALLL across the portfolio segments. These factors primarily include:
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices
Changes in international, national, regional, and local economic and business conditions
Changes in the nature and volume of the portfolio and in the terms of loans
Changes in the experience, ability, and depth of lending management and other relevant staff
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans

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Changes in the quality of the loan review system
Changes in the value of underlying collateral for collateral-dependent loans

The existence and effect of any concentration of credit, and changes in the level of such concentrations
The effect of other external factors such as competition and legal and regulatory requirements
The magnitude of the impact of these factors on our qualitative assessment of the ALLL changes from quarter to quarter according to changes made by management in its assessment of these factors, the extent these factors are already reflected in historic loss rates, and the extent changes in these factors diverge from one to another. We also consider the uncertainty inherent in the estimation process when evaluating the ALLL.
Reserve for Unfunded Lending Commitments
We also estimate a reserve for potential losses associated with off-balance sheet commitments, including standby letters of credit. We determine the RULC using the same procedures and methodologies that we use for the ALLL. The loss factors used in the RULC are the same as the loss factors used in the ALLL, and the qualitative adjustments used in the RULC are the same as the qualitative adjustments used in the ALLL. We adjust the Company’s unfunded lending commitments that are not unconditionally cancelable to an outstanding amount equivalent using credit conversion factors, and we apply the loss factors to the outstanding equivalents.
Changes in ACL Assumptions
During the first quarter of 2016, due to the consolidation of our separate banking charters, we enhanced our methodology to estimate the ACL on a Company-wide basis. As described previously, for large commercial and CRE loans, we began estimating historic loss factors by separately calculating historic default and LGD rates, instead of directly calculating loss rates for groupings of probability of default and LGD grades using a loss migration approach. For small commercial and CRE loans, we began using roll rate models to estimate probable inherent losses. For consumer loans, we began pooling loans by current loan-to-value, where applicable. The impact of these changes was largely neutral to the total ACL at implementation.
Changes in the allowance for credit losses are summarized as follows:

 
Three Months Ended September 30, 2016
(In thousands)
Commercial
 
Commercial
real estate
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
Balance at beginning of period
$
457,064

 
$
121,567

 
$
29,714

 
$
608,345

Additions:
 
 
 
 
 
 
 
Provision for loan losses
22,298

 
(6,446
)
 
2,973

 
18,825

Deductions:
 
 
 
 
 
 
 
Gross loan and lease charge-offs
(48,032
)
 
(1,075
)
 
(4,656
)
 
(53,763
)
Recoveries
14,724

 
6,952

 
2,102

 
23,778

Net loan and lease (charge-offs) recoveries
(33,308
)
 
5,877

 
(2,554
)
 
(29,985
)
Balance at end of period
$
446,054

 
$
120,998

 
$
30,133

 
$
597,185

 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 
 
 
 
 
 
 
Balance at beginning of period
$
53,523

 
$
11,257

 
$

 
$
64,780

Provision credited to earnings
(1,903
)
 
(1,262
)
 

 
(3,165
)
Balance at end of period
$
51,620

 
$
9,995

 
$

 
$
61,615

 
 
 
 
 
 
 
 
Total allowance for credit losses at end of period
 
 
 
 
 
 
 
Allowance for loan losses
$
446,054

 
$
120,998

 
$
30,133

 
$
597,185

Reserve for unfunded lending commitments
51,620

 
9,995

 

 
61,615

Total allowance for credit losses
$
497,674

 
$
130,993

 
$
30,133

 
$
658,800


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Nine Months Ended September 30, 2016
(In thousands)
Commercial
 
Commercial
real estate
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
Balance at beginning of period
$
454,277

 
$
113,992

 
$
37,779

 
$
606,048

Additions:
 
 
 
 
 
 
 
Provision for loan losses
93,359

 
4,876

 
(2,773
)
 
95,462

Deductions:
 
 
 
 
 
 
 
Gross loan and lease charge-offs
(137,897
)
 
(9,889
)
 
(11,716
)
 
(159,502
)
Recoveries
36,315

 
12,019

 
6,843

 
55,177

Net loan and lease (charge-offs) recoveries
(101,582
)
 
2,130

 
(4,873
)
 
(104,325
)
Balance at end of period
$
446,054

 
$
120,998

 
$
30,133

 
$
597,185

 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 
 
 
 
 
 
 
Balance at beginning of period
$
57,696

 
$
16,526

 
$
616

 
$
74,838

Provision credited to earnings
(6,076
)
 
(6,531
)
 
(616
)
 
(13,223
)
Balance at end of period
$
51,620

 
$
9,995

 
$

 
$
61,615

 
 
 
 
 
 
 
 
Total allowance for credit losses at end of period
 
 
 
 
 
 
 
Allowance for loan losses
$
446,054

 
$
120,998

 
$
30,133

 
$
597,185

Reserve for unfunded lending commitments
51,620

 
9,995

 

 
61,615

Total allowance for credit losses
$
497,674

 
$
130,993

 
$
30,133

 
$
658,800

 
Three Months Ended September 30, 2015
(In thousands)
Commercial

Commercial
real estate

Consumer

Total
Allowance for loan losses
 
 
 
 
 
 
 
Balance at beginning of period
$
437,770

 
$
125,796

 
$
45,809

 
$
609,375

Additions:
 
 
 
 
 
 
 
Provision for loan losses
22,417

 
(6,621
)
 
2,466

 
18,262

Deductions:
 
 
 
 
 
 

Gross loan and lease charge-offs
(36,961
)
 
(1,068
)
 
(4,330
)
 
(42,359
)
Recoveries
4,471

 
4,162

 
2,529

 
11,162

Net loan and lease (charge-offs) recoveries
(32,490
)
 
3,094

 
(1,801
)
 
(31,197
)
Balance at end of period
$
427,697

 
$
122,269

 
$
46,474

 
$
596,440


 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 
 
 
 
 
 
 
Balance at beginning of period
$
60,774

 
$
18,639

 
$
548

 
$
79,961

Provision charged (credited) to earnings
2,808

 
(1,467
)
 
87

 
1,428

Balance at end of period
$
63,582

 
$
17,172

 
$
635

 
$
81,389


 
 
 
 
 
 
 
Total allowance for credit losses at end of period
 
 
 
 
 
 
 
Allowance for loan losses
$
427,697


$
122,269


$
46,474


$
596,440

Reserve for unfunded lending commitments
63,582

 
17,172

 
635

 
81,389

Total allowance for credit losses
$
491,279

 
$
139,441

 
$
47,109

 
$
677,829


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Nine Months Ended September 30, 2015
(In thousands)
Commercial
 
Commercial
real estate
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
Balance at beginning of period
$
412,514

 
$
145,009

 
$
47,140

 
$
604,663

Additions:
 
 
 
 
 
 
 
Provision for loan losses
53,292

 
(38,491
)
 
2,533

 
17,334

Deductions:
 
 
 
 
 
 
 
Gross loan and lease charge-offs
(76,734
)
 
(5,637
)
 
(11,224
)
 
(93,595
)
Recoveries
38,682

 
21,331

 
8,025

 
68,038

Net loan and lease (charge-offs) recoveries
(38,052
)
 
15,694

 
(3,199
)
 
(25,557
)
Balance at end of period
$
427,697

 
$
122,269

 
$
46,474

 
$
596,440

 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 
 
 
 
 
 
 
Balance at beginning of period
$
58,931

 
$
21,517

 
$
628

 
$
81,076

Provision charged (credited) to earnings
4,651

 
(4,345
)
 
7

 
313

Balance at end of period
$
63,582

 
$
17,172

 
$
635

 
$
81,389

 
 
 
 
 
 
 
 
Total allowance for credit losses at end of period
 
 
 
 
 
 
 
Allowance for loan losses
$
427,697


$
122,269


$
46,474


$
596,440

Reserve for unfunded lending commitments
63,582

 
17,172

 
635

 
81,389

Total allowance for credit losses
$
491,279

 
$
139,441

 
$
47,109

 
$
677,829

The ALLL and outstanding loan balances according to the Company’s impairment method are summarized as follows:
 
September 30, 2016
(In thousands)
Commercial
 
Commercial
real estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
68,159

 
$
3,029

 
$
6,755

 
$
77,943

Collectively evaluated for impairment
377,197

 
117,520

 
22,900

 
517,617

Purchased loans with evidence of credit deterioration
698

 
449

 
478

 
1,625

 
 
 
 
 
 
 
 
Outstanding loan balances:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
495,919

 
$
74,456

 
$
76,564

 
$
646,939

Collectively evaluated for impairment
21,086,101

 
11,336,574

 
9,380,885

 
41,803,560

Purchased loans with evidence of credit deterioration
42,299

 
38,894

 
8,028

 
89,221

Total
$
21,624,319

 
$
11,449,924

 
$
9,465,477

 
$
42,539,720

 
December 31, 2015
(In thousands)
Commercial
 
Commercial
real estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
36,909

 
$
3,154

 
$
9,462

 
$
49,525

Collectively evaluated for impairment
417,295

 
110,417

 
27,866

 
555,578

Purchased loans with evidence of credit deterioration
73

 
421

 
451

 
945

 
 
 
 
 
 
 
 
Outstanding loan balances:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
289,629

 
$
107,341

 
$
92,605

 
$
489,575

Collectively evaluated for impairment
21,129,125

 
10,193,840

 
8,712,079

 
40,035,044

Purchased loans with evidence of credit deterioration
60,260

 
54,722

 
9,941

 
124,923

Total
$
21,479,014

 
$
10,355,903

 
$
8,814,625

 
$
40,649,542


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ZIONS BANCORPORATION AND SUBSIDIARIES

Nonaccrual and Past Due Loans
Loans are generally placed on nonaccrual status when payment in full of principal and interest is not expected, or the loan is 90 days or more past due as to principal or interest, unless the loan is both well secured and in the process of collection. Factors we consider in determining whether a loan is placed on nonaccrual include delinquency status, collateral value, borrower or guarantor financial statement information, bankruptcy status, and other information which would indicate that the full and timely collection of interest and principal is uncertain.
A nonaccrual loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement; the loan, if secured, is well secured; the borrower has paid according to the contractual terms for a minimum of six months; and analysis of the borrower indicates a reasonable assurance of the ability and willingness to maintain payments. Payments received on nonaccrual loans are applied as a reduction to the principal outstanding.
Closed-end loans with payments scheduled monthly are reported as past due when the borrower is in arrears for two or more monthly payments. Similarly, open-end credit such as charge-card plans and other revolving credit plans are reported as past due when the minimum payment has not been made for two or more billing cycles. Other multi-payment obligations (i.e., quarterly, semiannual, etc.), single payment, and demand notes are reported as past due when either principal or interest is due and unpaid for a period of 30 days or more.
Nonaccrual loans are summarized as follows:
(In thousands)
September 30,
2016
 
December 31,
2015
Loans held for sale
$
29,448

 
$

Commercial:
 
 
 
Commercial and industrial
$
387,339

 
$
163,906

Leasing
14,219

 
3,829

Owner occupied
65,873

 
73,881

Municipal
868

 
951

Total commercial
468,299

 
242,567

Commercial real estate:
 
 
 
Construction and land development
4,037

 
7,045

Term
27,420

 
40,253

Total commercial real estate
31,457

 
47,298

Consumer:
 
 
 
Home equity credit line
11,318

 
8,270

1-4 family residential
36,016

 
50,254

Construction and other consumer real estate
753

 
748

Bankcard and other revolving plans
1,415

 
537

Other
126

 
186

Total consumer loans
49,628

 
59,995

Total
$
549,384

 
$
349,860


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Past due loans (accruing and nonaccruing) are summarized as follows:
 
September 30, 2016
(In thousands)
Current
 
30-89 days
past due
 
90+ days
past due
 
Total
past due
 
Total
loans
 
Accruing
loans
90+ days
past due
 
Nonaccrual
loans
that are
current 1
Loans held for sale
$
160,287

 
$

 
$

 
$

 
$
160,287

 
$

 
$
29,448

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
13,404,163

 
$
87,689

 
$
50,900

 
$
138,589

 
$
13,542,752

 
$
5,452

 
$
320,959

Leasing
438,933

 

 

 

 
438,933

 

 
14,219

Owner occupied
6,839,251

 
30,313

 
20,110

 
50,423

 
6,889,674

 
5,472

 
42,803

Municipal
752,960

 

 

 

 
752,960

 

 
868

Total commercial
21,435,307

 
118,002

 
71,010

 
189,012

 
21,624,319

 
10,924

 
378,849

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
2,113,363

 
32,079

 
1,770

 
33,849

 
2,147,212

 

 
2,267

Term
9,254,133

 
25,362

 
23,217

 
48,579

 
9,302,712

 
15,231

 
17,226

Total commercial real estate
11,367,496

 
57,441

 
24,987

 
82,428

 
11,449,924

 
15,231

 
19,493

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line
2,569,726

 
4,380

 
6,962

 
11,342

 
2,581,068

 
1,500

 
4,219

1-4 family residential
5,751,412

 
13,393

 
19,778

 
33,171

 
5,784,583

 
63

 
11,248

Construction and other consumer real estate
446,778

 
5,896

 
561

 
6,457

 
453,235

 
107

 
288

Bankcard and other revolving plans
453,961

 
2,794

 
1,155

 
3,949

 
457,910

 
1,010

 
1,174

Other
188,147

 
533

 
1

 
534

 
188,681

 

 
82

Total consumer loans
9,410,024

 
26,996

 
28,457

 
55,453

 
9,465,477

 
2,680

 
17,011

Total
$
42,212,827

 
$
202,439

 
$
124,454

 
$
326,893

 
$
42,539,720

 
$
28,835

 
$
415,353

 
December 31, 2015
(In thousands)
Current
 
30-89 days
past due
 
90+ days
past due
 
Total
past due
 
Total
loans
 
Accruing
loans
90+ days
past due
 
Nonaccrual
loans
that are
current 1
Loans held for sale
$
149,880

 
$

 
$

 
$

 
$
149,880

 
$

 
$

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
13,114,045

 
$
60,523

 
$
36,913

 
$
97,436

 
$
13,211,481

 
$
3,065

 
$
117,942

Leasing
440,963

 
183

 
520

 
703

 
441,666

 

 
3,309

Owner occupied
7,085,086

 
37,776

 
27,166

 
64,942

 
7,150,028

 
3,626

 
43,984

Municipal
668,207

 
7,586

 
46

 
7,632

 
675,839

 
46

 
951

Total commercial
21,308,301

 
106,068

 
64,645

 
170,713

 
21,479,014

 
6,737

 
166,186

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
1,835,360

 
842

 
5,300

 
6,142

 
1,841,502

 

 
1,745

Term
8,469,390

 
10,424

 
34,587

 
45,011

 
8,514,401

 
21,697

 
24,867

Total commercial real estate
10,304,750

 
11,266

 
39,887

 
51,153

 
10,355,903

 
21,697

 
26,612

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line
2,407,972

 
4,717

 
3,668

 
8,385

 
2,416,357

 

 
3,053

1-4 family residential
5,340,549

 
14,828

 
26,722

 
41,550

 
5,382,099

 
1,036

 
20,939

Construction and other consumer real estate
374,987

 
8,593

 
1,660

 
10,253

 
385,240

 
1,337

 
408

Bankcard and other revolving plans
440,358

 
1,861

 
1,561

 
3,422

 
443,780

 
1,217

 
146

Other
186,436

 
647

 
66

 
713

 
187,149

 

 
83

Total consumer loans
8,750,302

 
30,646

 
33,677

 
64,323

 
8,814,625

 
3,590

 
24,629

Total
$
40,363,353

 
$
147,980

 
$
138,209

 
$
286,189

 
$
40,649,542

 
$
32,024

 
$
217,427

1 
Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is still not expected.

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Credit Quality Indicators
In addition to the past due and nonaccrual criteria, we also analyze loans using loan risk grading systems, which vary based on the size and type of credit risk exposure. The internal risk grades assigned to loans follow our definitions of Pass, Special Mention, Substandard, and Doubtful, which are consistent with published definitions of regulatory risk classifications.
Definitions of Pass, Special Mention, Substandard, and Doubtful are summarized as follows:
Pass – A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered low.
Special Mention A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date.
Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well-defined weaknesses and are characterized by the distinct possibility that the bank may sustain some loss if deficiencies are not corrected.
Doubtful – A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable.
We generally assign internal risk grades to commercial and CRE loans with commitments equal to or greater than $750,000 based on financial and statistical models, individual credit analysis, and loan officer experience and judgment. For these larger loans, we assign one of multiple grades within the Pass classification or one of the following four grades: Special Mention, Substandard, Doubtful, and Loss. Loss indicates that the outstanding balance has been charged off. We confirm our internal risk grades quarterly, or as soon as we identify information that affects the credit risk of the loan.
For consumer loans and certain small commercial and CRE loans with commitments less than $750,000, we generally assign internal risk grades similar to those described previously based on automated rules that depend on refreshed credit scores, payment performance, and other risk indicators. These are generally assigned either a Pass or Substandard grade and are reviewed as we identify information that might warrant a grade change.

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Outstanding loan balances (accruing and nonaccruing) categorized by these credit quality indicators are summarized as follows:
 
September 30, 2016
(In thousands)
Pass
 
Special
Mention
 
Sub-
standard
 
Doubtful
 
Total
loans
 
Total
allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
12,131,677

 
$
355,800

 
$
1,046,068

 
$
9,207

 
$
13,542,752

 
 
Leasing
403,597

 
6,155

 
29,181

 

 
438,933

 
 
Owner occupied
6,450,754

 
145,338

 
293,582

 

 
6,889,674

 
 
Municipal
738,808

 

 
14,152

 

 
752,960

 
 
Total commercial
19,724,836

 
507,293

 
1,382,983

 
9,207

 
21,624,319

 
$
446,054

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
2,059,627

 
61,936

 
25,649

 

 
2,147,212

 
 
Term
9,065,467

 
96,384

 
140,861

 

 
9,302,712

 
 
Total commercial real estate
11,125,094

 
158,320

 
166,510

 

 
11,449,924

 
120,998

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line
2,566,873

 

 
14,195

 

 
2,581,068

 
 
1-4 family residential
5,746,829

 

 
37,754

 

 
5,784,583

 
 
Construction and other consumer real estate
451,809

 

 
1,426

 

 
453,235

 
 
Bankcard and other revolving plans
454,850

 

 
3,060

 

 
457,910

 
 
Other
188,468

 

 
213

 

 
188,681

 
 
Total consumer loans
9,408,829

 

 
56,648

 

 
9,465,477

 
30,133

Total
$
40,258,759

 
$
665,613

 
$
1,606,141

 
$
9,207

 
$
42,539,720

 
$
597,185

 
December 31, 2015
(In thousands)
Pass
 
Special
Mention
 
Sub-
standard
 
Doubtful
 
Total
loans
 
Total
allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
12,007,076

 
$
399,847

 
$
804,403

 
$
155

 
$
13,211,481

 
 
Leasing
411,131

 
5,166

 
25,369

 

 
441,666

 
 
Owner occupied
6,720,052

 
139,784

 
290,192

 

 
7,150,028

 
 
Municipal
663,903

 

 
11,936

 

 
675,839

 
 
Total commercial
19,802,162

 
544,797

 
1,131,900

 
155

 
21,479,014

 
$
454,277

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
1,786,610

 
42,348

 
12,544

 

 
1,841,502

 
 
Term
8,319,348

 
47,245

 
139,036

 
8,772

 
8,514,401

 
 
Total commercial real estate
10,105,958

 
89,593

 
151,580

 
8,772

 
10,355,903

 
113,992

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line
2,404,635

 

 
11,722

 

 
2,416,357

 
 
1-4 family residential
5,325,519

 

 
56,580

 

 
5,382,099

 
 
Construction and other consumer real estate
381,738

 

 
3,502

 

 
385,240

 
 
Bankcard and other revolving plans
440,282

 

 
3,498

 

 
443,780

 
 
Other
186,836

 

 
313

 

 
187,149

 
 
Total consumer loans
8,739,010

 

 
75,615

 

 
8,814,625

 
37,779

Total
$
38,647,130

 
$
634,390

 
$
1,359,095

 
$
8,927

 
$
40,649,542

 
$
606,048

Impaired Loans
Loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. For our non-purchased credit-impaired loans, if a nonaccrual loan has a balance greater than $1 million, or if a loan is a troubled debt restructuring (“TDR”), including TDRs that subsequently default, or if the loan is no longer reported as a TDR, we individually evaluate the loan for impairment and estimate a specific

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ZIONS BANCORPORATION AND SUBSIDIARIES

reserve for the loan for all portfolio segments under applicable accounting guidance. Smaller nonaccrual loans are pooled for ALLL estimation purposes. Purchase credit-impaired (“PCI”) loans are included in impaired loans and are accounted for under separate accounting guidance. See subsequent discussion under Purchased Loans.
When a loan is impaired, we estimate a specific reserve for the loan based on the projected present value of the loan’s future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the loan’s underlying collateral. The process of estimating future cash flows also incorporates the same determining factors discussed previously under nonaccrual loans. When we base the impairment amount on the fair value of the loan’s underlying collateral, we generally charge off the portion of the balance that is impaired, such that these loans do not have a specific reserve in the ALLL. Payments received on impaired loans that are accruing are recognized in interest income, according to the contractual loan agreement. Payments received on impaired loans that are on nonaccrual are not recognized in interest income, but are applied as a reduction to the principal outstanding. The amount of interest income recognized on a cash basis during the time the loans were impaired within the three and nine months ended September 30, 2016 and 2015 was not significant.
Information on impaired loans individually evaluated is summarized as follows, including the average recorded investment and interest income recognized for the three and nine months ended September 30, 2016 and 2015:
 
September 30, 2016
(In thousands)

Unpaid
principal
balance
 
Recorded investment
 
Total
recorded
investment
 
Related
allowance
with no
allowance
 
with
allowance
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
18,935

 
$
15,996

 
$

 
$
15,996

 
$

 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
476,275

 
$
86,904

 
$
338,754

 
$
425,658

 
$
64,381

Owner occupied
108,694

 
61,794

 
38,163

 
99,957

 
3,612

Municipal
1,347

 
869

 

 
869

 

Total commercial
586,316

 
149,567

 
376,917

 
526,484

 
67,993

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction and land development
18,432

 
3,538

 
7,323

 
10,861

 
256

Term
86,540

 
52,295

 
22,290

 
74,585

 
1,322

Total commercial real estate
104,972

 
55,833

 
29,613

 
85,446

 
1,578

Consumer:
 
 
 
 
 
 
 
 
 
Home equity credit line
25,200

 
15,891

 
6,762

 
22,653

 
537

1-4 family residential
59,306

 
27,047

 
29,250

 
56,297

 
6,488

Construction and other consumer real estate
3,316

 
917

 
1,825

 
2,742

 
105

Other
1,992

 
1,484

 
32

 
1,516

 
3

Total consumer loans
89,814

 
45,339

 
37,869

 
83,208

 
7,133

Total
$
781,102

 
$
250,739

 
$
444,399

 
$
695,138

 
$
76,704


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ZIONS BANCORPORATION AND SUBSIDIARIES

 
December 31, 2015
(In thousands)

Unpaid
principal
balance
 
Recorded investment
 
Total
recorded
investment
 
Related
allowance
with no
allowance
 
with
allowance
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
272,161

 
$
44,190

 
$
163,729

 
$
207,919

 
$
30,538

Owner occupied
141,526

 
83,024

 
43,243

 
126,267

 
5,486

Municipal
1,430

 
951

 

 
951

 

Total commercial
415,117

 
128,165

 
206,972

 
335,137

 
36,024

Commercial real estate:
 
 
 
 
 
 
 
 
 
Construction and land development
22,791

 
5,076

 
9,558

 
14,634

 
618

Term
142,239

 
82,864

 
34,361

 
117,225

 
2,604

Total commercial real estate
165,030

 
87,940

 
43,919

 
131,859

 
3,222

Consumer:
 
 
 
 
 
 
 
 
 
Home equity credit line
27,064

 
18,980

 
5,319

 
24,299

 
243

1-4 family residential
74,009

 
29,540

 
41,155

 
70,695

 
8,736

Construction and other consumer real estate
2,741

 
989

 
1,014

 
2,003

 
173

Other
3,187

 
36

 
2,570

 
2,606

 
299

Total consumer loans
107,001

 
49,545

 
50,058

 
99,603

 
9,451

Total
$
687,148

 
$
265,650

 
$
300,949

 
$
566,599

 
$
48,697

 
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2016
(In thousands)

Average
recorded
investment
 
Interest
income
recognized
 
Average
recorded
investment
 
Interest
income
recognized
 
 
 
 
 
 
 
 
Loans held for sale
$
18,561

 
$

 
$
20,583

 
$

 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
$
448,590

 
$
1,464

 
$
318,434

 
$
3,977

Owner occupied
100,386

 
2,060

 
103,439

 
7,537

Municipal
877

 

 
903

 

Total commercial
549,853

 
3,524

 
422,776

 
11,514

Commercial real estate:
 
 
 
 
 
 
 
Construction and land development
11,281

 
863

 
12,041

 
2,065

Term
73,860

 
2,689

 
79,449

 
9,378

Total commercial real estate
85,141

 
3,552

 
91,490

 
11,443

Consumer:
 
 
 
 
 
 
 
Home equity credit line
22,895

 
323

 
22,291

 
1,029

1-4 family residential
61,149

 
461

 
57,815

 
1,324

Construction and other consumer real estate
2,767

 
43

 
2,707

 
134

Bankcard and other revolving plans

 
1

 

 
17

Other
1,912

 
81

 
2,166

 
281

Total consumer loans
88,723

 
909

 
84,979


2,785

Total
$
723,717

 
$
7,985

 
$
599,245

 
$
25,742


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ZIONS BANCORPORATION AND SUBSIDIARIES

 
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
(In thousands)

Average
recorded
investment
 
Interest
income
recognized
 
Average
recorded
investment
 
Interest
income
recognized
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
$
191,642

 
$
1,314

 
$
158,825

 
$
5,525

Owner occupied
138,194

 
2,752

 
135,212

 
9,706

Municipal
978

 

 
1,007

 

Total commercial
330,814

 
4,066

 
295,044

 
15,231

Commercial real estate:
 
 
 
 
 
 
 
Construction and land development
31,506

 
499

 
31,920

 
2,691

Term
119,694

 
3,705

 
124,446

 
13,383

Total commercial real estate
151,200

 
4,204

 
156,366

 
16,074

Consumer:
 
 
 
 
 
 
 
Home equity credit line
25,095

 
401

 
24,329

 
1,206

1-4 family residential
90,240

 
398

 
91,671

 
1,803

Construction and other consumer real estate
5,540

 
32

 
2,342

 
91

Bankcard and other revolving plans

 
1

 
1

 
101

Other
36

 
177

 
4,109

 
692

Total consumer loans
120,911

 
1,009

 
122,452

 
3,893

Total
$
602,925

 
$
9,279

 
$
573,862

 
$
35,198

Modified and Restructured Loans
Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. These modifications are structured on a loan-by-loan basis and, depending on the circumstances, may include extended payment terms, a modified interest rate, forgiveness of principal, or other concessions. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are considered TDRs.
We consider many factors in determining whether to agree to a loan modification involving concessions, and seek a solution that will both minimize potential loss to the Company and attempt to help the borrower. We evaluate borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral (if applicable), the possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.
TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the bank is willing to accept for a new loan with comparable risk may not be reported as a TDR or an impaired loan in the calendar years subsequent to the restructuring if it is in compliance with its modified terms.

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Selected information on TDRs that includes the recorded investment on an accruing and nonaccruing basis by loan class and modification type is summarized in the following schedules:
 
September 30, 2016
 
Recorded investment resulting from the following modification types:
 
 
(In thousands)

Interest
rate below
market
 
Maturity
or term
extension
 
Principal
forgiveness
 
Payment
deferral
 
Other1
 
Multiple
modification
types2
 
Total
Accruing
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
255

 
$
17,606

 
$
9

 
$
71

 
$
11

 
$
40,104

 
$
58,056

Owner occupied
2,580

 
109

 
899

 

 
7,703

 
14,352

 
25,643

Total commercial
2,835

 
17,715

 
908

 
71

 
7,714

 
54,456

 
83,699

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
41

 
196

 

 

 

 
7,358

 
7,595

Term
4,549

 
444

 
165

 
979

 
1,788

 
10,327

 
18,252

Total commercial real estate
4,590

 
640

 
165

 
979

 
1,788

 
17,685

 
25,847

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line
195

 
1,358

 
9,572

 
4

 
163

 
2,677

 
13,969

1-4 family residential
2,326

 
368

 
6,416

 
254

 
3,209

 
31,010

 
43,583

Construction and other consumer real estate
165

 
341

 
14

 
1,128

 

 
915

 
2,563

Other

 

 
123

 

 

 

 
123

Total consumer loans
2,686

 
2,067


16,125


1,386


3,372


34,602

 
60,238

Total accruing
10,111

 
20,422

 
17,198

 
2,436

 
12,874

 
106,743

 
169,784

Nonaccruing
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$

 
$

 
$

 
$
15,996

 
$
15,996

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
122

 
$
264

 
$

 
$
1,130

 
$
33,902

 
$
32,280

 
$
67,698

Owner occupied
622

 
788

 

 
2,867

 
253

 
13,518

 
18,048

Municipal

 
869

 

 

 

 

 
869

Total commercial
744

 
1,921

 

 
3,997

 
34,155

 
45,798

 
86,615

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development

 
45

 

 

 
1,725

 
410

 
2,180

Term
1,705

 
1,093

 

 

 
2,531

 
3,052

 
8,381

Total commercial real estate
1,705

 
1,138

 

 

 
4,256

 
3,462

 
10,561

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line

 
437

 
1,357

 
35

 

 
682

 
2,511

1-4 family residential

 
243

 
2,096

 
284

 
1,276

 
5,583

 
9,482

Construction and other consumer real estate

 
90

 

 
21

 

 
47

 
158

Total consumer loans

 
770

 
3,453

 
340

 
1,276

 
6,312

 
12,151

Total nonaccruing
2,449

 
3,829

 
3,453

 
4,337

 
39,687

 
55,572

 
109,327

Total
$
12,560

 
$
24,251

 
$
20,651

 
$
6,773

 
$
52,561

 
$
162,315

 
$
279,111


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Table of Contents
ZIONS BANCORPORATION AND SUBSIDIARIES

 
December 31, 2015
 
Recorded investment resulting from the following modification types:
 
 
(In thousands)

Interest
rate below
market
 
Maturity
or term
extension
 
Principal
forgiveness
 
Payment
deferral
 
Other1
 
Multiple
modification
types2
 
Total
Accruing
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
202

 
$
3,236

 
$
13

 
$
100

 
$
23,207

 
$
34,473

 
$
61,231

Owner occupied
1,999

 
681

 
929

 

 
9,879

 
16,339

 
29,827

Total commercial
2,201

 
3,917

 
942

 
100

 
33,086

 
50,812

 
91,058

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
94

 

 

 

 

 
9,698

 
9,792

Term
4,696

 
638

 
166

 
976

 
2,249

 
20,833

 
29,558

Total commercial real estate
4,790

 
638

 
166

 
976

 
2,249

 
30,531

 
39,350

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line
192

 
2,147

 
9,763

 

 
164

 
3,155

 
15,421

1-4 family residential
2,669

 
353

 
6,747

 
433

 
3,440

 
32,903

 
46,545

Construction and other consumer real estate
174

 
384

 

 

 

 
1,152

 
1,710

Other

 

 

 

 

 

 

Total consumer loans
3,035

 
2,884

 
16,510

 
433

 
3,604

 
37,210

 
63,676

Total accruing
10,026

 
7,439

 
17,618

 
1,509

 
38,939

 
118,553

 
194,084

Nonaccruing
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
28

 
$
455

 
$

 
$
1,879

 
$
3,577

 
$
49,617

 
$
55,556

Owner occupied
685

 
1,669

 

 
724

 
34

 
16,335

 
19,447

Municipal

 
951

 

 

 

 

 
951

Total commercial
713

 
3,075

 

 
2,603

 
3,611

 
65,952

 
75,954

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development

 
333

 

 

 
3,156

 
208

 
3,697

Term
1,844

 

 

 

 
2,960

 
5,203

 
10,007

Total commercial real estate
1,844

 
333

 

 

 
6,116

 
5,411

 
13,704

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line
7

 
500

 
1,400

 
54

 

 
233

 
2,194

1-4 family residential

 
275

 
2,052

 
136

 
1,180

 
7,299

 
10,942

Construction and other consumer real estate

 
101

 
17

 
48

 

 
44

 
210

Total consumer loans
7

 
876

 
3,469

 
238

 
1,180

 
7,576

 
13,346

Total nonaccruing
2,564

 
4,284

 
3,469

 
2,841

 
10,907

 
78,939

 
103,004

Total
$
12,590

 
$
11,723

 
$
21,087

 
$
4,350

 
$
49,846

 
$
197,492

 
$
297,088

1 
Includes TDRs that resulted from other modification types including, but not limited to, a legal judgment awarded on different terms, a bankruptcy plan confirmed on different terms, a settlement that includes the delivery of collateral in exchange for debt reduction, etc.
2 
Includes TDRs that resulted from a combination of any of the previous modification types.
Unfunded lending commitments on TDRs amounted to approximately $11.8 million at September 30, 2016 and $7.5 million at December 31, 2015.
The total recorded investment of all TDRs in which interest rates were modified below market was $145.1 million at September 30, 2016 and $188.0 million at December 31, 2015. These loans are included in the previous schedule in the columns for interest rate below market and multiple modification types.

29


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ZIONS BANCORPORATION AND SUBSIDIARIES

The net financial impact on interest income due to interest rate modifications below market for accruing TDRs is summarized in the following schedule:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
$
(89
)
 
$
(67
)
 
$
(240
)
 
$
(189
)
Owner occupied
(49
)
 
(46
)
 
(148
)
 
(230
)
Total commercial
(138
)
 
(113
)
 
(388
)
 
(419
)
Commercial real estate:
 
 
 
 
 
 
 
Construction and land development
(1
)
 
(26
)
 
(3
)
 
(88
)
Term
(65
)
 
(84
)
 
(218
)
 
(295
)
Total commercial real estate
(66
)
 
(110
)
 
(221
)
 
(383
)
Consumer:
 
 
 
 
 
 
 
Home equity credit line

 

 
(1
)
 
(1
)
1-4 family residential
(194
)
 
(260
)
 
(630
)
 
(800
)
Construction and other consumer real estate
(4
)
 
(7
)
 
(14
)
 
(21
)
Total consumer loans
(198
)
 
(267
)
 
(645
)
 
(822
)
Total decrease to interest income1
$
(402
)
 
$
(490
)
 
$
(1,254
)
 
$
(1,624
)
1 
Calculated based on the difference between the modified rate and the premodified rate applied to the recorded investment.
On an ongoing basis, we monitor the performance of all TDRs according to their restructured terms. Subsequent payment default is defined in terms of delinquency, when principal or interest payments are past due 90 days or more for commercial loans, or 60 days or more for consumer loans.
The recorded investment of accruing and nonaccruing TDRs that had a payment default during the period listed below (and are still in default at period end) and are within 12 months or less of being modified as TDRs is as follows:
 
Three Months Ended
September 30,
 2016
 
Nine Months Ended
September 30, 2016
(In thousands)
Accruing
 
Nonaccruing
 
Total
 
Accruing
 
Nonaccruing
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
31

 
$
3,240

 
$
3,271

 
$
31

 
$
3,309

 
$
3,340

Owner occupied
3,360

 

 
3,360

 
3,360

 

 
3,360

Total commercial
3,391

 
3,240

 
6,631

 
3,391

 
3,309

 
6,700

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development

 

 

 

 

 

Term

 
45

 
45

 

 
45

 
45

Total commercial real estate

 
45

 
45

 

 
45

 
45

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line

 

 

 

 

 

1-4 family residential

 

 

 

 
118

 
118

Construction and other consumer real estate

 

 

 

 

 

Total consumer loans

 

 

 

 
118

 
118

Total
$
3,391

 
$
3,285

 
$
6,676

 
$
3,391

 
$
3,472

 
$
6,863


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Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
(In thousands)
Accruing
 
Nonaccruing
 
Total
 
Accruing
 
Nonaccruing
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$

 
$
9

 
$
9

 
$

 
$
104

 
$
104

Owner occupied

 

 

 

 
943

 
943

Total commercial

 
9

 
9

 

 
1,047

 
1,047

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development

 

 

 

 

 

Term

 

 

 

 
833

 
833

Total commercial real estate

 

 

 

 
833

 
833

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity credit line

 

 

 

 

 

1-4 family residential

 
595

 
595

 

 
595

 
595

Construction and other consumer real estate

 

 

 

 

 

Total consumer loans

 
595

 
595

 

 
595

 
595

Total
$

 
$
604

 
$
604

 
$

 
$
2,475

 
$
2,475

Note: Total loans modified as TDRs during the 12 months previous to September 30, 2016 and 2015 were $139.4 million and $93.4 million, respectively.
At September 30, 2016 and December 31, 2015, the amount of foreclosed residential real estate property held by the Company was approximately $3.0 million and $0.5 million, and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was approximately $9.5 million and $12.5 million, respectively.
Concentrations of Credit Risk
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 risks (whether on- or off-balance sheet) may occur when individual borrowers, groups of borrowers, or counterparties have similar economic characteristics, including industries, geographies, collateral types, sponsors, etc., and are similarly affected by changes in economic or other conditions. Credit risk also includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. See Note 7 for a discussion of counterparty risk associated with the Company’s derivative transactions.
We perform an ongoing analysis of our loan portfolio to evaluate whether there is any significant exposure to any concentrations of credit risk. Based on this analysis, we believe that the loan portfolio is generally well diversified; however, there are certain significant concentrations in CRE and oil and gas-related lending. Further, we cannot guarantee that we have fully understood or mitigated all risk concentrations or correlated risks. We have adopted and adhere to concentration limits on various types of CRE lending, particularly construction and land development lending, leveraged and enterprise value lending, municipal lending, and oil and gas-related lending. All of these limits are continually monitored and revised as necessary.
Purchased Loans
Background and Accounting
We purchase loans in the ordinary course of business and account for them and the related interest income based on their performing status at the time of acquisition. PCI loans have evidence of credit deterioration at the time of acquisition and it is probable that not all contractual payments will be collected. Interest income for PCI loans is accounted for on an expected cash flow basis. Certain other loans acquired by the Company that are not credit-impaired include loans with revolving privileges and are excluded from the PCI tabular disclosures following. Interest income for these loans is accounted for on a contractual cash flow basis. Upon acquisition, in accordance with applicable accounting guidance, the acquired loans were recorded at their fair value without a corresponding ALLL. Certain acquired loans with similar characteristics such as risk exposure, type, size, etc., are grouped and accounted for in loan pools.

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Outstanding Balances and Accretable Yield
The outstanding balances of all required payments and the related carrying amounts for PCI loans are as follows:
(In thousands)
September 30, 2016
 
December 31, 2015
 
 
 
 
 
 
 
 
Commercial
 
$
47,982

 
 
 
$
72,440

 
Commercial real estate
 
48,036

 
 
 
65,167

 
Consumer
 
9,027

 
 
 
11,082

 
Outstanding balance
 
$
105,045

 
 
 
$
148,689

 
 
 
 
 
 
 
 
 
Carrying amount
 
$
89,221

 
 
 
$
125,029

 
Less ALLL
 
1,625

 
 
 
945

 
Carrying amount, net
 
$
87,596

 
 
 
$
124,084

 
At the time of acquisition of PCI loans, we determine the loan’s contractually required payments in excess of all cash flows expected to be collected as an amount that should not be accreted (nonaccretable difference). With respect to the cash flows expected to be collected, the portion representing the excess of the loan’s expected cash flows over our initial investment (accretable yield) is accreted into interest income on a level yield basis over the remaining expected life of the loan or pool of loans. The effects of estimated prepayments are considered in estimating the expected cash flows.
Certain PCI loans are not accounted for as previously described because the estimation of cash flows to be collected involves a high degree of uncertainty. Under these circumstances, the accounting guidance provides that interest income is recognized on a cash basis similar to the cost recovery methodology for nonaccrual loans. The net carrying amounts in the preceding schedule also include the amounts for these loans, which were $0.7 million at September 30, 2016. There were no amounts of these loans at December 31, 2015.
Changes in the accretable yield for PCI loans were as follows:
(In thousands)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Balance at beginning of period
$
38,033

 
$
46,702

 
$
39,803

 
$
45,055

Accretion
(5,633
)
 
(7,535
)
 
(19,026
)
 
(28,792
)
Reclassification from nonaccretable difference
127

 
1,005

 
9,697

 
18,865

Disposals and other
1,629

 
1,126

 
3,682

 
6,170

Balance at end of period
$
34,156

 
$
41,298

 
$
34,156

 
$
41,298

Note: Amounts have been adjusted based on refinements to the original estimates of the accretable yield.
The primary drivers of reclassification to accretable yield from nonaccretable difference and increases in disposals and other resulted primarily from (1) changes in estimated cash flows, (2) unexpected payments on nonaccrual loans, and (3) recoveries on zero balance loans pools. See subsequent discussion under changes in cash flow estimates.
ALLL Determination
For all acquired loans, the ALLL is only established for credit deterioration subsequent to the date of acquisition and represents our estimate of the inherent losses in excess of the book value of acquired loans. The ALLL for acquired loans is included in the overall ALLL in the balance sheet.
During the three and nine months ended September 30, we adjusted the ALLL for acquired loans by recording a provision for loan losses of $1.1 million and $1.9 million in 2016, and $0.8 million and $0.3 million in 2015, respectively. The provision is net of the ALLL reversals resulting from changes in cash flow estimates, which are discussed subsequently.

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Changes in the provision for loan losses and related ALLL are driven in large part by the same factors that affect the changes in reclassification from nonaccretable difference to accretable yield, as discussed under changes in cash flow estimates.
Changes in Cash Flow Estimates
Over the life of the loan or loan pool, we continue to estimate cash flows expected to be collected. We evaluate quarterly at the balance sheet date whether the estimated present values of these loans using the effective interest rates have decreased below their carrying values. If so, we record a provision for loan losses.
For increases in carrying values that resulted from better-than-expected cash flows, we use such increases first to reverse any existing ALLL. During the three and nine months ended September 30, total reversals to the ALLL, including the impact of increases in estimated cash flows, were $0.7 million and $1.2 million in 2016, and $0.6 million and $3.1 million in 2015, respectively. When there is no current ALLL, we increase the amount of accretable yield on a prospective basis over the remaining life of the loan and recognize this increase in interest income.
For the three and nine months ended September 30, the impact of increased cash flow estimates recognized in the statement of income for acquired loans with no ALLL was approximately $4.3 million and $14.3 million in 2016, and $5.4 million and $22.1 million in 2015, respectively, of additional interest income.
7.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Objectives
Our objectives in using derivatives are to add stability to interest income or expense, to modify the duration of specific assets or liabilities as we consider advisable, to manage exposure to interest rate movements or other identified risks, and/or to directly offset derivatives sold to our customers. We apply hedge accounting to certain derivatives executed for risk management purposes as described in more detail subsequently. However, we do not apply hedge accounting to all of the derivatives involved in our risk management activities. Derivatives not designated as accounting hedges are not speculative and are used to economically manage our exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements.
Accounting
We record all derivatives on the balance sheet at fair value. Note 10 discusses the process to estimate fair value for derivatives. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting accounting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the fair value of the derivative are recognized in earnings together with changes in the fair value of the related hedged item. The net amount, if any, representing hedge ineffectiveness, is reflected in earnings. In previous years, we used fair value hedges to manage interest rate exposure to certain long-term debt. These hedges have been terminated and their remaining balances were completely amortized into earnings during 2015.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in OCI and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized directly in earnings. We use interest rate swaps as part of our cash flow hedging strategy to hedge the variable cash flows associated with designated commercial loans. These interest rate swap agreements designated as cash flow hedges involve the receipt of fixed-rate amounts in exchange for variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Although we have foreign operations as a result of our branch in Grand Cayman, Cayman Islands B.W.I., no derivatives have been designated as hedges of net investments in foreign operations.

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We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows on the derivative hedging instrument with the changes in fair value or cash flows on the designated hedged item or transaction. For derivatives not designated as accounting hedges, changes in fair value are recognized in earnings. The remaining balances of any derivative instruments terminated prior to maturity, including amounts in accumulated other comprehensive income (“AOCI”) for swap hedges, are accreted or amortized to interest income or expense over the period to their previously stated maturity dates.
Amounts in AOCI are reclassified to interest income as interest is earned on related variable-rate loans and as amounts for terminated hedges are accreted or amortized to earnings. For the 12 months following September 30, 2016, we estimate that an additional $5.2 million will be reclassified.
Collateral and Credit Risk
Exposure to credit risk arises from the possibility of nonperformance by counterparties. Financial institutions which are well capitalized and well established are the counterparties for those derivatives entered into for asset liability management and to offset derivatives sold to our customers. The Company reduces its counterparty exposure for derivative contracts by centrally clearing all eligible derivatives.
For those derivatives that are not centrally cleared, the counterparties are typically financial institutions or customers of the Company. For those that are financial institutions, we manage our credit exposure through the use of a Credit Support Annex (“CSA”) to International Swaps and Derivative Association (“ISDA”) master agreements. Eligible collateral types are documented by the CSA and controlled under the Company’s general credit policies. Collateral balances are typically monitored on a daily basis. A valuation haircut policy reflects the fact that collateral may fall in value between the date the collateral is called and the date of liquidation or enforcement. In practice, all of the Company’s collateral held as credit risk mitigation under a CSA is cash.
We offer interest rate swaps to our customers to assist them in managing their exposure to changing interest rates. Upon issuance, all of these customer swaps are immediately offset through matching derivative contracts, such that the Company minimizes its interest rate risk exposure resulting from such transactions. Most of these customers do not have the capability for centralized clearing. Therefore, we manage the credit risk through loan underwriting, which includes a credit risk exposure formula for the swap, the same collateral and guarantee protection applicable to the loan and credit approvals, limits, and monitoring procedures. Fee income from customer swaps is included in other service charges, commissions and fees. No significant losses on derivative instruments have occurred as a result of counterparty nonperformance. Nevertheless, the related credit risk is considered and measured when and where appropriate. See Note 6 for further discussion of our underwriting, collateral requirements, and other procedures used to address credit risk.
Our derivative contracts require us to pledge collateral for derivatives that are in a net liability position at a given balance sheet date. Certain of these derivative contracts contain credit-risk-related contingent features that include the requirement to maintain a minimum debt credit rating. We may be required to pledge additional collateral if a credit-risk-related feature were triggered, such as a downgrade of our credit rating. However, in past situations, not all counterparties have demanded that additional collateral be pledged when provided for under their contracts. At September 30, 2016, the fair value of our derivative liabilities was $111.9 million, for which we were required to pledge cash collateral of approximately $113.1 million in the normal course of business. If our credit rating were downgraded one notch by either Standard & Poor’s or Moody’s at September 30, 2016, the additional amount of collateral we could be required to pledge is approximately $2.8 million. As a result of the Dodd-Frank Act, all newly eligible derivatives entered into are cleared through a central clearinghouse. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if our credit rating were downgraded.

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Derivative Amounts
Selected information with respect to notional amounts and recorded gross fair values at September 30, 2016 and December 31, 2015, and the related gain (loss) of derivative instruments for the nine months ended September 30, 2016 and 2015 is summarized as follows:
 
September 30, 2016
 
December 31, 2015
 
Notional
amount
 
Fair value
 
Notional
amount
 
Fair value
(In thousands)
Other
assets
 
Other
liabilities
 
Other
assets
 
Other
liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
1,387,500

 
$
18,888

 
$

 
$
1,387,500

 
$
5,461

 
$
956

Total derivatives designated as hedging instruments
1,387,500

 
18,888

 

 
1,387,500

 
5,461

 
956

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and forwards
262,187

 
3,582

 
230

 
40,314

 

 
8

Interest rate swaps for customers 1
3,994,275

 
95,424

 
102,605

 
3,256,190

 
51,353

 
53,843

Foreign exchange
570,213

 
11,171

 
9,094

 
463,064

 
20,824

 
17,761

Total derivatives not designated as hedging instruments
4,826,675

 
110,177

 
111,929

 
3,759,568

 
72,177

 
71,612

Total derivatives
$
6,214,175

 
$
129,065

 
$
111,929

 
$
5,147,068

 
$
77,638

 
$
72,568

1 Notional amounts include both the customer swaps and the offsetting derivative contracts.
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
Amount of derivative gain (loss) recognized/reclassified
(In thousands)
 
OCI
 
Reclassified from AOCI to interest income 2
 
Noninterest income (expense)
 
Offset to interest expense
 
OCI
 
Reclassified
from AOCI
to interest
income 2
 
Noninterest
income
(expense)
 
Offset to
interest
expense
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
(5,381
)
 
$
2,804

 
 
 
 
 
$
23,109

 
$
8,739

 
 
 
 

(5,381
)
 
2,804

 


 
 
 
23,109

 
8,739

 


 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Terminated swaps on long-term debt
 
 
 
 
 
 
$

 
 
 
 
 
 
 
$

Total derivatives designated as hedging instruments
(5,381
)
 
2,804

 


 

 
23,109

 
8,739

 


 

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and forward contracts
 
 
 
 
$
904

 
 
 
 
 
 
 
$
3,060

 
 
Interest rate swaps for customers
 
 
 
 
3,815

 
 
 
 
 
 
 
4,543

 
 
Foreign exchange
 
 
 
 
3,472

 
 
 
 
 
 
 
8,140

 
 
Total derivatives not designated as hedging instruments
 
 
 
 
8,191

 
 
 
 
 
 
 
15,743

 
 
Total derivatives
$
(5,381
)
 
$
2,804

 
$
8,191

 
$

 
$
23,109

 
$
8,739

 
$
15,743

 
$


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Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
Amount of derivative gain (loss) recognized/reclassified
(In thousands)
 
OCI
 
Reclassified from AOCI to interest income 2
 
Noninterest income (expense)
 
Offset to interest expense
 
OCI
 
Reclassified
from AOCI
to interest
income 2
 
Noninterest
income
(expense)
 
Offset to
interest
expense
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
17,343

 
$
2,957

 
 
 
 
 
$
21,172

 
$
5,191

 
 
 
 
 
17,343

 
2,957

 


 
 
 
21,172

 
5,191

 


 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Terminated swaps on long-term debt
 
 
 
 
 
 
$
431

 
 
 
 
 
 
 
$
1,364

Total derivatives designated as hedging instruments
17,343

 
2,957

 


 
431

 
21,172

 
5,191

 


 
1,364

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps for customers
 
 
 
 
$
939

 
 
 
 
 
 
 
$
5,329

 
 
Futures contracts
 
 
 
 
1

 
 
 
 
 
 
 
2

 
 
Foreign exchange
 
 
 
 
2,506

 
 
 
 
 
 
 
6,938

 
 
Total derivatives not designated as hedging instruments
 
 
 
 
3,446

 
 
 
 
 
 
 
12,269

 
 
Total derivatives
$
17,343

 
$
2,957

 
$
3,446

 
$
431

 
$
21,172

 
$
5,191

 
$
12,269

 
$
1,364

Note: These schedules are not intended to present at any given time the Company’s long/short position with respect to its derivative contracts.
1 
Amounts recognized in OCI and reclassified from AOCI represent the effective portion of the change in fair value of the derivative.
2 
Amounts for the three and nine months ended September 30, of $2.8 million and $8.7 million in 2016, and $3.0 million and $5.2 million in 2015, respectively, are the amounts of reclassification to earnings from AOCI presented in Note 8.
The fair value of derivative assets was reduced by a net credit valuation adjustment of $7.2 million and $3.0 million at September 30, 2016 and 2015, respectively. The adjustment for derivative liabilities was not significant at September 30, 2016 and 2015. These adjustments are required to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.
8.
DEBT AND SHAREHOLDERS’ EQUITY
Long-term debt is summarized as follows:
(In thousands)
September 30,
2016
 
December 31, 2015
 
 
 
 
Junior subordinated debentures related to trust preferred securities
$
36,083

 
$
164,950

Subordinated notes
246,453

 
246,170

Senior notes
287,065

 
400,334

Capital lease obligations
784

 
912

Total
$
570,385

 
$
812,366

The preceding carrying values represent the par value of the debt adjusted for any unamortized premium or discount or unamortized debt issuance costs. The amount of long-term debt as of December 31, 2015 presented in the schedule differs from the amount in our 2015 10-K as a result of the reclassification of unamortized debt issuance costs to long-term debt in compliance with ASU 2015-03.
Debt Redemptions and Maturities
During the first nine months of 2016, $89 million of our 4.0% senior notes matured. In addition, we purchased $15 million of our 4.5% senior notes and redeemed $11 million of our 3.6% senior medium-term notes.

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We elected to exercise our right to redeem the junior subordinated debentures related to trust preferred securities issued to the following trusts. Redemptions included a total of $129 million in the third quarter of 2016, and $36 million in the fourth quarter of 2016. The following schedule presents the outstanding trust preferred securities balances as of September 30, 2016 and December 31, 2015.
(In thousands)
 
September 30,
2016
 
December 31,
2015
 
Coupon rate 1
 
Redemption date
 
 
 
 
 
 
 
 
 
Amegy Statutory Trust I
 
$

 
$
51,547

 
3mL+2.85%
 
September 17, 2016
Amegy Statutory Trust II
 
36,083

 
36,083

 
3mL+1.90%
 
October 7, 2016
Amegy Statutory Trust III
 

 
61,856

 
3mL+1.78%
 
September 15, 2016
Stockmen’s Statutory Trust II
 

 
7,732

 
3mL+3.15%
 
September 26, 2016
Stockmen’s Statutory Trust III
 

 
7,732

 
3mL+2.89%
 
September 17, 2016
Total
 
$
36,083

 
$
164,950

 
 
 
 
1 
Designation of “3mL” is three-month London Interbank Offered Rate (“LIBOR”).
Shareholders’ Equity
On April 25, 2016, we launched a tender offer to purchase up to $120 million par amount of certain outstanding preferred stock. Our preferred stock decreased by $119 million in the second quarter of 2016 as a result of the tender offer, including the purchase of $27 million of our Series I preferred stock, $59 million
of our Series J preferred stock, and $33 million of our Series G preferred stock for an aggregate cash payment of $126 million. The total one-time reduction to net earnings applicable to common shareholders associated with the preferred stock redemption was $9.8 million.

During the third quarter of 2016, the Company commenced its common stock buyback program and repurchased 1.47 million shares of common stock outstanding with a fair value of $45 million at an average price of $30.64 per share. Since September 30, 2016, the Company has repurchased 1.42 million shares of our common stock outstanding with a fair value of $45 million at an average price of $31.69 per share, leaving $90 million of buyback capacity remaining in the 2016 capital plan (which spans the timeframe of July 2016 to June 2017).
Basel III Capital Framework
Effective January 1, 2015, we adopted the new Basel III capital framework that was issued by the Federal Reserve for U.S. banking organizations. We adopted the new capital rules on a phase-in basis and will adopt the fully phased-in requirements effective January 1, 2019.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income (loss) was $10 million at September 30, 2016 compared to $24 million at June 30, 2016 and $(55) million at December 31, 2015. The increase during the first nine months of 2016 was primarily due to an improvement in the fair value of the Company’s AFS securities portfolio due largely to changes in the interest rate environment.

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Changes in AOCI by component are as follows:
(In thousands)

Net unrealized gains (losses) on investment securities
 
Net unrealized gains (losses) on derivatives and other
 
Pension and post-retirement
 
Total
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
$
(18,369
)
 
 
 
$
1,546

 
 
$
(37,789
)
 
$
(54,612
)
OCI (loss) before reclassifications, net of tax
 
54,316

 
 
 
16,437

 
 
(665
)
 
70,088

Amounts reclassified from AOCI, net of tax
 
(57
)
 
 
 
(5,418
)
 
 

 
(5,475
)
OCI (loss)
 
54,259

 
 
 
11,019

 
 
(665
)
 
64,613

Balance at September 30, 2016
 
$
35,890

 
 
 
$
12,565

 
 
$
(38,454
)
 
$
10,001

Income tax expense included in OCI
 
$
33,742

 
 
 
$
6,619

 
 
$
665

 
$
41,026

Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
(91,921
)
 
 
 
$
2,226

 
 
$
(38,346
)
 
$
(128,041
)
OCI before reclassifications, net of tax
 
15,398

 
 
 
13,035

 
 

 
28,433

Amounts reclassified from AOCI, net of tax
 
85,845

 
 
 
(3,212
)
 
 

 
82,633

OCI
 
101,243

 
 
 
9,823

 
 

 
111,066

Balance at September 30, 2015
 
$
9,322

 
 
 
$
12,049

 
 
$
(38,346
)
 
$
(16,975
)
Income tax expense included in OCI
 
$
65,549

 
 
 
$
6,311

 
 
$

 
$
71,860

 
 
Amounts reclassified
from AOCI 1
 
Statement of income (SI) Balance sheet
(BS)
 
 
(In thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
Details about AOCI components
 
2016
 
2015
 
2016
 
2015
 
 
Affected line item
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized gains (losses) on investment securities
 
$
39

 
$
(53
)
 
$
92

 
$
(138,728
)
 
SI
 
Fixed income securities gains (losses), net
Income tax expense (benefit)
 
15

 
(20
)
 
35

 
(52,883
)
 
 
 
 
Amounts reclassified from AOCI
 
$
24

 
$
(33
)
 
$
57

 
$
(85,845
)
 
 
 
 
Net unrealized gains on derivative instruments
 
$
2,804

 
$
2,957

 
$
8,739

 
$
5,191

 
SI
 
Interest and fees on loans
Income tax expense
 
1,066

 
1,127

 
3,321

 
1,979

 
 
 
 
Amounts Reclassified from AOCI
 
$
1,738

 
$
1,830

 
$
5,418

 
$
3,212

 
 
 
 
1 
Negative reclassification amounts indicate decreases to earnings in the statement of income and increases to balance sheet assets. The opposite applies to positive reclassification amounts.
9.
INCOME TAXES
The effective income tax rate of 33.7% for the third quarter of 2016 was higher than the 2015 third quarter rate of 28.8%. The tax rates for both the third quarter of 2016 and 2015 were benefited primarily by the non-taxability of certain income items. The tax rate for the third quarter of 2016 was higher compared to the same period in 2015 due to a decrease in investments in tax credit projects related to alternative energy and research and development initiatives. On a year-to-date basis, the 2016 tax rate of 33.4% was higher than the 2015 tax rate of 32.0%. The year-to-date tax rates for 2016 and 2015 were similarly impacted by the above-discussed permanent items.
Net deferred tax assets were approximately $170 million at September 30, 2016 and $203 million at December 31, 2015, which included a $4 million valuation allowance at each respective reporting date for certain acquired net operating loss carryforwards included in our acquisition of the remaining interests in a less significant subsidiary. We evaluate deferred tax assets on a regular basis to determine whether an additional valuation allowance is required. Based on this evaluation, and considering the weight of the positive evidence compared to the negative evidence, we have concluded that an additional valuation allowance is not required as of September 30, 2016.

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10.
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 SVC 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 88% 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:

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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 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 cash surrender values (“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 Equity Investments Committee, consisting of executives familiar with the investments, reviews periodic financial information, including audited financial statements when available. Certain 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. The amount of unfunded commitments to invest is disclosed in Note 11. Certain restrictions apply for the redemption of these investments and certain investments are prohibited by the Volcker Rule. See discussions in Notes 5 and 11.
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.

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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 (“OTC”). Exchange-traded derivatives consist of foreign currency exchange contracts measured under Level 1 because they are traded in active markets. OTC 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.

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Quantitative Disclosure of Fair Value Measurements
Assets and liabilities measured at fair value by class on a recurring basis are summarized as follows:
(In thousands)
September 30, 2016
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury, agencies and corporations
$

 
$
9,517,153

 
$

 
$
9,517,153

Municipal securities
 
 
778,245

 


 
778,245

Other debt securities
 
 
22,969

 
 
 
22,969

Money market mutual funds and other
38,982

 
734

 
 
 
39,716

 
38,982

 
10,319,101

 

 
10,358,083

Trading account
 
 
108,004

 
 
 
108,004

Other noninterest-bearing investments:
 
 
 
 
 
 
 
Bank-owned life insurance
 
 
494,181

 
 
 
494,181

Private equity investments
 
 


 
131,459

 
131,459

Other assets:
 
 
 
 
 
 
 
Agriculture loan servicing and interest-only strips

 


 
19,928

 
19,928

Deferred compensation plan assets
85,977

 


 


 
85,977

Derivatives:
 
 
 
 
 
 
 
Interest rate swaps and forwards
 
 
22,470

 
 
 
22,470

Interest rate swaps for customers
 
 
95,424

 
 
 
95,424

Foreign currency exchange contracts
11,171

 
 
 
 
 
11,171

 
11,171

 
117,894

 

 
129,065

 
$
136,130

 
$
11,039,180

 
$
151,387

 
$
11,326,697

LIABILITIES
 
 
 
 
 
 
 
Securities sold, not yet purchased
$
56,635

 
$

 
$

 
$
56,635

Other liabilities:
 
 
 
 
 
 
 
Deferred compensation plan obligations
85,977

 

 

 
85,977

Derivatives:
 
 
 
 
 
 
 
Interest rate swaps and forwards
 
 
230

 
 
 
230

Interest rate swaps for customers
 
 
102,605

 
 
 
102,605

Foreign currency exchange contracts
9,094

 
 
 
 
 
9,094

 
9,094

 
102,835

 

 
111,929

 
$
151,706

 
$
102,835

 
$

 
$
254,541


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(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 swaps and forwards
 
 
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 swaps and forwards
 
 
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


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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 September 30, 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 June 30, 2016
$

 
$

 
$

 
$
122,257

 
$
18,228

 
$

Net gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
 
Statement of income:
 
 
 
 
 
 
 
 
 
 
 
Dividends and other investment income
 
 
 
 
 
 
2,601

 
 
 
 
Equity securities gains, net
 
 
 
 
 
 
8,363

 
 
 
 
Other noninterest income
 
 
 
 
 
 
 
 
2,035

 
 
Purchases
 
 
 
 
 
 
3,015

 

 
 
Sales

 

 

 
(65
)
 
 
 
 
Redemptions and paydowns


 


 


 
(4,712
)
 
(335
)
 

Balance at September 30, 2016
$

 
$

 
$

 
$
131,459

 
$
19,928

 
$

 
Level 3 Instruments
 
Nine Months Ended September 30, 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

 
$

Net gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
 
Statement of income:
 
 
 
 
 
 
 
 
 
 
 
Dividends and other investment income
 
 
 
 
 
 
1,247

 
 
 
 
Equity securities gains, net
 
 
 
 
 
 
8,909

 
 
 
 
Other noninterest income
 
 
 
 
 
 
 
 
7,026

 
 
Purchases
 
 
 
 
 
 
10,331

 
368

 
 
Sales
 
 
 
 
 
 
(3,479
)
 
 
 
 
Redemptions and paydowns
 
 
 
 
 
 
(5,576
)
 
(980
)
 
 
Balance at September 30, 2016
$

 
$

 
$

 
$
131,459

 
$
19,928

 
$

 
Level 3 Instruments
 
Three Months Ended September 30, 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 June 30, 2015
$

 
$

 
$

 
$
110,115

 
$
13,502

 
$

Net gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
 
Statement of income:
 
 
 
 
 
 
 
 
 
 
 
Dividends and other investment losses
 
 
 
 
 
 
(620
)
 
 
 
 
Equity securities gains, net
 
 
 
 
 
 
3,587

 
 
 
 
Other noninterest income
 
 
 
 
 
 
 
 
(375
)
 
 
Purchases
 
 
 
 
 
 
8,184

 
234

 
 
Sales


 

 

 
(126
)
 
 
 
 
Redemptions and paydowns


 


 


 
(945
)
 
(200
)
 


Balance at September 30, 2015
$

 
$

 
$

 
$
120,195

 
$
13,161

 
$


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ZIONS BANCORPORATION AND SUBSIDIARIES

 
Level 3 Instruments
 
Nine Months Ended September 30, 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

 
$
(13
)
Net gains (losses) included in:
 
 
 
 
 
 
 
 
 
 
 
Statement of income:
 
 
 
 
 
 
 
 
 
 
 
Accretion of purchase discount on AFS securities
3

 
471

 
 
 
 
 
 
 
 
Dividends and other investment losses
 
 
 
 
 
 
(1,179
)
 
 
 
 
Equity securities gains, net
 
 
 
 
 
 
7,554

 
 
 
 
Fixed income securities losses, net
(344
)
 
(136,691
)
 
(606
)
 
 
 
 
 
 
Other noninterest income
 
 
 
 
 
 
 
 
1,112

 
 
Other noninterest expense
 
 
 
 
 
 
 
 
 
 
13

OCI (loss)
687

 
141,547

 
(74
)
 
 
 
 
 
 
Fair value of HTM securities reclassified as AFS
 
 
57,308

 
 
 
 
 
 
 
 
Purchases
 
 
 
 
 
 
20,498

 
615

 
 
Sales
(2,651
)
 
(440,055
)
 
(4,081
)
 
(2,634
)
 
 
 
 
Redemptions and paydowns
(1,859
)
 
(15,587
)
 
 
 
(1,693
)
 
(793
)
 
 
Balance at September 30, 2015
$

 
$

 
$

 
$
120,195

 
$
13,161

 
$

No transfers of assets or liabilities occurred among Levels 1, 2 or 3 for the three and nine months ended September 30, 2016 and 2015.
The preceding reconciling amounts using Level 3 inputs include the following realized amounts in the statement of income:
(In thousands)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Dividends and other investment income
$

 
$
(6
)
 
$

 
$
(2
)
Fixed income securities losses, net

 

 

 
(137,641
)
Equity securities gains (losses), net
3,505

 
(10,637
)
 
3,598

 
(11,311
)
Nonrecurring Fair Value Measurements
Included in the balance sheet amounts are the following amounts of assets that had fair value changes during the year-to-date period measured on a nonrecurring basis.
(In thousands)
Fair value at September 30, 2016
 
Fair value at December 31, 2015
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity investments, carried at cost
$

 
$

 
$
1,326

 
$
1,326

 
$

 
$

 
$
10,707

 
$
10,707

Impaired loans

 
50,873

 

 
50,873

 

 
10,991

 

 
10,991

Other real estate owned

 
2,501

 

 
2,501

 

 
2,388

 

 
2,388

 
$

 
$
53,374

 
$
1,326

 
$
54,700

 
$

 
$
13,379

 
$
10,707

 
$
24,086


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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 thousands)

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2016
 
2015
 
2016
 
2015
ASSETS
 
 
 
 
 
 
 
Private equity investments, carried at cost
$
(151
)
 
$
(625
)
 
$
(493
)
 
$
(2,903
)
Impaired loans
(5,297
)
 
(7,666
)
 
(34,267
)
 
(12,682
)
Other real estate owned
(603
)
 
(565
)
 
(1,203
)
 
(1,883
)
 
$
(6,051
)
 
$
(8,856
)
 
$
(35,963
)
 
$
(17,468
)
During the three and nine months ended September 30, we recognized net gains of $0.4 million and $3.2 million in 2016 and $0.8 million and $2.7 million in 2015 from the sale of other real estate owned (“OREO”) properties that had a carrying value at the time of sale of approximately $8.4 million and $13.1 million during the nine months ended September 30, 2016 and 2015, respectively. Previous to their sale in these periods, we recognized impairment on these properties of an insignificant amount in 2016 and 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 $15.1 million at September 30, 2016 and $25.3 million at December 31, 2015. Amounts of other noninterest-bearing investments carried at cost were $221.3 million at September 30, 2016 and $191.5 million at December 31, 2015, 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.

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Fair Value of Certain Financial Instruments
Following is a summary of the carrying values and estimated fair values of certain financial instruments:
 
September 30, 2016
 
December 31, 2015
(In thousands)
Carrying
value
 
Estimated
fair value
 
Level
 
Carrying
value
 
Estimated
fair value
 
Level
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
HTM investment securities
$
715,279

 
$
717,822

 
2
 
$
545,648

 
$
552,088

 
2
Loans and leases (including loans held for sale), net of allowance
42,102,822

 
42,100,277

 
3
 
40,193,374

 
39,535,365

 
3
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Time deposits
2,516,493

 
2,517,487

 
2
 
2,130,680

 
2,129,742

 
2
Foreign deposits
118,762

 
118,772

 
2
 
294,391

 
294,321

 
2
Long-term debt
570,385

 
602,624

 
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.

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11.
COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES
Commitments and Guarantees
Contractual amounts of off-balance sheet financial instruments used to meet the financing needs of our customers are as follows:
(In thousands)
September 30,
2016
 
December 31,
2015
 
 
 
 
Net unfunded commitments to extend credit 1
$
18,113,233

 
$
17,169,785

Standby letters of credit:
 
 
 
Financial
798,476

 
661,554

Performance
194,592

 
216,843

Commercial letters of credit
38,964

 
18,447

Total unfunded lending commitments
$
19,145,265

 
$
18,066,629

1 
Net of participations
The Company’s 2015 Annual Report on Form 10-K contains further information about these commitments and guarantees including their terms and collateral requirements. At September 30, 2016, the Company had recorded approximately $5.0 million as a liability for the guarantees associated with the standby letters of credit, which consisted of $1.5 million attributable to the RULC and $3.5 million of deferred commitment fees.
As of September 30, 2016, the Parent has guaranteed $36 million of debt of affiliated trusts issuing trust preferred securities, which was subsequently redeemed in the fourth quarter of 2016. See related information on the redemption of these trusts in Note 8.
At September 30, 2016, we had unfunded commitments for PEIs of approximately $18 million. These obligations have no stated maturity. Certain PEIs related to these commitments are prohibited by the Volcker Rule. See related discussions about these investments in Notes 5 and 10.
Legal Matters
We are subject to litigation in court and arbitral proceedings, as well as proceedings, investigations, examinations and other actions brought or considered by governmental and self-regulatory agencies. Litigation may relate to lending, deposit and other customer relationships, vendor and contractual issues, employee matters, intellectual property matters, personal injuries and torts, regulatory and legal compliance, and other matters. While most matters relate to individual claims, we are also subject to putative class action claims and similar broader claims. Proceedings, investigations, examinations and other actions brought or considered by governmental and self-regulatory agencies may relate to our banking, investment advisory, trust, securities, and other products and services; our customers’ involvement in money laundering, fraud, securities violations and other illicit activities or our policies and practices relating to such customer activities; and our compliance with the broad range of banking, securities and other laws and regulations applicable to us. At any given time, we may be in the process of responding to subpoenas, requests for documents, data and testimony relating to such matters and engaging in discussions to resolve the matters.
As of September 30, 2016, we were subject to the following material litigation and governmental inquiries:
a class action case, Reyes v. Zions First National Bank, et. al., which was brought in the United States District Court for the Eastern District of Pennsylvania in early 2010. This case relates to payment processing services provided by Modern Payments, a small subsidiary of Zions, to ten of its customers that allegedly engaged in wrongful telemarketing practices. The plaintiff has been seeking a trebled monetary award under the federal RICO Act. During the second quarter of 2016, the parties reached an agreement in principle to settle the case for $37.50 million to $37.75 million, (with the amount within that range dependent upon the outcome of certain contingencies). A definitive settlement agreement on those terms was executed by the parties and preliminarily approved by the District Court in July 2016. The settlement agreement is subject to further court process and final approval by the District Court. These further steps are likely to be finalized during the fourth quarter of 2016. There can be no assurance that the settlement agreement will ultimately be approved by the

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District Court or become effective. We have fully reserved for our obligations with respect to the settlement. A portion of the settlement amount is covered by our insurance policies and has been funded by our insurers.
a governmental inquiry into our payment processing practices relating primarily to the allegedly fraudulent telemarketers at issue in the Reyes case, discussed above, conducted by the Department of Justice. Our first contact with the Department of Justice relating to this matter occurred in early 2013. We commenced substantive settlement discussion with the Department of Justice in the third quarter of 2016. There can be no assurance, however, that the parties will be able to settle this matter.
a governmental inquiry into possible money laundering activities of one of our bank customers and our anti-money laundering practices relating to that customer, conducted by the United States Attorney’s Office for the Southern District of New York. Our first contact with the United States Attorney’s Office relating to this matter occurred in early 2012. We are unclear about the status of this inquiry.
a civil suit, Shou-En Wang v. CB&T (“Wang”), brought against us in Superior Court for Los Angeles County, Central District in April 2016. The case relates to our depositor relationships with customers who were promoters of an investment program that allegedly misappropriated investors’ funds. This case is in an early phase, with initial motion practice having commenced.
In the third quarter of 2016 we resolved a civil suit, Liu Aifang, et al. v. Velocity VIII, et al. (“Aifang”), brought against us in the United States District of California in April 2015. This case made similar allegations to those in the Wang case, but was brought by different plaintiffs.
At least quarterly, we review outstanding and new legal matters, utilizing then available information. In accordance with applicable accounting guidance, if we determine that a loss from a matter is probable and the amount of the loss can be reasonably estimated, we establish an accrual for the loss. In the absence of such a determination, no accrual is made. Once established, accruals are adjusted to reflect developments relating to the matters.
In our review, we also assess whether we can determine the range of reasonably possible losses for significant matters in which we are unable to determine that the likelihood of a loss is remote. Because of the difficulty of predicting the outcome of legal matters, discussed subsequently, we are able to meaningfully estimate such a range only for a limited number of matters. Based on information available as of September 30, 2016, we estimated that the aggregate range of reasonably possible losses for those matters to be from $0 million to roughly $10 million in excess of amounts accrued. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate. Those matters for which a meaningful estimate is not possible are not included within this estimated range and, therefore, this estimated range does not represent our maximum loss exposure.
Based on our current knowledge, we believe that our current estimated liability for litigation and other legal actions and claims, reflected in our accruals and determined in accordance with applicable accounting guidance, is adequate and that liabilities in excess of the amounts currently accrued, if any, arising from litigation and other legal actions and claims for which an estimate as previously described is possible, will not have a material impact on our financial condition, results of operations, or cash flows. However, in light of the significant uncertainties involved in these matters, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to our financial condition, results of operations, or cash flows for any given reporting period.
Any estimate or determination relating to the future resolution of litigation, arbitration, governmental or self-regulatory examinations, investigations or actions or similar matters is inherently uncertain and involves significant judgment. This is particularly true in the early stages of a legal matter, when legal issues and facts have not been well articulated, reviewed, analyzed, and vetted through discovery, preparation for trial or hearings, substantive and productive mediation or settlement discussions, or other actions. It is also particularly true with respect to class action and similar claims involving multiple defendants, matters with complex procedural requirements or substantive issues or novel legal theories, and examinations, investigations and other actions conducted or brought by governmental and self-regulatory agencies, in which the normal adjudicative process is not applicable. Accordingly, we usually are unable to determine whether a favorable or unfavorable outcome is remote, reasonably

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likely, or probable, or to estimate the amount or range of a probable or reasonably likely loss, until relatively late in the course of a legal matter, sometimes not until a number of years have elapsed. Accordingly, our judgments and estimates relating to claims will change from time to time in light of developments and actual outcomes will differ from our estimates. These differences may be material.
12.
RETIREMENT PLANS
The following discloses the net periodic benefit cost (credit) and its components for the Company’s pension and postretirement plans:
 
Pension benefits
 
Supplemental
retirement
benefits
 
Postretirement
benefits
 
Pension benefits
 
Supplemental
retirement
benefits
 
Postretirement
benefits
(In thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$


$

 
$

 
$

 
$
5

 
$
8

 
$

 
$

 
$

 
$

 
$
15

 
$
25

Interest cost
1,721


1,755

 
101


101

 
10

 
10

 
5,246

 
5,320

 
302

 
302

 
29

 
30

Expected return on plan assets
(3,039
)

(3,090
)
 

 

 

 

 
(8,548
)
 
(9,270
)
 

 

 

 

Partial settlement loss
2,625

 

 

 

 

 

 
2,625

 

 

 

 

 

Amortization of net actuarial (gain) loss
1,293


1,297

 
29


31

 
(17
)
 
(13
)
 
4,612

 
4,445

 
87

 
92

 
(50
)
 
(40
)
Net periodic benefit cost (credit)
$
2,600

 
$
(38
)
 
$
130

 
$
132

 
$
(2
)
 
$
5

 
$
3,935

 
$
495

 
$
389

 
$
394

 
$
(6
)
 
$
15

During the third quarter of 2016, we accrued a partial settlement loss of $2.6 million on our pension plan liability. Participants in the pension plan can elect lump sum distributions after retirement at their discretion. During the third quarter of 2016, the amount of expected lump sum distributions for all of 2016 exceeded the expected interest cost for the year, which triggered partial settlement accounting. As disclosed in the our 2015 Annual Report on Form 10-K, the Company has frozen its participation and benefit accruals for the pension plan and its contributions for individual benefit payments in the postretirement benefit plan.
13.
OPERATING SEGMENT INFORMATION
We manage our operations and prepare management reports and other information with a primary focus on geographical area. Following the close of business on December 31, 2015, we completed the merger of our subsidiary banks and certain non-banking subsidiaries, including Zions Management Services Company (“ZMSC”), with and into a single bank, ZB, N.A. We continue to manage our banking operations under our existing brand names, including Zions Bank, Amegy Bank, California Bank & Trust, National Bank of Arizona, Nevada State Bank, Vectra Bank Colorado, and The Commerce Bank of Washington. Performance assessment and resource allocation are based upon this geographical structure. Due to the charter consolidation, we have moved to an internal funds transfer pricing allocation system to report results of operations for business segments. This process continues to be refined. Total average loans and deposits presented for the banking segments do not include intercompany amounts between banking segments, but may include deposits with the Other segment. Prior period amounts have been reclassified to reflect these changes.
As of September 30, 2016, Zions Bank operates 98 branches in Utah, 24 branches in Idaho, and one branch in Wyoming. Amegy operates 73 branches in Texas. CB&T operates 93 branches in California. NBAZ operates 58 branches in Arizona. NSB operates 49 branches in Nevada. Vectra operates 36 branches in Colorado and one branch in New Mexico. TCBW operates one branch in Washington and one branch in Oregon. Effective April 1, 2015, TCBO was merged into TCBW.
The operating segment identified as “Other” includes the Parent, ZMSC, certain nonbank financial service subsidiaries, and eliminations of transactions between segments. The Parent’s operations are significant to the Other segment. The Company’s net interest income is substantially affected by the Parent’s interest expense on long-term

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debt. The condensed statement of income identifies the components of income and expense which affect the operating amounts presented in the Other segment.
The accounting policies of the individual operating segments are the same as those of the Company. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations. Operating segments pay for centrally provided services based upon estimated or actual usage of those services.
The following schedule presents selected operating segment information for the three months ended September 30, 2016 and 2015:
(In millions)
Zions Bank
 
Amegy
 
CB&T
 
NBAZ
 
NSB
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
SELECTED INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
159.1

 
$
153.2

 
$
119.4

 
$
119.8

 
$
114.1

 
$
103.9

 
$
49.9

 
$
45.8

 
$
31.9

 
$
30.9

Provision for loan losses
(1.0
)
 
(5.7
)
 
24.3

 
31.8

 
(2.3
)
 
1.1

 
0.2

 
(2.5
)
 
(4.1
)
 
(3.7
)
Net interest income after provision for loan losses
160.1

 
158.9

 
95.1

 
88.0

 
116.4

 
102.8

 
49.7

 
48.3

 
36.0

 
34.6

Noninterest income
38.6

 
33.6

 
32.4

 
30.6

 
18.4

 
16.3

 
10.6

 
9.5

 
10.0

 
9.3

Noninterest expense
102.6

 
108.3

 
76.4

 
88.9

 
71.4

 
70.2

 
33.8

 
36.1

 
31.8

 
32.8

Net Income (loss) before taxes
$
96.1

 
$
84.2

 
$
51.1

 
$
29.7

 
$
63.4

 
$
48.9

 
$
26.5

 
$
21.7

 
$
14.2

 
$
11.1

SELECTED AVERAGE BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
12,629

 
$
12,116

 
$
10,666

 
$
10,076

 
$
9,341

 
$
8,531

 
$
4,156

 
$
3,798

 
$
2,288

 
$
2,322

Total deposits
15,960

 
15,329

 
11,068

 
11,457

 
10,929

 
10,180

 
4,632

 
4,361

 
4,223

 
3,949

 
Vectra
 
TCBW
 
Other
 
Consolidated
Company
 
 
 
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
 
 
SELECTED INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
32.0

 
$
29.0

 
$
10.1

 
$
8.7

 
$
(47.3
)
 
$
(65.9
)
 
$
469.2

 
$
425.4

 
 
 
 
Provision for loan losses
1.7

 
(1.6
)
 
0.2

 
(1.2
)
 
(0.2
)
 

 
18.8

 
18.2

 
 
 
 
Net interest income after provision for loan losses
30.3

 
30.6

 
9.9

 
9.9

 
(47.1
)
 
(65.9
)
 
450.4

 
407.2

 
 
 
 
Noninterest income
5.9

 
5.7

 
1.0

 
1.0

 
28.0

 
19.9

 
144.9

 
125.9

 
 
 
 
Noninterest expense
23.6

 
24.9

 
4.5

 
5.3

 
59.2

 
24.8

 
403.3

 
391.3

 
 
 
 
Net Income (loss) before taxes
$
12.6

 
$
11.4

 
$
6.4

 
$
5.6

 
$
(78.3
)
 
$
(70.8
)
 
$
192.0

 
$
141.8

 
 
 
 
SELECTED AVERAGE BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
2,489

 
$
2,396

 
$
796

 
$
700

 
$
122

 
$
86

 
$
42,487

 
$
40,025

 
 
 
 
Total deposits
2,663

 
2,832

 
1,010

 
906

 
190

 
(95
)
 
50,675

 
48,919

 
 
 
 

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The following schedule presents selected operating segment information for the nine months ended September 30, 2016 and 2015:
(In millions)
Zions Bank
 
Amegy
 
CB&T
 
NBAZ
 
NSB
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
SELECTED INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
469.3

 
$
460.4

 
$
359.4

 
$
352.6

 
$
334.6

 
$
314.6

 
$
144.7

 
$
135.4

 
$
93.1

 
$
93.0

Provision for loan losses
(31.5
)
 
(18.8
)
 
159.4

 
56.9

 
(1.3
)
 
(6.5
)
 
2.0

 
1.0

 
(28.8
)
 
(15.4
)
Net interest income after provision for loan losses
500.8

 
479.2

 
200.0

 
295.7

 
335.9

 
321.1

 
142.7

 
134.4

 
121.9

 
108.4

Noninterest income
111.5

 
98.3

 
89.6

 
90.3

 
50.9

 
48.6

 
30.2

 
27.3

 
29.2

 
27.6

Noninterest expense
297.6

 
325.3

 
237.1

 
275.2

 
203.9

 
223.2

 
98.5

 
110.4

 
93.5

 
99.2

Net Income (loss) before taxes
$
314.7

 
$
252.2

 
$
52.5

 
$
110.8

 
$
182.9

 
$
146.5

 
$
74.4

 
$
51.3

 
$
57.6

 
$
36.8

SELECTED AVERAGE BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
12,512

 
$
12,102

 
$
10,599

 
$
10,169

 
$
9,170

 
$
8,502

 
$
4,010

 
$
3,803

 
$
2,275

 
$
2,354

Total deposits
15,879

 
15,688

 
11,100

 
11,409

 
10,764

 
9,917

 
4,553

 
4,277

 
4,113

 
3,870

 
Vectra
 
TCBW
 
Other
 
Consolidated
Company
 
 
 
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
 
 
SELECTED INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
92.4

 
$
87.5

 
$
28.9

 
$
25.7

 
$
(135.5
)
 
$
(202.8
)
 
$
1,386.9

 
$
1,266.4

 
 
 
 
Provision for loan losses
(4.3
)
 
1.9

 
(0.2
)
 
(1.8
)
 
0.2

 

 
95.5

 
17.3

 
 
 
 
Net interest income after provision for loan losses
96.7

 
85.6

 
29.1

 
27.5

 
(135.7
)
 
(202.8
)
 
1,291.4

 
1,249.1

 
 
 
 
Noninterest income
17.2

 
16.1

 
3.3

 
3.0

 
55.5

 
(72.6
)
 
387.4

 
238.6

 
 
 
 
Noninterest expense
66.2

 
73.3

 
14.6

 
11.6

 
169.4

 
65.1

 
1,180.8

 
1,183.3

 
 
 
 
Net Income (loss) before taxes
$
47.7

 
$
28.4

 
$
17.8

 
$
18.9

 
$
(249.6
)
 
$
(340.5
)
 
$
498.0

 
$
304.4

 
 
 
 
SELECTED AVERAGE BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
2,453

 
$
2,385

 
$
769

 
$
711

 
$
80

 
$
85

 
$
41,868

 
$
40,111

 
 
 
 
Total deposits
2,704

 
2,745

 
970

 
863

 
(21
)
 
(588
)
 
50,062

 
48,181

 
 
 
 
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.

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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 and its tender offers for certain of its preferred stock;
changes in local, national and international political and economic conditions, including without limitation the political and economic effects of the recent economic crisis, delay of recovery from that crisis, 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 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;
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;

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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
ACL
Allowance for Credit Losses
HQLA
High-Quality Liquid Assets
AFS
Available-for-Sale
HTM
Held-to-Maturity
ALCO
Asset/Liability Committee
IFRS
International Financial Reporting Standards
ALLL
Allowance for Loan and Lease Losses
ISDA
International Swaps and Derivative Association
Amegy
Amegy Bank, a division of ZB, N.A.
LCR
Liquidity Coverage Ratio
AOCI
Accumulated Other Comprehensive Income
LGD
Loss Given Default
ASC
Accounting Standards Codification
LIBOR
London Interbank Offered Rate
ASU
Accounting Standards Update
NAV
Net Asset Value
ATM
Automated Teller Machine
NBAZ
National Bank of Arizona, a division of ZB, N.A.
BOLI
Bank-Owned Life Insurance
NIM
Net Interest Margin
bps
basis points
NSB
Nevada State Bank, a division of ZB, N.A.
CB&T
California Bank & Trust, a division of ZB, N.A.
NSFR
Net Stable Funding Ratio
CCAR
Comprehensive Capital Analysis and Review
NYMEX
New York Mercantile Exchange
CDO
Collateralized Debt Obligation
OCC
Office of the Comptroller of the Currency
CET1
Common Equity Tier 1 (Basel III)
OCI
Other Comprehensive Income
CFPB
Consumer Financial Protection Bureau
OREO
Other Real Estate Owned
CLTV
Combined Loan-to-Value Ratio
OTC
Over-the-Counter
COSO
Committee of Sponsoring Organizations of the Treadway Commission
OTTI
Other-Than-Temporary Impairment
CRE
Commercial Real Estate
Parent
Zions Bancorporation
CSA
Credit Support Annex
PCI
Purchase Credit-Impaired
CSV
Cash Surrender Value
PEI
Private Equity Investment
DFAST
Dodd-Frank Act Stress Test
PPNR
Pre-provision Net Revenue
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
ROC
Risk Oversight Committee
DTA
Deferred Tax Asset
RULC
Reserve for Unfunded Lending Commitments
EITF
Emerging Issues Task Force
SBA
Small Business Administration
ERM
Enterprise Risk Management
SBIC
Small Business Investment Company
ERMC
Enterprise Risk Management Committee
SEC
Securities and Exchange Commission
EVE
Economic Value of Equity at Risk
SNC
Shared National Credit
FAMC
Federal Agricultural Mortgage Corporation, or “Farmer Mac”
SVC
Securities Valuation Committee
FASB
Financial Accounting Standards Board
TCBO
The Commerce Bank of Oregon, a division of ZB, N.A.
FDIC
Federal Deposit Insurance Corporation
TCBW
The Commerce Bank of Washington, a division of ZB, N.A.
FHLB
Federal Home Loan Bank
TDR
Troubled Debt Restructuring
FHLMC
Federal Home Loan Mortgage Corporation, or “Freddie Mac”
Vectra
Vectra Bank Colorado, a division of ZB, N.A.
FNMA
Federal National Mortgage Association, or “Fannie Mae”
VIE
Variable Interest Entity
FRB
Federal Reserve Board
ZB, N.A.
ZB, National Association
GAAP
Generally Accepted Accounting Principles
Zions Bank
Zions Bank, a division of ZB, N.A.
HECL
Home Equity Credit Line
ZMSC
Zions Management Services Company

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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 2015 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Executive Summary
Net earnings applicable to common shareholders for the third quarter of 2016 was $116.9 million, or $0.57 per diluted common share, compared with net earnings applicable to common shareholders of $90.6 million, or $0.44 per diluted common share for the second quarter of 2016, and $84.2 million, or $0.41 per diluted common share for the third quarter of 2015.
Major Initiative Announced in 2015
In June 2015, we announced a series of initiatives designed to substantially improve customer experience (e.g., faster turnaround times), simplify our corporate structure and operations, and drive positive operating leverage. Key elements of the announcement included:
Consolidation of bank charters from seven to one while maintaining local leadership, local product pricing, and local brands. The consolidation of the bank charters occurred on December 31, 2015.
Creation of a Chief Banking Officer position, with responsibility for retail banking, wealth management, and residential mortgage lending.
Consolidation of risk functions and other non-customer facing operations, while emphasizing local credit decision making.
Investment in technology to modernize our loan, deposit, and customer information systems to meet the demands of a rapidly changing information technology environment.
The Company expects to continue to benefit from these initiatives to create efficiencies and improve customer experience.
Financial Performance Targets
Following are the targeted financial performance outcomes of these organizational changes, and associated operational and technological initiatives with some brief comments regarding current performance against these measures:
Maintain adjusted noninterest expense less than $1.58 billion in 2016, although increasing somewhat in 2017; this target excludes those same expense items excluded in arriving at the efficiency ratio (see “GAAP to Non-GAAP Reconciliations” on page 90 for more information regarding the calculation of the efficiency ratio). For the third quarter of 2016 adjusted noninterest expense was $403.8 million. Year-to-date adjusted noninterest expense was $1.18 billion, which, when annualized, is consistent with our commitment to hold adjusted noninterest expense to less than $1.58 billion in 2016.
Achieve an efficiency ratio less than 66% in 2016, and in the low 60s by fiscal year-end 2017, driven by expense and revenue initiatives detailed below; the announced target assumes a slight increase in interest rates. Our efficiency ratio increased 144 bps to 66.0% for the third quarter of 2016 compared with 64.5% during the second quarter of 2016, and improved 313 bps compared with an efficiency ratio of 69.1% for the third quarter of 2015. The ratio for the six months ending on September 30, 2016 is 65.2%, which is an improvement of 485 bps compared with the efficiency ratio of 70.1% for the same prior year period. We show the efficiency ratio for six-month periods, in addition to the three-month periods, in order to illustrate the trend over longer periods as quarterly fluctuations may not be reflective of the prevailing trend, while yearly results may not accurately reflect the pace of change. We show a nine-month efficiency ratio to illustrate the progress towards our annual target. The year-to-date efficiency ratio was 66.3%. We are firmly committed to achieving an efficiency ratio of less than 66% in 2016. See “GAAP to Non-GAAP Reconciliations” on page 90 for more information regarding the calculation of the efficiency ratio.

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Achieve annual gross pretax cost savings of $120 million from operational expense initiatives by year-end 2017, which include overhauling technology, consolidating legal charters, and improving operating efficiency across the Company. We remain on track with this initiative, and expect to achieve cost savings in excess of the initial target of $120 million.
Our initiatives are designed to make the Company a more efficient organization that drives positive operating leverage, increases returns on tangible common equity over the long term to double digit levels, simplifies the corporate structure and operations, and improves customer experience. The increase in operating leverage is evident through increased revenue from growth in loans, deployment of cash to mortgage-backed securities, continued use of interest rate swaps, improvement in core fee income, and disciplined expense management.
Areas Experiencing Strength in the Third Quarter and First Nine Months of 2016
Net interest income, which is more than three-quarters of our revenue, was $469.2 million in the third quarter of 2016 and $464.8 million and $425.4 million in the second quarter of 2016 and third quarter of 2015, respectively. Year-to-date net interest income is also up in 2016, increasing 9.5% to $1.4 billion in 2016 from $1.3 billion in 2015. The increase in net interest income was due to our effort to change the mix of interest-earning assets from lower-yielding money market securities into higher-yielding loans and investment securities and to reduce interest expense related to long-term debt. The average investment securities portfolio for the third quarter of 2016 grew by $4.6 billion compared with the same prior year period, which resulted in a $19.1 million increase in interest income on investment securities over the same quarters. As a result of tender offers, early calls and maturities, the average balance of long-term debt for the third quarter of 2016 decreased by $348.5 million compared with the same prior year period, which led to a $9.5 million decrease in interest expense for the third quarter of 2016 compared with the third quarter of 2015. 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.
Some of the same factors that led to an increase in net interest income also helped improve net interest margin (“NIM”) between the third quarter of 2016 and the third quarter of 2015, which was 3.36% and 3.11% respectively. Declines in the yields on average commercial (“CRE”) and consumer loans and average investment securities were partially offset by increases in the yield on average commercial loans, which represent over half of the Company’s lending portfolio, and a shift of approximately $5 billion away from low-yielding money market investments into higher-yielding agency-backed securities. Further, rates dropped 14 bps on the Company’s funding base due to the aforementioned decline in long-term debt.
Adjusted pre-provision net revenue (“PPNR”) of $208.5 million for the third quarter of 2016 was down $3.0 million, or 1.4%, from the prior quarter, but has increased by $37.3 million, or 21.8%, compared with the third quarter of 2015. The increase from the same prior year period reflects operating leverage improvement resulting from loan growth, a more profitable earning assets mix, and controlled core operating expenses. The higher adjusted PPNR in the third quarter of 2016 drove an improvement in the Company’s efficiency ratio from 69.1% in the third quarter of 2015 to 66.0% in the current quarter. Noninterest expense of $403.3 million for the third quarter of 2016 was $12.0 million higher than it was in the third quarter of 2015. The increase in total noninterest expense from the third quarter of 2015 was primarily due to a legal accrual, the alignment of a single back-office operating environment, and other employee benefits-related items. The increase in noninterest expense was partially offset by a lower accrual for senior management compensation. See “GAAP to Non-GAAP Reconciliations” on page 90 for more information regarding the calculation of adjusted PPNR.
Customer-related fees in the third quarter of 2016 increased by 6.9% compared with the prior quarter and by 11.2% from the prior year period. Increases were spread across most categories of customer-related fees, with the largest increases in interchange fees, trust income, and loan servicing income. In addition to the customer-related fees, noninterest income for the third quarter of 2016 was also higher due to increased securities gains primarily due to an increase of approximately $8 million in the market value of one of the Company’s Small Business Investment Company (“SBIC”) investments.

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Asset quality for the non-oil and gas portfolio, representing approximately 95% of the Company’s lending assets, remained strong when compared with the prior quarter. Excluding oil and gas-related loans, the ratio of nonperforming assets to loans and leases and other real estate owned (“OREO”) was 0.60% at September 30, 2016 compared with 0.67% at June 30, 2016. For the non-oil and gas-related loans, the allowance for credit losses (“ACL”) was 1.13% of loans and leases at September 30, 2016, compared with 1.15% at June 30, 2016. Net charge-offs for the total portfolio were $30 million in the third quarter of 2016, and $104 million for the first nine months of 2016. Excluding the oil and gas-related loans, the Company had net recoveries of $11 million, or an annualized (0.11)% of average loans, in the third quarter of 2016, and $10 million of net recoveries for the first nine months of 2016.
Tangible return on average tangible common equity was 7.88%, up 157 bps from the prior quarter and up 183 bps from the same prior year period, driven by steady growth in net interest and noninterest income and improvements in credit quality.
Areas Experiencing Challenges in the Third Quarter and First Nine Months of 2016
The overall credit quality of our loan portfolio remained strong, but the credit quality of our oil and gas-related portfolio experienced some deterioration. Criticized and classified oil and gas-related loan balances decreased $3 million and $44 million respectively in the third quarter of 2016 relative to the second quarter; however, criticized and classified oil and gas-related loans as a percentage of net oil and gas-related loans increased 405 bps and 159 bps respectively for the same period. Nonaccrual oil and gas-related loan balances increased $60 million relative to the prior quarter. The Company actively manages this portfolio and as part of our risk management efforts, we further reduced our oil and gas-related exposure to $4.1 billion, a reduction of approximately $300 million. Outstanding net loan balances in the oil and gas-related portfolio decreased $256 million or 10.0% during the quarter and outstanding net loan balances related to oilfield services and oil and gas service manufacturing decreased 14.7%, which are the highest risk areas for our oil and gas-related exposure.
Average yields in our lending and investments portfolios fell slightly compared with the second quarter of 2016 and with the third quarter of 2015. Factors include competitive pricing pressure, continued depressed interest rates, and premium amortization on agency securities due to prepayments. We expect continued growth from residential mortgage and commercial lending, with limited growth in our CRE portfolio.
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 third quarter of 2016, taxable-equivalent net interest income was $475.7 million, compared with $470.9 million for the second quarter of 2016 and $429.8 million for the third quarter of 2015.
Net interest margin in 2016 vs. 2015
The NIM was 3.36% and 3.11% for the third quarter of 2016 and 2015, respectively, and 3.39% for the second quarter of 2016. The increased NIM for the third quarter, compared with the same prior year period, resulted primarily from the change in the mix of interest-earning assets by moving funds from lower-yielding money market investments into available-for-sale (“AFS”) investment securities and loans, in addition to lower rates on long-term debt as a result of tender offers, early calls and maturities of high-cost debt. Due to market trends and competitive pricing, general yields on interest-earning assets have declined year-over-year.
The average loan portfolio increased $2.5 billion between the third quarter of 2016 and the third quarter of 2015. The average yield fell by 7 bps over the same period due to a continuation of competitive pricing pressure and depressed interest rates as new loans were originated or existing loans reset or were modified. The yield decreased 5 bps between the second quarter of 2016 and the third quarter of 2016 primarily as a result of changes in the yield in CRE term and consumer loans.
The average balance of AFS securities for the third quarter of 2016 increased by $4.4 billion, or 84.5%, but the average yield was 3 bps lower compared with the same prior year period, mainly due to accelerated premium

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amortization due to prepayments on agency-backed securities. The slight decrease in the average yield was more than offset by the increase in average balance which produced $19.9 million more taxable-equivalent interest income compared with the same prior year quarter.
Average noninterest-bearing demand deposits provided us with low cost funding and comprised 44.3% of average total deposits for the third quarter of 2016, compared with 44.1% for the third quarter of 2015. Average interest-bearing deposits increased by 3.1% in the third quarter of 2016, compared with the same prior year period, while the average rate paid was flat at 18 bps. Although we consider a wide variety of sources when determining our funding needs, we benefit from access to borrower deposits, 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 $348.5 million lower for the third quarter of 2016 compared with the same prior year period. The reduced balance was a result of tender offers, early calls, and maturities. The average interest rate paid on long-term debt decreased by 191 bps between the same periods. This is primarily due to higher cost long-term debt maturities in both the third and fourth quarters of 2015. Additionally, $89 million par amount of long-term debt matured late in the second quarter of 2016 and the Company reduced its long-term debt by $128 million during the third quarter of 2016 by exercising its call options for junior subordinated debentures related to trust preferred securities. Refer to the “Liquidity Risk Management” section beginning on page 83 for more information.
See “Interest Rate and Market Risk Management” on page 79 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 2.91% for the third quarters of 2016 and 2015, respectively. The spread on average interest-bearing funds for these periods was affected by the same factors that had an impact on the NIM. The mix of interest-earning assets may change over time as we emphasize loan growth in 1-4 family residential and commercial and industrial loans. Although we have experienced strong growth in term CRE, we expect limited growth in future quarters, due in part to internal concentration limits and risk management practices. In addition, as discussed below, we are continuing to invest in short-to-medium duration U.S. agency pass-through securities that qualify as high-quality liquid assets (“HQLA”); over time we expect these investments to continue to reduce the proportion of earning assets in money market investments, and increase the proportion of AFS securities. Average yields on the loan portfolio may continue to experience modest downward pressure due to competitive pricing and growth in lower-yielding residential mortgages.
We expect to remain “asset-sensitive” (which refers to net interest income increasing as a result of a rising interest rate environment) with regard to interest rate risk. In response to liquidity and liquidity stress-testing regulations, which elevate, relative to historic levels, the proportion of HQLA we will be required to hold, we decided in the second half of 2014 to begin deploying cash into short-to-medium duration U.S. agency pass-through securities. During the third quarter of 2016, we purchased HQLA securities of $1.5 billion at amortized cost, increasing HQLA securities by $835 million after paydowns and payoffs during the quarter. In the near term, we plan to continue these purchases, which are expected to reduce our asset sensitivity compared with previous periods, and better match the duration of our assets with our liabilities, while also improving current earnings.
Our estimates of the Company’s actual interest rate risk position are predicated on a static balance sheet size and 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 79.

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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.
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
(Unaudited)
 
Three Months Ended
September 30,
 2016
 
Three Months Ended
September 30,
 2015
(In thousands)
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
 
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Money market investments
$
3,139,771

 
$
4,934

 
0.63
%
 
$
8,775,823

 
$
6,018

 
0.27
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
706,012

 
7,677

 
4.33

 
553,615

 
7,075

 
5.07

Available-for-sale
9,697,759

 
44,380

 
1.82

 
5,254,986

 
24,502

 
1.85

Trading account
80,591

 
676

 
3.34

 
47,235

 
445

 
3.74

Total securities
10,484,362

 
52,733

 
2.00

 
5,855,836

 
32,022

 
2.17

Loans held for sale
132,602

 
1,114

 
3.34

 
131,113

 
1,222

 
3.70

Loans and leases 2
 
 
 
 
 
 
 
 
 
 
 
Commercial
21,815,443

 
229,720

 
4.19

 
21,289,641

 
222,478

 
4.15

Commercial real estate
11,331,183

 
119,242

 
4.19

 
10,170,539

 
114,695

 
4.47

Consumer
9,340,297

 
89,464

 
3.81

 
8,565,075

 
84,200

 
3.90

Total loans and leases
42,486,923

 
438,426

 
4.11

 
40,025,255

 
421,373

 
4.18

Total interest-earning assets
56,243,658

 
497,207

 
3.52

 
54,788,027

 
460,635

 
3.34

Cash and due from banks
555,945

 
 
 
 
 
583,936

 
 
 
 
Allowance for loan losses
(608,948
)
 
 
 
 
 
(602,677
)
 
 
 
 
Goodwill
1,014,129

 
 
 
 
 
1,014,129

 
 
 
 
Core deposit and other intangibles
11,576

 
 
 
 
 
19,726

 
 
 
 
Other assets
2,845,876

 
 
 
 
 
2,597,278

 
 
 
 
Total assets
$
60,062,236

 
 
 
 
 
$
58,400,419

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings and money market
$
25,682,829

 
$
9,374

 
0.15
%
 
$
24,676,897

 
$
9,895

 
0.16
%
Time
2,409,092

 
3,086

 
0.51

 
2,242,064

 
2,445

 
0.43

Foreign
116,678

 
89

 
0.30

 
441,670

 
202

 
0.18

Total interest-bearing deposits
28,208,599

 
12,549

 
0.18

 
27,360,631

 
12,542

 
0.18

Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Federal funds and other short-term borrowings
343,358

 
193

 
0.22

 
211,322

 
76

 
0.14

Long-term debt
679,990

 
8,766

 
5.13

 
1,028,457

 
18,235

 
7.03

Total borrowed funds
1,023,348

 
8,959

 
3.48

 
1,239,779

 
18,311

 
5.86

Total interest-bearing liabilities
29,231,947

 
21,508

 
0.29

 
28,600,410

 
30,853

 
0.43

Noninterest-bearing deposits
22,466,132

 
 
 
 
 
21,558,557

 
 
 
 
Other liabilities
668,180

 
 
 
 
 
581,880

 
 
 
 
Total liabilities
52,366,259

 
 
 
 
 
50,740,847

 
 
 
 
Shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred equity
709,601

 
 
 
 
 
1,004,059

 
 
 
 
Common equity
6,986,376

 
 
 
 
 
6,655,513

 
 
 
 
Total shareholders’ equity
7,695,977

 
 
 
 
 
7,659,572

 
 
 
 
Total liabilities and shareholders’ equity
$
60,062,236

 
 
 
 
 
$
58,400,419

 
 
 
 
Spread on average interest-bearing funds
 
 
 
 
3.23%

 
 
 
 
 
2.91%

Taxable-equivalent net interest income and net yield on interest-earning assets
 
 
$
475,699

 
3.36%

 
 
 
$
429,782

 
3.11%

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

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Nine Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2015
(In thousands)
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
 
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Money market investments
$
4,099,015

 
$
17,527

 
0.57
%
 
$
8,404,053

 
$
17,021

 
0.27
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
646,027

 
21,905

 
4.53

 
589,673

 
22,431

 
5.09

Available-for-sale
8,889,346

 
129,542

 
1.95

 
4,644,554

 
67,981

 
1.96

Trading account
70,848

 
1,905

 
3.59

 
64,534

 
1,653

 
3.42

Total securities
9,606,221

 
153,352

 
2.13

 
5,298,761

 
92,065

 
2.32

Loans held for sale
133,022

 
3,596

 
3.61

 
117,351

 
3,138

 
3.58

Loans and leases 2
 
 
 
 
 
 
 
 
 
 
 
Commercial
21,791,318

 
684,406

 
4.20

 
21,463,558

 
672,468

 
4.19

Commercial real estate
11,019,877

 
349,859

 
4.24

 
10,115,149

 
337,980

 
4.47

Consumer
9,057,052

 
261,784

 
3.86

 
8,532,595

 
250,191

 
3.92

Total loans and leases
41,868,247

 
1,296,049

 
4.13

 
40,111,302

 
1,260,639

 
4.20

Total interest-earning assets
55,706,505

 
1,470,524

 
3.53

 
53,931,467

 
1,372,863

 
3.40

Cash and due from banks
601,264

 
 
 
 
 
639,049

 
 
 
 
Allowance for loan losses
(605,145
)
 
 
 
 
 
(611,062
)
 
 
 
 
Goodwill
1,014,129

 
 
 
 
 
1,014,129

 
 
 
 
Core deposit and other intangibles
13,487

 
 
 
 
 
22,055

 
 
 
 
Other assets
2,749,993

 
 
 
 
 
2,571,525

 
 
 
 
Total assets
$
59,480,233

 
 
 
 
 
$
57,567,163

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings and money market
$
25,604,575

 
$
28,020

 
0.15
%
 
$
24,470,254

 
$
29,083

 
0.16
%
Time
2,230,373

 
7,905

 
0.47

 
2,304,572

 
7,447

 
0.43

Foreign
163,360

 
338

 
0.28

 
373,390

 
437

 
0.16

Total interest-bearing deposits
27,998,308

 
36,263

 
0.17

 
27,148,216


36,967

 
0.18

Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Federal funds and other short-term borrowings
385,677

 
634

 
0.22

 
215,088

 
228

 
0.14

Long-term debt
759,448

 
28,773

 
5.06

 
1,063,288

 
56,290

 
7.08

Total borrowed funds
1,145,125

 
29,407

 
3.43

 
1,278,376

 
56,518

 
5.91

Total interest-bearing liabilities
29,143,433

 
65,670

 
0.30

 
28,426,592

 
93,485

 
0.44

Noninterest-bearing deposits
22,063,908

 
 
 
 
 
21,033,053

 
 
 
 
Other liabilities
614,969

 
 
 
 
 
584,672

 
 
 
 
Total liabilities
51,822,310

 
 
 
 
 
50,044,317

 
 
 
 
Shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred equity
772,083

 
 
 
 
 
1,004,035

 
 
 
 
Common equity
6,885,840

 
 
 
 
 
6,518,811

 
 
 
 
Total shareholders’ equity
7,657,923

 
 
 
 
 
7,522,846

 
 
 
 
Total liabilities and shareholders’ equity
$
59,480,233

 
 
 
 
 
$
57,567,163

 
 
 
 
Spread on average interest-bearing funds
 
 
 
 
3.23
%
 
 
 
 
 
2.96
%
Taxable-equivalent net interest income and net yield on interest-earning assets
 
 
$
1,404,854

 
3.37
%
 
 
 
$
1,279,378

 
3.17
%
1 
Taxable-equivalent rates used where applicable.
2 
Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
Provisions for Credit Losses
The provision for loan losses is the amount of expense that, in our judgment, is required to maintain the allowance for loan losses 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 allowance and reserve, we perform periodic evaluations of our various loan portfolios, the levels of actual charge-

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offs, credit trends, and external factors. See Note 6 of the Notes to Consolidated Financial Statements and “Credit Risk Management” on page 69 for more information on how we determine the appropriate level for the allowance for loan and lease losses (“ALLL”) and the RULC.
During the past few years, we have experienced a significant improvement in credit quality metrics for loans outside the oil and gas-related portfolio; however, in recent quarters we have experienced deterioration in various credit quality metrics primarily associated with oil and gas-related loans. The year-to-date difference between 2016 and 2015 shows an increase in the provision of $78.1 million, which is mainly due to incurred losses in the oil and gas-related portfolio. For the first nine months of 2016, the Company had net charge-offs of $114 million in its oil and gas-related portfolio. Non-oil and gas-related loans had net recoveries of $10 million for the first nine months of 2016. Overall, net charge-offs for the third quarter 2016 were $30 million, down slightly from $31 million for the third quarter of 2015. Improvement in the credit quality of the non-oil and gas-related portfolio, which represents 95% of all lending assets, has effectively compensated for any credit deterioration due to the oil and gas sector.
Nonperforming assets were $587 million at September 30, 2016, compared with $357 million at December 31, 2015. The ratio of nonperforming assets to loans and leases and OREO increased to 1.37% at September 30, 2016 from 0.87% at December 31, 2015, and increased slightly from 1.30% at June 30, 2016. Classified loans increased to $1.6 billion at September 30, 2016 from $1.4 billion at December 31, 2015. Classified loans current as to principal and interest payments, were 89.1% at September 30, 2016, compared with 86.5% at December 31, 2015. Classified loans are loans with well-defined credit weaknesses that are risk graded substandard or doubtful.
The ALLL decreased by approximately $9 million since December 31, 2015. Loan growth, change in the loan portfolio mix, the decline in credit quality and the increase of charge-offs in the oil and gas-related portfolio, offset by improvements in the rest of the funded loan portfolio, resulted in a provision of $18.8 million in the third quarter of 2016, compared with $34.5 million in the second quarter of 2016 and $18.3 million in the third quarter of 2015. Over the next four quarters, we expect the quarterly provision for credit losses, which includes the provision for both funded loans and unfunded loan commitments, to be generally stable relative to the first and second quarters of 2016, assuming no significant change in market conditions. Refer to the “Oil and Gas-Related Exposure” section on page 70 for more information.
During the third quarter of 2016, we recorded a $(3.2) million provision for unfunded lending commitments compared with a $(4.2) million in the second quarter of 2016 and $1.4 million in the third quarter of 2015. The negative provision recognized in the third quarter of 2016 is primarily due to improved credit quality assessments related to these obligations. 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, funding, and changes in credit quality.
Noninterest Income
Noninterest income represents revenues we earn for products and services that have no associated interest rate or yield. For the third quarter of 2016 noninterest income increased to $144.9 million, compared with $125.9 million for the third quarter of 2015. Year-to-date noninterest income also increased to $387.4 million for the first nine months of 2016 from $238.6 million for the same prior year period. The major driver in noninterest income for the year-to-date increase when compared with the same prior year period was the sale of our remaining collateralized debt obligation (“CDO”) portfolio during the second quarter of 2015, which resulted in a pre-tax loss of $136.8 million. Noninterest income improved across almost all categories in the third quarter of 2016 when compared with the third quarter of 2015; however the largest contributing factors are described subsequently.
Other service charges, commissions, and fees, which are comprised of loan fees, ATM fees, bankcard merchant fees, debit and credit card interchange fees, cash management fees, and other miscellaneous fees, increased by 12.9% to $54.1 million in the third quarter of 2016 from $48.0 million for the third quarter of 2015. The main increases relate to higher credit card interchange fees, fees generated on sales of interest rate swaps to clients, and exchange and other fees.

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Equity securities gains increased to $8.4 million in the third quarter of 2016 from $3.6 million in the third quarter of 2015. Gains or losses on equity securities may increase or decrease due to market factors or the performance of individual securities. During the current quarter, the gains were recognized due to fair value adjustments relating to one equity investment in the Company’s consolidated SBIC investments. We do not expect these gains to recur.
Significant items impacting noninterest income for the first nine months of 2016 not previously discussed include dividends and other investment income, which declined by $7.3 million, or 26.7%, to $19.9 million from $27.2 million for the same prior year period. Much of the change stemmed from consolidating seven banking charters into one. Consequently, our stock ownership with the Federal Home Loan Banking (“FHLB”) system has decreased significantly since December 31, 2015. We expect our FHLB dividends to decline by approximately $7 million annually, but only $5 million in 2016 due to the timing of the FHLB stock redemptions. Due to the charter consolidation, where our state-chartered banks had not previously needed to hold stock in the Federal Reserve, our stock with the Federal Reserve remained stable between the second and third quarters of 2016 but has increased by $58 million from December 31, 2015. However, due to the passage of the “Fixing of America’s Surface Transportation” Act, which reduced dividends on Federal Reserve stock, we expect income related to these dividends to decline by approximately $4 million in 2016 compared with 2015.
Year-to-date fixed income securities gains increased to $92 thousand in 2016 from a loss of $138.8 million for the same period in 2015. The large increase was due to losses from the sale of the remaining securities in our CDO portfolio during the second quarter of 2015.
Other noninterest income for the first nine months of 2016 decreased by $3.1 million compared with the prior year comparable period as a result of a gain on sale of a branch in California that occurred in the second quarter of 2015.
Noninterest Expense
Noninterest expense increased by $12.0 million, or 3.1%, to $403.3 million in the third quarter of 2016, compared with the same prior year period. Year-to-date noninterest expense decreased by $2.5 million between the first nine months of 2016 and the same prior year period. Expense increases were driven mainly by the higher cost of labor and several operating, but typically non-recurring items. Offsetting some of this pressure were reductions due to cost cutting efforts and reductions in the provision for unfunded lending commitments, which were due to credit quality improvement outside the oil and gas-related portfolio. We are committed to maintaining annual noninterest expense below $1.58 billion. The following are major components of noninterest expense line items impacting the third quarter change.
Occupancy expense increased $4.1 million or 13.8% in the third quarter of 2016 compared with the third quarter of 2015. The major cause of the increase related to an adjustment relating to the alignment of a single back-office operating environment earlier in the year.
The provision for unfunded lending commitments decreased $4.6 million from $1.4 million to $(3.2) million for the third quarters of 2015 and 2016 respectively. As discussed previously, credit quality improvements outside the oil and gas-related portfolio have outpaced deterioration within that smaller portfolio. Commitments on oil and gas-related loans also decreased, resulting in an improved commitment base and a lower provision.
FDIC premium expense increased $3.2 million or 37.3% between the third quarter of 2016 and the same prior year period 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 and the premium has been effective for the entire third quarter of 2016, though this is somewhat offset by a reduction in the Company’s overall rate resulting from the consolidation of the individual bank charters.
Other noninterest expense was $60.8 million in the third quarter of 2016, compared with $51.4 million for the same prior year period. This increase of $9.4 million, or 18.2%, between the periods was primarily due to the alignment

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of a single back-office operating environment, resolution of certain legal matters, and the release of a reserve in the third quarter of 2015 that did not recur in 2016.
One significant item impacting noninterest expense for the first nine months of 2016 not previously discussed was salaries and employee benefits expense. For the first nine months of 2016 our expense increased $5.3 million when compared with the same prior year period. In general, labor costs have risen slightly despite a reduction of 251 full-time equivalents over the past twelve months, partially due to the hiring of more skilled employees as part of our core transformation efforts and an increase in risk and compliance staff. Retirement expense also increased $2.6 million from a partial settlement loss due to increased lump sum distributions in the Company’s pension plan during the third quarter of 2016. Participants in the pension plan can elect lump sum distributions after retirement at their discretion. Because the Company has frozen its participation and benefit accruals for the pension plan, and the expected interest cost of the plan is decreasing, future lump sum distributions may exceed the expected interest cost which would result in partial settlement losses in future periods. The Company also reduced its incentive accrual for senior management compensation in the third quarter of 2016.
As discussed in the executive summary section of this document, our goal is to hold adjusted noninterest expense to less than $1.58 billion in 2016. For the first nine months of 2016 adjusted noninterest expense was $1.18 billion, reflecting our commitment to achieve this goal. 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 90 for more information regarding the calculation of the efficiency ratio).
Income Taxes
Income tax expense for the third quarter of 2016 was $64.7 million compared with $40.8 million for the same prior year period in 2015. The effective income tax rates were 33.7% and 28.8% for the third quarter of 2016 and 2015, respectively. The tax rates for the third quarter of 2016 and 2015 were benefited primarily by the non-taxability of certain income items. The tax rate for the third quarter of 2016 was higher compared with the same period in 2015 due to a decrease in investments in tax credit projects related to alternative energy and research and development initiatives. On a year-to-date basis, the 2016 tax rate of 33.4% was higher than the 2015 tax rate of 32.0%. The year-to-date tax rates for 2016 and 2015 were similarly impacted by the above-discussed permanent items. We expect our effective tax rate to be in the range of 34% to 35% for the next three months.
We had a net deferred tax asset (“DTA”) balance of $170 million at September 30, 2016, compared with $203 million at December 31, 2015. The net decrease in the DTA resulted primarily from the payout of accrued compensation and the reduction of unrealized losses in OCI related to securities. The decrease in the deferred tax liabilities, which related to premises and equipment, FHLB stock dividends and the deferred gain on a prior period debt exchange, offset some of the overall decrease in DTA.
Preferred Dividends
Our preferred dividends decreased $6.4 million in the third quarter of 2016 when compared with the third quarter of 2015 and $13.0 million for the first nine months of 2016 when compared with the same prior year period. We completed a tender offer in the fourth quarter of 2015 to purchase $176 million of our Series I preferred stock. We also completed a tender offer in the second quarter of 2016 to purchase $119 million of preferred stock. The total one-time reduction to net earnings applicable to common shareholders associated with the preferred stock redemption in the second quarter of 2016 was $9.8 million. At September 30, 2016 the balance of preferred stock was $710 million compared with $828 million at December 31, 2015. Preferred dividends are expected to be $12.4 million for the fourth quarter of 2016 and the second quarter of 2017 and $10.4 million for the first quarter of 2017.
Our efficiency initiative announced on June 1, 2015 included a reduction of approximately $20 million of preferred stock dividends on an annual basis, which has now been achieved. On June 29, 2016, the Board of Governors of the Federal Reserve System notified us that the Federal Reserve did not object to our board-approved 2016 capital plan, which included redemption of up to $144 million of our preferred stock by the end of the second quarter of 2017.

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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, such as money market investments or securities, while maintaining adequate levels of highly liquid assets. As a result of slower economic growth accompanied by moderate loan demand in previous periods, the Company’s initiative to maintain a higher-yielding mix of interest-earning assets caused us to deploy excess funds into highly liquid securities.
The schedule referred to in our discussion of net interest income includes the average balances of our interest-earning assets, the amount of revenue generated by them, and their respective yields.
Average interest-earning assets were $55.7 billion for the first nine months of 2016, compared with $53.9 billion for the first nine months of 2015. Average interest-earning assets as a percentage of total average assets for the first nine months of 2016 and 2015 were 93.7%.
Average loans were $41.9 billion and $40.1 billion for the first nine months of 2016 and 2015, respectively. Average loans as a percentage of total average assets for the first nine months of 2016 were 70.4%, 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 51.2% to $4.1 billion for the first nine months of 2016, compared with $8.4 billion for the first nine months of 2015. Average securities increased by 81.3% for the first nine months of 2016, compared with the first nine months of 2015. Average total deposits increased by 3.9% resulting from an increase in noninterest-bearing deposits, interest-on-checking, and savings deposits.
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 83 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 adjustments, and for impairment losses, including credit-related impairment. The estimated fair value measurement levels and methodology are discussed in Note 10 of the Notes to Consolidated Financial Statements.

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INVESTMENT SECURITIES PORTFOLIO
 
September 30, 2016
 
December 31, 2015
(In millions)
 
Par value
 
Amortized
cost
 
Estimated
fair
value
 
Par value
 
Amortized
cost
 
Estimated
fair
value
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
716

 
$
715

 
$
718

 
$
546

 
$
546

 
$
552

 
716

 
715

 
718

 
546

 
546

 
552

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations:
 
 
 
 
 
 
 
 
 
 
 
Agency securities
1,835

 
1,834

 
1,857

 
1,233

 
1,232

 
1,233

Agency guaranteed mortgage-backed securities
5,241

 
5,439

 
5,474

 
3,810

 
3,965

 
3,936

Small Business Administration loan-backed securities
1,973

 
2,193

 
2,186

 
1,741

 
1,933

 
1,931

Municipal securities
691

 
769

 
778

 
387

 
417

 
419

Other debt securities
25

 
25

 
23

 
25

 
25

 
23

 
9,765

 
10,260

 
10,318

 
7,196

 
7,572

 
7,542

Money market mutual funds and other
40

 
40

 
40

 
101

 
101

 
101

 
9,805

 
10,300

 
10,358

 
7,297

 
7,673

 
7,643

Total
$
10,521

 
$
11,015

 
$
11,076

 
$
7,843

 
$
8,219

 
$
8,195

The amortized cost of investment securities at September 30, 2016 increased by 34.0% from the balances at December 31, 2015, 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 $494 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 amortization of these premiums each quarter is dependent upon borrower prepayment behavior. Changes in actual prepayments and prepayment assumptions will result in changes to the amount of premium amortization recognized in net interest income. Premium amortization for the first nine months of 2016 was approximately $70 million compared with approximately $33 million for 2015. Premium amortization for the third quarter of 2016 was approximately $27 million, compared with approximately $24 million in the second quarter of 2016, and is included in portfolio yields. The increased premium amortization is due to both an increased amount of agency guaranteed mortgage-backed securities and SBA loan-backed securities and changes in prepayment rates of the underlying loans.
As of September 30, 2016, under the GAAP fair value accounting hierarchy, 0.4% of the $10.4 billion fair value of the AFS securities portfolio was valued at Level 1, 99.6% was valued at Level 2, and there were no Level 3 AFS securities. At December 31, 2015, 0.8% of the $7.6 billion fair value of AFS securities portfolio was valued at Level 1, 99.2% was valued at Level 2, and there were no Level 3 AFS securities. See Note 10 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.

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The following schedule summarizes our exposure to state and local municipalities:
MUNICIPALITIES
(In millions)
September 30,
2016
 
December 31,
2015
 
 
 
 
 
 
 
 
Loans and leases
 
$
753

 
 
 
$
676

 
Held-to-maturity – municipal securities
 
715

 
 
 
546

 
Available-for-sale – municipal securities
 
778

 
 
 
419

 
Trading account – municipal securities
 
97

 
 
 
33

 
Unfunded lending commitments
 
109

 
 
 
119

 
Total direct exposure to municipalities
 
$
2,452

 
 
 
$
1,793

 
At September 30, 2016, one municipal loan with a balance of $0.9 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 NBAZ. Growth in municipal exposures came primarily from increases in the municipal AFS securities portfolio consistent with our initiative to move available funds to higher-yielding investments. AFS securities generally consist of securities with investment-grade ratings from one or more major credit rating agencies. HTM securities consist of unrated bonds issued by small local government entities. Prior to purchase, the issuers of municipal securities are evaluated by the Company for their creditworthiness, and some of the securities are guaranteed by third parties.
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 have foreign operations as a result of our branch in Grand Cayman, Grand Cayman Islands B.W.I. While deposits in this branch are not subject to Federal Reserve Board (“FRB”) reserve requirements, there are no federal or state income tax benefits to the Company or any customers as a result of these operations. Foreign deposits were $119 million at September 30, 2016 and $294 million at December 31, 2015.
Loan Portfolio
For the first nine months of 2016 and 2015, average loans accounted for 70.4% and 69.7%, respectively, of total average assets. As presented in the following schedule, commercial and industrial loans were the largest category and constituted 31.8% of our loan portfolio at September 30, 2016.

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LOAN PORTFOLIO
 
September 30, 2016
 
December 31, 2015
(Amounts in millions)
Amount
 
% of
total loans
 
Amount
 
% of
total loans
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
$
13,543

 
31.8
%
 
$
13,211

 
32.5
%
Leasing
439

 
1.0

 
442

 
1.1

Owner occupied
6,889

 
16.2

 
7,150

 
17.6

Municipal
753

 
1.8

 
676

 
1.7

Total commercial
21,624

 
50.8

 
21,479

 
52.9

Commercial real estate:
 
 
 
 
 
 
 
Construction and land development
2,147

 
5.0

 
1,842

 
4.5

Term
9,303

 
21.9

 
8,514

 
21.0

Total commercial real estate
11,450

 
26.9

 
10,356

 
25.5

Consumer:
 
 
 
 
 
 
 
Home equity credit line
2,581

 
6.1

 
2,417

 
5.9

1-4 family residential
5,785

 
13.6

 
5,382

 
13.2

Construction and other consumer real estate
453

 
1.1

 
385

 
0.9

Bankcard and other revolving plans
458

 
1.1

 
444

 
1.1

Other
189

 
0.4

 
187

 
0.5

Total consumer
9,466

 
22.3

 
8,815

 
21.6

Total net loans
$
42,540

 
100.0
%
 
$
40,650

 
100.0
%
Loan portfolio growth during the first nine months of 2016 was widespread across loan products and geography with particular strength in CRE term, 1-4 family residential, and commercial and industrial loans. During the second quarter of 2016, the Company purchased $104 million of 1-4 family residential loans. The impact of these increases was partially offset by decreases in commercial owner occupied loans.
Commercial owner occupied loans declined primarily due to the 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.
We continue to emphasize loan growth in 1-4 family residential and commercial and industrial loans. Although we have experienced strong growth in CRE term loans, internal concentration limits and risk management practices may reduce the growth rate in future quarters.
Other Noninterest-Bearing Investments
As part of the Company’s initiative to consolidate its charters into a single charter, the Company has shares in a single FHLB (Des Moines). Historically, each affiliate bank held shares in different FHLBs, but all stock in the other FHLBs has been redeemed. Our investment balance in Federal Reserve stock is expected to remain relatively stable from where it currently sits at September 30, 2016. The $58 million increase is because several state-chartered affiliate banks were not required to hold stock with the FRB. Following consolidation, the capital requirements for ZB, N.A. increased. The following schedule sets forth the Company’s other noninterest-bearing investments.

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OTHER NONINTEREST-BEARING INVESTMENTS
(In millions)
September 30,
2016
 
December 31,
2015
 
 
 
 
 
 
 
 
Bank-owned life insurance
 
$
494

 
 
 
$
486

 
Federal Home Loan Bank stock
 
40

 
 
 
68

 
Federal Reserve stock
 
181

 
 
 
123

 
Farmer Mac stock
 
32

 
 
 
25

 
SBIC investments
 
129

 
 
 
113

 
Non-SBIC investment funds
 
14

 
 
 
24

 
Others
 
4

 
 
 
9

 
 
 
$
894

 
 
 
$
848

 
Premises and Equipment
Premises and equipment increased $81 million, or 9.0%, during the first nine months of 2016 primarily due to capitalized costs associated with the development of a new corporate facility for Amegy Bank in Texas, and additionally from 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 nine months of 2016 increased by 3.9%, compared with the first nine months of 2015, with average interest-bearing deposits increasing by 3.1% and average noninterest-bearing deposits increasing by 4.9%. 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 1 bp lower during the first nine months of 2016, compared with the first nine months of 2015.
Deposits at September 30, 2016, excluding time deposits $100,000 and over and brokered deposits, increased slightly to $49.3 billion from $49.2 billion at December 31, 2015. The increase was mainly due to an increase in noninterest-bearing deposits offset by a decrease in interest-bearing domestic savings and money market deposits and foreign deposits.
Demand and savings and money market deposits were 94.8% and 95.2% of total deposits at September 30, 2016 and December 31, 2015, respectively. In the normal course of business we utilize broker deposits for our deposit funding mix. At September 30, 2016 and December 31, 2015, total deposits included $681 million and $119 million, respectively, of brokered deposits.
See “Liquidity Risk Management” on page 83 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.

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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 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. Credit examination reports are submitted to management and to the ROC on a regular basis. 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.
Of note, as we continue to monitor our concentration risk, the composition of our loan portfolio has changed. Oil and gas-related loans represent 5.4% of the total loan portfolio at September 30, 2016, compared with 6.5% at December 31, 2015, and total commercial loans are 50.8% of the total portfolio compared with 52.8% for the same periods. Consumer loans have grown to represent 22.3% of the total loan portfolio at September 30, 2016, compared with 21.7% at December 31, 2015.
Government Agency Guaranteed Loans
We participate in various guaranteed lending programs sponsored by U.S. government agencies, such as the SBA, FDIC, Federal Housing Authority, Veterans’ Administration, Export-Import Bank of the U.S., and the U.S. Department of Agriculture. At September 30, 2016, the guaranteed portion of these loans was $428 million. Most of these loans were guaranteed by the SBA.

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The following schedule presents the composition of government agency guaranteed loans.
GOVERNMENT GUARANTEES
(Amounts in millions)
September 30, 2016
 
Percent
guaranteed
 
December 31, 2015
 
Percent
guaranteed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
525

 
 
 
76
%
 
 
 
$
536

 
 
 
76
%
 
Commercial real estate
 
18

 
 
 
76

 
 
 
17

 
 
 
77

 
Consumer
 
18

 
 
 
91

 
 
 
16

 
 
 
90

 
Total loans
 
$
561

 
 
 
76

 
 
 
$
569

 
 
 
76

 
Commercial Lending
The following schedule provides selected information regarding lending concentrations to certain industries in our commercial lending portfolio.
COMMERCIAL LENDING BY INDUSTRY GROUP
 
September 30, 2016
 
December 31, 2015
(Amounts in millions)
Amount
 
Percent
 
Amount
 
Percent
 
 
 
 
 
 
 
 
Real estate, rental and leasing
$
2,527

 
11.7
%
 
$
2,355

 
11.0
%
Manufacturing
2,213

 
10.2

 
2,338

 
10.9

Retail trade
2,120

 
9.8

 
2,025

 
9.4

Mining, quarrying and oil and gas extraction
1,505

 
7.0

 
1,820

 
8.5

Healthcare and social assistance
1,475

 
6.8

 
1,361

 
6.3

Wholesale trade
1,464

 
6.8

 
1,644

 
7.6

Finance and insurance
1,443

 
6.7

 
1,325

 
6.2

Transportation and warehousing
1,296

 
6.0

 
1,219

 
5.7

Construction
1,084

 
5.0

 
1,087

 
5.1

Accommodation and food services
942

 
4.4

 
964

 
4.5

Other services (except Public Administration)
872

 
4.0

 
862

 
4.0

Professional, scientific and technical services
846

 
3.9

 
860

 
4.0

Utilities 1
813

 
3.8

 
775

 
3.6

Other 2
3,024

 
13.9

 
2,844

 
13.2

Total
$
21,624

 
100.0
%
 
$
21,479

 
100.0
%
1 
Includes primarily utilities, power, and renewable energy.
2 
No other industry group exceeds 3%.
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 September 30, 2016 and December 31, 2015, we had approximately $4.1 billion and $4.8 billion of total oil and gas-related credit exposure, respectively. The distribution of oil and gas-related loans by customer market segment is shown in the following schedule:

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OIL AND GAS-RELATED EXPOSURE 1 
(Amounts in millions)
 
September 30,
2016
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
Loans and leases
 
 
 
 
 
 
 
 
 
 
Upstream – exploration and production
 
$
752

 
$
831

 
$
859

 
$
817

 
$
924

Midstream – marketing and transportation
 
623

 
658

 
649

 
621

 
626

Downstream – refining
 
123

 
131

 
129

 
127

 
124

Other non-services
 
44

 
45

 
43

 
44

 
55

Oilfield services
 
596

 
712

 
734

 
784

 
825

Oil and gas service manufacturing
 
176

 
193

 
229

 
229

 
251

Total loan and lease balances 2
 
2,314

 
2,570

 
2,643

 
2,622

 
2,805

Unfunded lending commitments
 
1,784

 
1,823

 
2,021

 
2,151

 
2,341

Total oil and gas credit exposure
 
$
4,098

 
$
4,393

 
$
4,664

 
$
4,773

 
$
5,146

Private equity investments
 
$
6

 
$
6

 
$
12

 
$
13

 
$
17

Credit quality measures 2
 
 
 
 
 
 
 
 
 
 
Criticized loan ratio
 
41.8
%
 
37.8
%
 
37.5
%
 
30.3
%
 
23.2
%
Classified loan ratio
 
33.1
%
 
31.5
%
 
26.9
%
 
19.7
%
 
15.7
%
Nonaccrual loan ratio
 
15.0
%
 
11.1
%
 
10.8
%
 
2.5
%
 
3.0
%
Ratio of nonaccrual loans that are current
 
87.3
%
 
89.2
%
 
90.6
%
 
71.2
%
 
45.2
%
Net charge-off ratio, annualized 3
 
7.1
%
 
5.8
%
 
5.4
%
 
3.7
%
 
2.4
%
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 September 30, 2016 do not include $29 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 third quarter of 2016, our overall balance of oil and gas-related loans decreased by $308 million, or 11.7%, from year-end 2015, and decreased by $491 million, or 17.5%, from the third quarter of 2015. Oil and gas-related loans represent 5.4% of the total loan portfolio at September 30, 2016, compared with 6.5% at December 31, 2015 and 7.0% at September 30, 2015. Unfunded oil and gas-related lending commitments declined by $367 million, or 17.1%, during the third quarter of 2016, from year-end 2015, and declined by $557 million, or 23.8%, from the third quarter of 2015. The decrease in unfunded oil and gas-related lending commitments was primarily in the oilfield services and oil and gas service manufacturing portfolios.
The majority of loan downgrades in the first nine months of 2016 reflected deterioration in the financial condition of companies in the oilfield services and the exploration and production portfolios. Oil and gas-related loan net charge-offs were $41 million in the third quarter of 2016, and were predominantly in the oilfield services portfolio, compared with $37 million in the second quarter of 2016. Nonaccruing oil and gas-related loans increased by $60 million from the second quarter of 2016, primarily in the exploration and production and oilfield services portfolios. Approximately 87% of oil and gas-related nonaccruing loans were current as to principal and interest payments at September 30, 2016, similar to 89% at June 30, 2016.
Upstream
Upstream exploration and production loans comprised approximately 32% and 31% of the oil and gas-related loans at September 30, 2016 and December 31, 2015, respectively. Many upstream borrowers have relatively balanced production between oil and gas.
We use disciplined underwriting practices to mitigate the risk associated with upstream lending activities. Upstream loans are made to reserve-based borrowers where approximately 88% of those loans are collateralized by the value of the borrower’s oil and gas reserves. Our oil and gas price deck, the pricing applied to a borrower’s reserves for underwriting purposes, has generally been below the NYMEX strip, i.e., the average of the daily settlement prices

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of the next 12 months’ futures contracts. Through the use of independent and third party engineers and conservative underwriting, we apply multiple discounts. These discounts often range from 10-40% of the value of the collateral in determining the borrowing base (commitment), and help protect credit quality against significant commodity price declines. Further, reserve-based commitments are subject to a borrowing base redetermination based on then-current oil and gas prices, typically every six months. Generally, we have, at our option, the right to conduct additional redeterminations during the year. Borrowing bases for clients are usually set at 60-70% of available collateral after an adjustment for the discounts described above.
Upstream borrowers generally do not draw the maximum available funding on their lines, which provides the borrower additional liquidity and flexibility. The line utilization rate for upstream borrowers was approximately 60% and 57% at September 30, 2016 and December 31, 2015, respectively. This unused commitment gives us the ability in some cases to reduce the borrowing base commitment through the redetermination process without creating a borrowing base deficiency (where outstanding debt exceeds the new borrowing base). Nevertheless, our loan agreements generally require the borrowers to maintain a certain amount of equity. Therefore, if the loan to collateral value exceeds an acceptable limit, we work with the borrowers to reinstate an acceptable collateral-value threshold.
An additional metric we consider in our underwriting is a borrower’s oil and gas price hedging practices. A considerable portion of our reserve-based borrowers are hedged. As of September 30, 2016, of the upstream borrower’s risk-based estimated oil production and gas production projected in 2016, approximately 40% and 82%, respectively, is hedged based on the latest data provided by the borrowers.
Midstream
Midstream marketing and transportation loans comprised approximately 27% and 23% of the oil and gas-related exposure at September 30, 2016 and December 31, 2015, respectively. Loans in this segment are made to companies that gather, transport, treat and blend oil and natural gas, or that provide services to similar companies. The assets owned by these borrowers, which make this activity possible, are field-level gathering systems (small diameter pipe), pipelines (medium/large diameter pipe), tanks, trucks, rail cars, various water-based vessels, and natural gas treatment plants. Our midstream loans are secured by these assets, unless the borrower is rated investment-grade. A significant portion of our midstream borrowers’ revenues are derived from fee-based contracts, giving them limited exposure to commodity price risk. Since lower oil and gas prices slow the drilling and development of new oil and natural gas, but do not normally result in significant numbers of producing wells being shut in, volumes of oil and gas flowing through midstream systems usually remain relatively stable throughout oil and natural gas price cycles.
Oil and Gas Services
Oil and gas services loans, which include oilfield services and oil and gas service manufacturing, comprised approximately 34% and 39% of the oil and gas-related exposure at September 30, 2016 and December 31, 2015, respectively. Oil and gas services loans 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 are not subject to the same volatility as new drilling activities. Many of these borrowers are diversified geographically and service both oil and gas-related drilling and production.
For oil and gas services loans, underwriting criteria require lower leverage to compensate for the cyclical nature of the industry. During the underwriting process, we use sensitivity analysis to consider revenue and cash flow impacts resulting from oil and gas price cycles.
Risk Management of the Oil and Gas-Related Portfolio
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 69% 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

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that employ excessive leverage through the use of junior lien loans or unsecured layers of debt. Approximately 90% 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 80% of the upstream portfolio, 81% of the midstream portfolio, and 46% 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 shared national credit 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.
We expect further deterioration in the oil and gas-related portfolio, primarily from the oil and gas services companies; we currently believe we have appropriately reserved for these downgrades. However; a continuation of low oil and gas prices may result in further credit deterioration. 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 second quarter of 2016, the ACL related to the oil and gas portfolio continued to exceed 8% for the third quarter of 2016.

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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
(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
9/30/2016
 
$
1,233

 
$
3,161

 
$
389

 
$
578

 
$
1,705

 
$
1,339

 
$
303

 
$
595

 
$
9,303

 
81.2
%
% of loan type
 
 
13.3
%
 
34.0
%
 
4.2
%
 
6.2
%
 
18.3
%
 
14.4
%
 
3.2
%
 
6.4
%
 
100.0
%
 
 
Delinquency rates 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-89 days
9/30/2016
 
0.3
%
 
0.5
%
 
0.8
%
 
%
 
%
 
0.1
%
 
0.2
%
 
0.2
%
 
0.3
%
 
 
 
12/31/2015
 
0.1
%
 
0.1
%
 
0.3
%
 
0.1
%
 
0.1
%
 
%
 
0.2
%
 
0.2
%
 
0.1
%
 
 
≥ 90 days
9/30/2016
 
0.3
%
 
0.3
%
 
0.2
%
 
0.1
%
 
%
 
0.2
%
 
%
 
0.7
%
 
0.2
%
 
 
 
12/31/2015
 
%
 
0.5
%
 
1.6
%
 
0.1
%
 
0.1
%
 
0.2
%
 
1.0
%
 
0.9
%
 
0.4
%
 
 
Accruing loans past due 90 days or more
9/30/2016
 
$
1

 
$
10

 
$
1

 
$

 
$

 
$
3

 
$

 
$

 
$
15

 
 
 
12/31/2015
 

 
15

 

 

 

 
3

 
3

 
1

 
22

 
 
Nonaccrual loans
9/30/2016
 
$
9

 
$
10

 
$

 
$
2

 
$

 
$
1

 
$

 
$
5

 
$
27

 
 
 
12/31/2015
 
17

 
4

 
8

 
3

 
1

 
1

 

 
6

 
40

 
 
Residential construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance outstanding
9/30/2016
 
$
35

 
$
375

 
$
89

 
$
11

 
$
255

 
$
47

 
$
8

 
$
3

 
$
823

 
7.2
%
% of loan type
 
 
4.2
%
 
45.6
%
 
10.8
%
 
1.3
%
 
31.0
%
 
5.7
%
 
1.0
%
 
0.4
%
 
100.0
%
 
 
Delinquency rates 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-89 days
9/30/2016
 
2.3
%
 
%
 
1.5
%
 
%
 
2.5
%
 
%
 
%
 
%
 
1.0
%
 
 
 
12/31/2015
 
%
 
%
 
%
 
%
 
0.3
%
 
%
 
%
 
%
 
0.1
%
 
 
≥ 90 days
9/30/2016
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
 
 
12/31/2015
 
%
 
%
 
%
 
%
 
0.5
%
 
%
 
%
 
%
 
0.2
%
 
 
Accruing loans past due 90 days or more
9/30/2016
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
12/31/2015
 

 

 

 

 

 

 

 

 

 
 
Nonaccrual loans
9/30/2016
 
$

 
$

 
$

 
$

 
$
2

 
$

 
$

 
$

 
$
2

 
 
 
12/31/2015
 

 

 

 

 
3

 

 

 

 
3

 
 
Commercial construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance outstanding
9/30/2016
 
$
104

 
$
236

 
$
98

 
$
59

 
$
507

 
$
225

 
$
59

 
$
36

 
$
1,324

 
11.6
%
% of loan type
 
 
7.8
%
 
17.8
%
 
7.4
%
 
4.5
%
 
38.3
%
 
17.0
%
 
4.5
%
 
2.7
%
 
100.0
%
 
 
Delinquency rates 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-89 days
9/30/2016
 
%
 
%
 
16.5
%
 
%
 
2.1
%
 
%
 
%
 
%
 
1.8
%
 
 
 
12/31/2015
 
%
 
%
 
%
 
%
 
%
 
0.1
%
 
%
 
%
 
%
 
 
≥ 90 days
9/30/2016
 
%
 
%
 
%
 
%
 
0.4
%
 
%
 
%
 
%
 
%
 
 
 
12/31/2015
 
%
 
%
 
%
 
%
 
0.7
%
 
0.4
%
 
%
 
%
 
0.4
%
 
 
Accruing loans past due 90 days or more
9/30/2016
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
12/31/2015
 

 

 

 

 

 

 

 

 

 
 
Nonaccrual loans
9/30/2016
 
$

 
$

 
$

 
$

 
$
2

 
$

 
$

 
$

 
$
2

 
 
 
12/31/2015
 

 

 

 

 
4

 

 

 

 
4

 
 
Total construction and land development
9/30/2016
 
$
139


$
611


$
187


$
70


$
762


$
272


$
67


$
39

 
$
2,147

 
 
Total commercial real estate
9/30/2016
 
$
1,372


$
3,772


$
576


$
648


$
2,467


$
1,611


$
370


$
634

 
$
11,450

 
100.0
%
1 
No other geography exceeds $89 million for all three loan types.
2 
Delinquency rates include nonaccrual loans.
Approximately 24% of the CRE term loans consist of mini-perm loans as of September 30, 2016. For such loans, construction has been completed and the project has stabilized to a level that supports the granting of a mini-perm loan in accordance with our underwriting standards. Mini-perm loans generally have initial maturities of three to seven years. The remaining 76% of CRE loans are term loans with initial maturities generally of 5 to 20 years. The stabilization criteria for a project to qualify for a term loan differ by product type and include criteria related to the cash flow generated by the project, loan-to-value ratio, and occupancy rates.

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Approximately $161 million, or 12%, of the commercial construction and land development portfolio at September 30, 2016 consists of acquisition and development loans. Most of these acquisition and development loans are secured by specific retail, apartment, office, or other projects.
Underwriting on commercial properties is primarily based on the economic viability of the project with heavy consideration given to the creditworthiness and experience of the sponsor. We generally require that the owner’s equity be injected prior to bank advances. Remargining requirements (required equity infusions upon a decline in value of the collateral) are often included in the loan agreement along with guarantees of the sponsor. Recognizing that debt is paid via cash flow, the projected cash flows of the project are critical in the underwriting because these determine the ultimate value of the property and its ability to service debt. Therefore, in most projects (with the exception of multifamily projects) we look for substantial pre-leasing in our underwriting and we generally require a minimum projected stabilized debt service coverage ratio of 1.20 or higher, depending on the project asset class.
Within the residential construction and development sector, many of the requirements previously mentioned, such as creditworthiness and experience of the developer, up-front injection of the developer’s equity, principal curtailment requirements, and the viability of the project are also important in underwriting a residential development loan. Significant consideration is given to the likely market acceptance of the product, location, strength of the developer, and the ability of the developer to stay within budget. Progress inspections by qualified independent inspectors are routinely performed before disbursements are made.
Real estate appraisals are ordered and validated independent of the loan officer and the borrower, generally by each bank’s internal appraisal review function, which is staffed by licensed appraisers. In some cases, reports from automated valuation services are used. Appraisals are ordered from outside appraisers at the inception, renewal or, for CRE loans, upon the occurrence of any event causing a downgrade to an adverse grade (i.e., “criticized” or “classified”). We increase the frequency of obtaining updated appraisals for adversely graded credits when declining market conditions exist.
Advance rates (i.e., loan commitments) will vary based on the viability of the project and the creditworthiness of the sponsor, but our guidelines generally limit advances to 50% for raw land, 65% for land development, 65% for finished commercial lots, 75% for finished residential lots, 80% for pre-sold homes, 75% for models and homes not under contract, and 70-80% for commercial properties, depending on the collateral type. Exceptions may be granted on a case-by-case basis.
Loan agreements require regular financial information on the project and the sponsor in addition to lease schedules, rent rolls and, on construction projects, independent progress inspection reports. The receipt of this financial information is monitored and calculations are made to determine adherence to the covenants set forth in the loan agreement. Additionally, loan-by-loan reviews of pass grade loans for all commercial and residential construction and land development loans are generally performed semiannually.
The existence of a guarantee that improves the likelihood of repayment is generally taken into consideration when analyzing CRE loans for impairment. If the support of the guarantor is quantifiable and documented, it is included in the potential cash flows and liquidity available for debt repayment and our impairment methodology takes into consideration this repayment source.
When we modify or extend a loan, we also give consideration to whether the borrower is in financial difficulty, and whether we have granted a concession. In determining if an interest rate concession has been granted, we consider whether the interest rate on the modified loan is equivalent to current market rates for new debt with similar risk characteristics. If the rate in the modification is less than current market rates, it may indicate that a concession was granted and impairment exists. However, if additional collateral is obtained or if a strong guarantor exists who is believed to be able and willing to support the loan on an extended basis, we also consider the nature and amount of the additional collateral and guarantees in the ultimate determination of whether a concession has been granted.
In general, we obtain and consider updated financial information for the guarantor as part of our determination to extend a loan. The quality and frequency of financial reporting collected and analyzed varies depending on the

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contractual requirements for reporting, the size of the transaction, and the strength of the guarantor.
Complete underwriting of the guarantor includes, but is not limited to, an analysis of the guarantor’s current financial statements, leverage, liquidity, cash flow, debt service coverage, contingent liabilities, etc. The assessment also includes a qualitative analysis of the guarantor’s willingness to perform in the event of a problem and demonstrated history of performing in similar situations. Additional analysis may include personal financial statements, tax returns, liquidity (brokerage) confirmations, and other reports, as appropriate.
A qualitative assessment is performed on a case-by-case basis to evaluate the guarantor’s experience, performance track record, reputation, performance of other related projects with which we are familiar, and willingness to work with us. We also utilize market information sources, rating, and scoring services in our assessment. This qualitative analysis coupled with a documented quantitative ability to support the loan may result in a higher-quality internal loan grade, which may reduce the level of allowance we estimate. Previous documentation of the guarantor’s financial ability to support the loan is discounted if there is any indication of a lack of willingness by the guarantor to support the loan.
In the event of default, we evaluate the pursuit of any and all appropriate potential sources of repayment, which may come from multiple sources, including the guarantee. A number of factors are considered when deciding whether or not to pursue a guarantor, including, but not limited to, the value and liquidity of other sources of repayment (collateral), the financial strength and liquidity of the guarantor, possible statutory limitations (e.g., single action rule on real estate) and the overall cost of pursuing a guarantee compared with the ultimate amount we may be able to recover. In other instances, the guarantor may voluntarily support a loan without any formal pursuit of remedies.
A continuation of low oil and gas prices could potentially produce an adverse impact on our CRE loan portfolio within Texas. Our largest CRE credit exposures in Texas are to the multi-family, office, and retail sectors. However, compared with 2008, our CRE exposure in Texas has significantly decreased. Approximately 60% of our CRE credit exposures in Texas are located in Houston. We have a standardized review and approval process for all CRE transactions providing more consistency and discipline in underwriting standards compared with 2008. The current CRE loan portfolio mix in Texas is 68% commercial term, 18% commercial construction, 10% residential construction, and 4% land development.
Consumer Loans
We have mainly been an originator of first and second mortgages, generally considered to be of prime quality. Historically, our practice has been to sell “conforming” fixed-rate loans to third parties, including Fannie Mae and Freddie Mac, for which we make representations and warranties that the loans meet certain underwriting and collateral documentation standards. It has also been our practice historically to hold variable-rate loans in our portfolio.
We are engaged in home equity credit line (“HECL”) lending. At September 30, 2016 and December 31, 2015, our HECL portfolio totaled $2.6 billion and $2.4 billion, respectively. The following schedule describes the composition of our HECL portfolio by lien status.
HECL PORTFOLIO BY LIEN STATUS
(In millions)
September 30, 2016
 
December 31, 2015
 
 
 
 
Secured by first deeds of trust
$
1,352

 
$
1,268

Secured by second (or junior) liens
1,229

 
1,149

Total
$
2,581

 
$
2,417

At September 30, 2016, loans representing approximately 1% of the outstanding balance in the HECL portfolio were estimated to have combined loan-to-value ratios (“CLTV”) above 100%. An estimated CLTV ratio is the ratio of our loan plus any prior lien amounts divided by the estimated current collateral value. At origination, underwriting standards for the HECL portfolio generally include a maximum 80% CLTV with high credit scores at origination.

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Approximately 94% of our HECL portfolio is still in the draw period, and approximately 28% is scheduled to begin amortizing within the next five years. We regularly analyze the risk of borrower default in the event of a loan becoming fully amortizing and the risk of higher interest rates. The analysis indicates that the risk of loss from this factor is minimal in the current economic environment. The annualized net credit losses for the HECL portfolio were 2 bps and (3) bps, for the first nine months of 2016 and 2015, respectively. See Note 6 of the Notes to Consolidated Financial Statements for additional information on the credit quality of this portfolio.
Nonperforming Assets
Nonperforming assets as a percentage of loans and leases and OREO increased to 1.37% at September 30, 2016, compared with 0.87% at December 31, 2015.
Total nonaccrual loans at September 30, 2016 increased $229 million from December 31, 2015, primarily due to the deterioration in the oil and gas-related loan portfolio. However, nonaccrual loans declined in the 1-4 family residential, commercial owner occupied, and CRE construction and land development loan classes. The largest total decreases in nonaccrual loans occurred at Zions Bank.
The balance of nonaccrual loans decreased due to paydowns, charge-offs, and the return of loans to accrual status under certain conditions. If a nonaccrual loan is refinanced or restructured, the new note is immediately placed on nonaccrual. If a restructured loan performs under the new terms for at least a period of six months, the loan can be considered for return to accrual status. See “Restructured Loans” following for more information. Company policy does not allow for the conversion of nonaccrual construction and land development loans to CRE term loans. See Note 6 of the Notes to Consolidated Financial Statements for more information.
The following schedule sets forth our nonperforming assets:
NONPERFORMING ASSETS
(Amounts in millions)
September 30,
2016
 
December 31,
2015
 
 
 
 
Nonaccrual loans 1
$
579

 
$
350

Other real estate owned
8

 
7

Total nonperforming assets
$
587

 
$
357

Ratio of nonperforming assets to net loans and leases1 and other real estate owned
1.37
%
 
0.87
%
Accruing loans past due 90 days or more
$
29

 
$
32

Ratio of accruing loans past due 90 days or more to loans and leases1
0.07
%
 
0.08
%
Nonaccrual loans and accruing loans past due 90 days or more
$
608

 
$
382

Ratio of nonaccrual loans and accruing loans past due 90 days or more to loans and leases1
1.42
%
 
0.94
%
Accruing loans past due 30-89 days
$
164

 
$
122

Nonaccrual loans current as to principal and interest payments
76.8
%
 
62.1
%
1 Includes loans held for sale.
Restructured Loans
Troubled debt restructurings (“TDRs”) are loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for whom we have granted a concession that we would not otherwise consider. TDRs decreased 0.7% during the first nine months of 2016. Commercial loans may be modified to provide the borrower more time to complete the project, to achieve a higher lease-up percentage, to sell the property, or for other reasons. Consumer loan TDRs represent loan modifications in which a concession has been granted to the borrower who is unable to refinance the loan with another lender, or who is experiencing economic hardship. Such consumer loan TDRs may include first-lien residential mortgage loans and home equity loans.
If the restructured loan performs for at least six months according to the modified terms, and an analysis of the customer’s financial condition indicates that we are reasonably assured of repayment of the modified principal and interest, the loan may be returned to accrual status. The borrower’s payment performance prior to and following the restructuring is taken into account to determine whether a loan should be returned to accrual status.

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ACCRUING AND NONACCRUING TROUBLED DEBT RESTRUCTURED LOANS
(In millions)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
 
 
 
 
Restructured loans – accruing
 
 
$
170

 
 
 
$
194

 
Restructured loans – nonaccruing
 
 
125

 
 
 
103

 
Total
 
 
$
295

 
 
 
$
297

 
In the periods following the calendar year in which a loan was restructured, a loan may no longer be reported as a TDR if it is on accrual, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the modification or restructure). Company policy requires that the removal of TDR status be approved at the same management level that approved the upgrading of a loan’s classification. See Note 6 of the Notes to Consolidated Financial Statements for additional information regarding TDRs.
TROUBLED DEBT RESTRUCTURED LOANS ROLLFORWARD
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Balance at beginning of period
$
315

 
$
298

 
$
297

 
$
343

New identified TDRs and principal increases
40

 
31

 
142

 
83

Payments and payoffs
(35
)
 
(27
)
 
(107
)
 
(115
)
Charge-offs
(24
)
 
(6
)
 
(29
)
 
(11
)
No longer reported as TDRs

 
(10
)
 
(7
)
 
(12
)
Sales and other
(1
)
 

 
(1
)
 
(2
)
Balance at end of period
$
295

 
$
286

 
$
295

 
$
286

Allowance for Credit Losses
The ACL consists of the ALLL (also referred to as the allowance for loan losses) and the RULC. In analyzing the adequacy of the allowance for loan losses, we utilize a comprehensive loan grading system to determine the risk potential in the portfolio and also consider the results of independent internal credit reviews. To determine the adequacy of the allowance, our loan and lease portfolio is broken into segments based on loan type.

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The following schedule shows the changes in the allowance for loan losses and a summary of loan loss experience:
SUMMARY OF LOAN LOSS EXPERIENCE
(Amounts in millions)

Nine Months Ended September 30, 2016
 
Twelve Months Ended December 31, 2015
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
Loans and leases outstanding (net of unearned income)
$
42,540

 
$
40,650

 
$
40,113

Average loans and leases outstanding (net of unearned income)
$
41,868

 
$
40,171

 
$
40,111

Allowance for loan losses:
 
 
 
 
 
Balance at beginning of period
$
606

 
$
605

 
$
605

Provision charged (credited) to earnings
95

 
40

 
17

Adjustment for FDIC-supported/PCI loans

 

 

Charge-offs:
 
 
 
 
 
Commercial
(138
)
 
(111
)
 
(77
)
Commercial real estate
(10
)
 
(14
)
 
(6
)
Consumer
(11
)
 
(14
)
 
(10
)
Total
(159
)
 
(139
)
 
(93
)
Recoveries:
 
 
 
 
 
Commercial
36

 
55

 
39

Commercial real estate
12

 
35

 
21

Consumer
7

 
10

 
8

Total
55

 
100

 
68

Net loan and lease charge-offs
(104
)
 
(39
)
 
(25
)
Balance at end of period
$
597

 
$
606

 
$
597

 
 
 
 
 
 
Ratio of annualized net charge-offs to average loans and leases
0.33
%
 
0.10
%
 
0.08
%
Ratio of allowance for loan losses to net loans and leases, at period end
1.40
%
 
1.49
%
 
1.49
%
Ratio of allowance for loan losses to nonperforming loans, at period end
103
%
 
173
%
 
166
%
Ratio of allowance for loan losses to nonaccrual loans and accruing loans past due 90 days or more, at period end
98
%
 
159
%
 
151
%
The total ALLL decreased during the first nine months of 2016 by $9 million due to improvements in credit quality metrics outside of the oil and gas industry. This decrease was partially offset by continued weaknesses in the oil and gas industry.
The RULC represents a reserve for potential losses associated with off-balance sheet commitments and standby letters of credit. The reserve is separately shown in the balance sheet and any related increases or decreases in the reserve are shown separately in the statement of income. At September 30, 2016, the reserve decreased by $13 million compared with December 31, 2015, and decreased by $20 million from September 30, 2015.
See Note 6 of the Notes to Consolidated Financial Statements for additional information related to the ACL and credit trends experienced in each portfolio segment.
Interest Rate and Market Risk Management
Interest rate and market risk are managed centrally. Interest rate risk is the potential for reduced net interest income and other rate sensitive income resulting from adverse changes in the level of interest rates. Market risk is the potential for loss arising from adverse changes in the fair value of fixed income securities, equity securities, other earning assets, and derivative financial instruments as a result of changes in interest rates or other factors. As a financial institution that engages in transactions involving an array of financial products, we are exposed to both interest rate risk and market risk.
The Company’s Board of Directors is responsible for approving the overall policies relating to the management of the financial risk of the Company, including interest rate and market risk management. In addition, the Board establishes and periodically revises policy limits and reviews limit exceptions reported by management. The Board has established the Asset/Liability Committee (“ALCO”) consisting of members of management, to which it has

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delegated the responsibility of managing interest rate and market risk for the Company. ALCO is primarily responsible for managing interest rate and market risk.
Interest Rate Risk
Interest rate risk is one of the most significant risks to which we are regularly exposed. In general, our goal in managing interest rate risk is to have net interest income increase in a rising interest rate environment. We refer to this goal as being “asset-sensitive.” This approach is based on our belief that in a rising interest rate environment, the market cost of equity, or implied rate at which future earnings are discounted, would also tend to rise.
Due to the low level of rates, there is limited sensitivity to falling rates at the current time, and we have tended to operate near interest rate risk “triggers” and appetites to be appropriately positioned in light of prevailing market conditions in order to maximize shareholder value. However, if interest rates remain at their current historically low levels, given our asset sensitivity, we would expect the NIM to be under continuing modest pressure assuming a balance sheet that is static in size. In order to mitigate this pressure we have been deploying cash into short-to-medium duration agency pass-through securities. Over time these actions are expected to reduce our asset sensitivity compared with previous periods, and better match the duration of our assets with our liabilities, while also improving current earnings.
Interest Rate Risk Measurement
We monitor interest rate risk through the use of two complementary measurement methods: net interest income simulation and Economic Value of Equity at Risk (“EVE”). In the net interest income simulation method, we analyze the expected change in net interest income in response to changes in interest rates. In the EVE method, we measure the expected changes in the fair value of equity in response to changes in interest rates.
Net interest income simulation is an estimate of the total net interest income that would be recognized under different rate environments. Net interest income is measured under several parallel and nonparallel interest rate environments and deposit repricing assumptions, taking into account an estimate of the possible exercise of embedded options within the portfolio (e.g., a borrower’s ability to refinance a loan under a lower rate environment). Our policy contains a trigger for a 10% decline in rate sensitive income as well as a risk capacity of a 13% decline if rates were to immediately rise or fall in parallel by 200 bps. This trigger and risk capacity apply to both the fast and the slow deposit assumptions.
EVE is calculated as the fair value of all assets minus the fair value of liabilities. We measure changes in the dollar amount of EVE for parallel shifts in interest rates. Due to embedded optionality and asymmetric rate risk, changes in EVE can be useful in quantifying risks not apparent for small rate changes. Examples of such risks may include out-of-the-money interest rate caps (or limits) on loans, which have little effect under small rate movements but may become important if large rate changes were to occur, or substantial prepayment deceleration for low rate mortgages in a higher rate environment.
The following schedule presents the formal EVE limits we have adopted. Exceptions to the EVE limits are subject to notification and approval by the ROC. In the normal course of business, we evaluated our limits and made changes to reflect its current balance sheet management objectives. These changes are reflected in the following schedule.
ECONOMIC VALUE OF EQUITY DECLINE LIMITS
Parallel change in interest rates
 
Trigger decline in EVE
 
Risk capacity decline in EVE
 
 
 
 
 
+/- 200 bps
 
8
%
 
10
%
 +/- 400 bps
 
21
%
 
25
%
Estimating the impact on net interest income and EVE requires that we assess a number of variables and make various assumptions in managing our exposure to changes in interest rates. The assessments address deposit withdrawals and deposit product migration (e.g., customers moving money from checking accounts to certificates of

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deposit), competitive pricing (e.g., existing loans and deposits are assumed to roll into new loans and deposits at similar spreads relative to benchmark interest rates), loan and security prepayments, and the effects of other similar embedded options. As a result of uncertainty about the maturity and repricing characteristics of both deposits and loans, we estimate ranges of possible net interest income and EVE results under a variety of assumptions and scenarios. The modeled results are highly sensitive to the assumptions used for deposits that do not have specific maturities, such as checking, savings and money market accounts, and also to prepayment assumptions used for loans with prepayment options. We use historical regression analysis as a guide to setting such assumptions; however, due to the current low interest rate environment, which has little historical precedent, estimated deposit durations may not reflect actual future results. Additionally, competition for funding in the marketplace has and may again result in changes to deposit pricing on interest-bearing accounts that are greater or less than changes in benchmark interest rates such as LIBOR or the federal funds rate.
Under most rising interest rate environments, we would expect some customers to move balances in demand deposits to interest-bearing accounts such as money market, savings, or CDs. The models are particularly sensitive to the assumption about the rate of such migration. In order to capture the sensitivity of our models to this risk, we estimate a range of possible outcomes for interest sensitivity under “fast” and “slow” movements of client funds out of noninterest-bearing deposits and into interest-bearing sources of funds.
In addition, we assume certain correlation rates, often referred to as a “deposit beta,” of interest-bearing deposits, wherein the rates paid to customers change at a different pace when compared to changes in benchmark interest rates. Generally, certificates of deposit are assumed to have a high correlation rate, while interest-on-checking accounts are assumed to have a lower correlation rate. Actual results may differ materially due to factors including competitive pricing, money supply, credit worthiness of the Company, and so forth; however, we use our historical experience as well as industry data to inform our assumptions.
The aforementioned migration and correlation assumptions result in deposit durations presented in the following schedule:
DEPOSIT ASSUMPTIONS
 
 
September 30, 2016
 
 
Fast
 
Slow
Product
 
Effective duration (unchanged)
 
Effective duration (+200 bps)
 
Effective duration (unchanged)
 
Effective duration (+200 bps)
 
 
 
 
 
 
 
 
 
Demand deposits
 
2.2
%
 
1.4
%
 
2.7
%
 
2.2
%
Money market
 
1.5
%
 
1.2
%
 
1.9
%
 
1.6
%
Savings and interest-on-checking
 
2.8
%
 
2.0
%
 
3.4
%
 
2.7
%
As of the dates indicated and incorporating the assumptions previously described, the following schedule shows our estimated percentage change in net interest income, based on a static balance sheet size, in the first year after the interest rate change if interest rates were to sustain immediate parallel changes ranging from -100 bps to +300 bps.
INCOME SIMULATION – CHANGE IN NET INTEREST INCOME
 
 
September 30, 2016
 
 
Parallel shift in rates (in bps)1
Repricing scenario
 
-100
 
0
 
+100
 
+200
 
+300
 
 
 
 
 
 
 
 
 
 
 
Fast
 
(4.9
)%
 
%
 
4.6
%
 
7.8
%
 
9.5
%
Slow
 
(5.8
)%
 
%
 
7.5
%
 
14.2
%
 
20.1
%
1 
Assumes rates cannot go below zero in the negative rate shift.

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For comparative purposes, the December 31, 2015 measures are presented in the following schedule.
 
 
December 31, 2015
 
 
Parallel shift in rates (in bps)1
Repricing scenario
 
-100
 
0
 
+100
 
+200
 
+300
 
 
 
 
 
 
 
 
 
 
 
Fast
 
(4.2
)%
 
%
 
5.0
%
 
8.6
%
 
11.1
%
Slow
 
(5.0
)%
 
%
 
8.0
%
 
15.5
%
 
22.2
%
1 
Assumes rates cannot go below zero in the negative rate shift.
The asset sensitivity as measured by income simulation declined slightly due to deployment of cash into medium-term securities, partially offset by growth in noninterest-bearing deposits.
As of the dates indicated and incorporating the assumptions previously described, the following schedule shows our estimated percentage change in EVE under parallel interest rate changes ranging from -100 bps to +300 bps.
CHANGES IN ECONOMIC VALUE OF EQUITY
 
 
September 30, 2016
Repricing scenario
 
-100 bps
 
0 bps
 
+100 bps
 
+200 bps
 
+300 bps
 
 
 
 
 
 
 
 
 
 
 
Fast
 
8.3
%
 
%
 
(0.2
)%
 
(2.3
)%
 
(6.0
)%
Slow
 
6.9
%
 
%
 
3.3
 %
 
5.1
 %
 
5.7
 %
For comparative purposes, the December 31, 2015 measures are presented in the following schedule. For positive rate shocks, the decline in EVE measures are driven by the same factors as those in our income simulation.
 
 
December 31, 2015
Repricing scenario
 
-100 bps
 
0 bps
 
+100 bps
 
+200 bps
 
+300 bps
 
 
 
 
 
 
 
 
 
 
 
Fast
 
(1.8
)%
 
%
 
0.4
%
 
(1.3
)%
 
(4.5
)%
Slow
 
(1.1
)%
 
%
 
3.9
%
 
6.1
 %
 
7.2
 %
With respect to EVE estimates, certain of our nonspecific maturity deposit assumptions limit the estimated change in deposit value in downside interest rate shocks. While these deposit value assumptions have had limited impact on our EVE estimates in the past, the current interest rate yield curve, distinguished by very low rates across the curve, is causing these assumptions to have an overstated impact on our EVE estimates. As a result of the current interest rate environment, deposit value assumptions are under review and may change in future reporting periods.
Our focus on business banking also plays a significant role in determining the nature of the Company’s asset-liability management posture. At September 30, 2016, $19.3 billion of the Company’s commercial lending and CRE loan balances were scheduled to reprice in the next six months. Of these variable-rate loans approximately 95% are tied to either the prime rate or LIBOR. For these variable-rate loans we have executed $1.4 billion of cash flow hedges by receiving fixed rates on interest rate swaps. Additionally, asset sensitivity is reduced due to $1.4 billion of variable-rate loans being priced at floored rates at September 30, 2016, which were above the “index plus spread” rate by an average of 58 bps. At September 30, 2016, we also had $3.1 billion of variable-rate consumer loans scheduled to reprice in the next six months. Of these variable-rate consumer loans approximately $0.6 billion were priced at floored rates, which were above the “index plus spread” rate by an average of 68 bps.
See Notes 7 and 10 of the Notes to Consolidated Financial Statements for additional information regarding derivative instruments.
Market Risk – Fixed Income
We engage in the underwriting and trading of municipal securities. This trading activity exposes us to a risk of loss arising from adverse changes in the prices of these fixed income securities.
At September 30, 2016, we had a relatively small amount, $108 million, of trading assets and $57 million of securities sold, not yet purchased, compared with $48 million and $30 million, at December 31, 2015.

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We are exposed to market risk through changes in fair value. We are also exposed to market risk for interest rate swaps used to hedge interest rate risk. Changes in the fair value of AFS securities and in interest rate swaps that qualify as cash flow hedges are included in accumulated other comprehensive income (“AOCI”) for each financial reporting period. During the third quarter of 2016, the after-tax change in AOCI attributable to AFS and HTM securities decreased by $11 million, due largely to changes in the interest rate environment, compared with a $11 million improvement in the same prior year period.
Market Risk – Equity Investments
Through our equity investment activities, we own equity securities that are publicly traded. In addition, we own equity securities in companies and governmental entities, e.g., Federal Reserve Bank and FHLBs, that are not publicly traded. The accounting for equity investments may use the cost, fair value, equity, or full consolidation methods of accounting, depending on our ownership position and degree of involvement in influencing the investees’ affairs. Regardless of the accounting method, the value of our investment is subject to fluctuation. Because the fair value of these securities may fall below our investment costs, we are exposed to the possibility of loss. Equity investments in private and public companies are approved, monitored and evaluated by the Company’s Equity Investment Committee consisting of members of management.
We hold both direct and indirect investments in predominantly pre-public companies through various SBIC venture capital funds. Our equity exposure to these investments was approximately $129 million and $113 million at September 30, 2016 and December 31, 2015, respectively. On occasion, some of the companies within our SBIC investments may issue an initial public offering. In this case, the fund is generally subject to a lockout period before liquidating the investment which can introduce additional market risk. As of September 30, 2016 we had direct SBIC investments of approximately $26 million of publicly traded stocks.
Additionally, Amegy has an alternative investments portfolio. These investments are primarily directed towards equity buyout and mezzanine funds with a key strategy of deriving ancillary commercial banking business from the portfolio companies. Early stage venture capital funds are generally not a part of the strategy because the underlying companies are typically not creditworthy. The carrying value of Amegys equity investments was $17 million at September 30, 2016 and $21 million at December 31, 2015.
These PEIs are subject to the provisions of the Dodd-Frank Act. The Volcker Rule of the Dodd-Frank Act prohibits banks and bank holding companies from holding PEIs beyond July 21, 2017, except for SBIC funds. As of September 30, 2016, such prohibited PEIs amounted to $7 million, with an additional $1 million of unfunded commitments (see Notes 5 and 11 of the Notes to Consolidated Financial Statements for more information). We currently do not believe that this divestiture requirement will have a material impact on our financial statements or earnings.
Our earnings from these investments, and the potential volatility of these earnings, are expected to decline as we ultimately plan to dispose of them in accordance with the Volcker Rule.
Liquidity Risk Management
Liquidity risk is the possibility that our cash flows may not be adequate to fund our ongoing operations and meet our commitments in a timely and cost-effective manner. Since liquidity risk is closely linked to both credit risk and market risk, many of the previously discussed risk control mechanisms also apply to the monitoring and management of liquidity risk. We manage our liquidity to provide adequate funds to meet our anticipated financial and contractual obligations, including withdrawals by depositors, debt and capital service requirements, and lease obligations, as well as to fund customers’ needs for credit. The management of liquidity and funding is performed centrally for the Parent and jointly by the Parent and bank management for its subsidiary bank.
Consolidated cash, interest-bearing deposits held as investments, and security resell agreements at the Parent and its subsidiaries was $3.6 billion at September 30, 2016 compared with $3.2 billion at June 30, 2016, and $7.4 billion at December 31, 2015. The $3.8 billion decrease during the first nine months of 2016 resulted primarily from (1) an increase in investment securities, (2) net loan originations, (3) repurchase and redemption of our preferred stock and

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common stock, and (4) repayment of long-term debt. These decreases were partially offset by (1) net cash provided by operating activities and (2) short-term FHLB borrowings.
During the first nine months of 2016, our HTM and AFS investment securities increased by $2.8 billion. This increase was primarily due to purchases of short-to-medium duration agency guaranteed mortgage-backed securities. We have been adding to our investment portfolio during the past several quarters to increase our permanent HQLA position in light of the new LCR rules and more broadly, to manage balance sheet liquidity more effectively. We expect to continue to deploy cash and short-term investments into HQLA during the fourth quarter of 2016 and 2017.
During the first nine months of 2016 we made cash payments totaling $244 million for our long-term debt which matured or were redeemed and did not incur any new long-term debt during the same time period. See Note 8 for additional detail about debt redemptions and maturities during the first nine months of 2016. During the third quarter of 2016, we incurred $750 million of short-term debt, which has since matured, with the FHLB to take advantage of a very short-term investment opportunity yielding a higher return than the debt charged. The investment resulted in an increase of $750 million to federal funds sold and security resell agreements.
The Company has adopted policy limits that govern liquidity risk. The policy requires the Company to maintain a buffer of highly liquid assets sufficient to cover cash outflows in the event of a severe liquidity crisis. The Company targets a buffer of highly liquid assets at the Parent to cover 18-24 months of cash outflows under a scenario with limited cash inflows, and maintains a minimum policy limit of not less than 12 months. Throughout the first nine months of 2016 and as of September 30, 2016, the Company complied with this policy.
Liquidity Regulation
In September 2014, U.S. banking regulators issued a final rule that implements a quantitative liquidity requirement in the U.S. generally consistent with the LCR minimum liquidity measure established under the Basel III liquidity framework. Under this rule, we are subject to a modified LCR standard, which requires a financial institution to hold an adequate amount of unencumbered HQLA that can be converted into cash easily and immediately in private markets to meet its liquidity needs for a short-term liquidity stress scenario. This rule became applicable to us on January 1, 2016. The Company exceeds the regulatory requirements of the Modified LCR that mandates a buffer of HQLA to cover 70% of 30-day cash outflows under the assumptions mandated in the Final Liquidity Rule. ZB, N.A. maintains a buffer of highly liquid assets consisting of cash, U.S. Agency, and U.S. Government Sponsored Entity securities to cover 30-day cash outflows under liquidity stress tests and maintains a contingency funding plan to identify funding sources that would be utilized over the extended 12-month horizon.
The Basel III liquidity framework includes a second minimum liquidity measure, the Net Stable Funding Ratio (“NSFR”), which requires a financial institution to maintain a stable funding profile over a one-year period in relation to the characteristics of its on- and off-balance sheet activities. On October 31, 2014, the Basel Committee on Banking Supervision issued its final standards for this ratio, entitled Basel III: The Net Stable Funding Ratio. On May 3, 2016, the FRB issued a proposal requiring bank holding companies with less than $250 billion of assets, but more than $50 billion of assets, to cover 70% of 1-year cash outflows under the assumptions required in the proposed NSFR Rule. Under the proposal, bank holding companies would be required to publicly disclose information about the NSFR levels each quarter. The proposal has an effective date of January 1, 2018. We continue to monitor this proposal and any other developments. Based on this Basel III publication and the FRB proposal, we believe we would meet the minimum NSFR if such requirement were currently effective.
We are required by the requirements of the Enhanced Prudent Standards for liquidity management (Reg. YY) to conduct monthly liquidity stress tests. These tests incorporate scenarios designed by us subject to review by the FRB. The Company’s internal liquidity stress-testing program as contained in its policy complies with these requirements. Additionally, the Company performs monthly liquidity stress testing using a set of internally generated scenarios representing severe liquidity constraints over a 12-month horizon.

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Parent Company Liquidity
The Parent’s cash requirements consist primarily of debt service, investments in and advances to subsidiaries, operating expenses, income taxes, and dividends to preferred and common shareholders. The Parent’s cash needs are usually met through dividends from its subsidiaries, interest and investment income, subsidiaries’ proportionate shares of current income taxes, and long-term debt and equity issuances.
Cash, interest-bearing deposits held as investments, and security resell agreements at the Parent decreased to $0.4 billion at September 30, 2016 compared with $0.6 billion at June 30, 2016 and $0.9 billion at December 31, 2015. This $0.5 billion decrease for the first nine months of 2016 resulted primarily from (1) purchase and redemption of our preferred stock and common stock, (2) repayment of long-term debt, (3) dividends on our common and preferred stock, and (4) interest payments. This decrease in cash was partially offset by common dividends and return of common equity received by the parent from its subsidiary bank.
At September 30, 2016, the Parent had no long-term debt maturities during the remainder of 2016. During 2017, the Parent’s long-term debt maturities consist of $152 million for a senior note due on March 27, 2017. At September 30, 2016, maturities of our long-term senior and subordinated debt ranged from March 2017 to September 2028.
During the first nine months of 2016, our subsidiary bank accrued $125 million of common dividends and return of common equity that has since been paid to the Parent, compared with $125 million for the first nine months of 2015 from its subsidiary banks. In addition, during the first nine months of 2015, the Parent received $31 million from dividends on preferred stock from its subsidiary banks. At September 30, 2016, ZB, N.A. had approximately $621 million available for the payment of dividends under current capital regulations. The dividends that ZB, N.A. can pay to the Parent are restricted by current and historical earning levels, retained earnings, and risk-based and other regulatory capital requirements and limitations.
General financial market and economic conditions impact our access to, and cost of, external financing. Access to funding markets for the Parent and its subsidiary bank is also directly affected by the credit ratings received from various rating agencies. The ratings not only influence the costs associated with the borrowings, but can also influence the sources of the borrowings. The debt ratings and outlooks issued by the various rating agencies for the Company and ZB, N.A. did not change during the first nine months of 2016, except Moody’s and Fitch upgraded the Company’s outlook to positive from stable. Standard & Poor’s, Fitch, Dominion Bond Rating Service, and Kroll all rate the Company’s senior debt at an investment-grade level, while Moody’s rates the Company’s senior debt as Ba1 (one notch below investment-grade). In addition, all of the previously mentioned rating agencies, except Kroll, rate the Company’s subordinated debt as noninvestment-grade.

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The following schedule presents the Parent’s balance sheets as of September 30, 2016, December 31, 2015, and September 30, 2015.
PARENT ONLY CONDENSED BALANCE SHEETS
(In thousands)
September 30,
2016
 
December 31,
2015
 
September 30,
2015
ASSETS
 
 
 
 
 
Cash and due from banks
$
39

 
$
18,375

 
$
19,105

Interest-bearing deposits
415,162

 
775,649

 
478,136

Security resell agreements

 
100,000

 
650,000

Investment securities:
 
 
 
 
 
Available-for-sale, at fair value
40,756

 
45,168

 
45,889

Other noninterest-bearing investments
29,066

 
28,178

 
31,998

Investments in subsidiaries:
 
 
 
 
 
Commercial bank
7,617,242

 
7,312,654

 
7,308,673

Other subsidiaries
80,628

 
84,010

 
86,725

Receivables from subsidiaries:
 
 
 
 
 
Commercial bank

 

 
6,000

Other subsidiaries
60

 
60

 
60

Other assets
152,806

 
78,728

 
72,844

 
$
8,335,759

 
$
8,442,822

 
$
8,699,430

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Other liabilities
$
86,851

 
$
123,849

 
$
122,691

Subordinated debt to affiliated trusts
36,083

 
164,950

 
164,950

Long-term debt:
 
 
 
 
 
Due to affiliates

 

 
50

Due to others
533,518

 
646,504

 
773,644

Total liabilities
656,452

 
935,303

 
1,061,335

Shareholders’ equity:
 
 
 
 
 
Preferred stock
709,601

 
828,490

 
1,004,159

Common stock
4,747,912

 
4,766,731

 
4,756,288

Retained earnings
2,211,793

 
1,966,910

 
1,894,623

Accumulated other comprehensive income (loss)
10,001

 
(54,612
)
 
(16,975
)
Total shareholders’ equity
7,679,307

 
7,507,519

 
7,638,095

 
$
8,335,759

 
$
8,442,822

 
$
8,699,430

The Parent’s cash payments for interest, reflected in operating expenses, decreased to $25 million during the first nine months of 2016 from $33 million during the first nine months of 2015 due to the maturity and repayment of debt during 2016 and 2015. Additionally, the Parent paid approximately $81 million of total dividends on preferred stock and common stock for the first nine months of 2016 and 2015.
Subsidiary Bank Liquidity
ZB, N.A.’s primary source of funding is its core deposits, consisting of demand, savings and money market deposits, and time deposits under $250,000. On a consolidated basis, the Company’s loan to total deposit ratio was 83.7% at September 30, 2016 compared with 84.5% at June 30, 2016 and 80.7% at December 31, 2015.
Total deposits increased by $475 million to $50.8 billion at September 30, 2016, compared with $50.4 billion at December 31, 2015. This increase was a result of a $463 million increase in time deposits $100 million and over and a $434 million increase in noninterest-bearing deposits. This increase was partially offset by a $176 million decrease in foreign deposits, and a $169 million decrease in savings and money market deposits, and a $77 million decrease in time deposits under $100 million. Also, during the first nine months of 2016, ZB, N.A. redeployed approximately $3.9 billion of cash to short-to-medium duration agency guaranteed mortgage-backed securities. ZB, N.A.’s long-term senior debt ratings were the same as the Parent, except Standard & Poor’s was BBB and Kroll’s was BBB+, compared to BBB- for Standard & Poor’s and BBB for Kroll for the Company.

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The FHLB system and Federal Reserve Banks have been and are a source of back-up liquidity, and from time to time, have been a significant source of funding. ZB, N.A. is a member of the FHLB of Des Moines. The FHLB allows member banks to borrow against their eligible loans to satisfy liquidity and funding requirements. The bank is required to invest in FHLB and Federal Reserve stock to maintain their borrowing capacity.
At September 30, 2016, the amount available for additional FHLB and Federal Reserve borrowings was approximately $16.5 billion, compared with $13.4 billion at December 31, 2015. Loans with a carrying value of approximately $25.9 billion at September 30, 2016 have been pledged at the Federal Reserve and the FHLB of Des Moines as collateral for current and potential borrowings compared with $19.4 billion at December 31, 2015 at the Federal Reserve and various FHLBs. At September 30, 2016, we had $750 million of short-term FHLB borrowings outstanding and no long-term FHLB or Federal Reserve borrowings outstanding, compared with no short or long-term FHLB or Federal Reserve borrowings outstanding at December 31, 2015. The $750 million of short-term FHLB borrowings matured and was repaid during October 2016. At September 30, 2016, our total investment in FHLB and Federal Reserve stock was $40 million and $181 million, respectively, compared with $68 million and $123 million at December 31, 2015.
Our investment activities can provide or use cash, depending on the asset liability management posture taken. During the first nine months of 2016, HTM and AFS investment securities’ activities resulted in a net increase in investment securities and a net $2.9 billion decrease in cash, compared with a net $2.1 billion decrease in cash for the first nine months of 2015, reflecting our continued purchase of HQLAs.
Maturing balances in ZB, N.A.’s loan portfolios also provide additional flexibility in managing cash flows. Lending and purchase activity for the first nine months of 2016 resulted in a net cash outflow of $1.9 billion compared with a net cash outflow of $75 million for the first nine months of 2015.
A more comprehensive discussion of liquidity management is contained in our 2015 Annual Report on Form 10-K.
Operational Risk Management
Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events. In our ongoing efforts to identify and manage operational risk, we have an ERM department whose responsibility is to help employees, management and the Board of Directors to assess, understand, measure, and monitor risk in accordance with our Risk Appetite Framework. We have documented both controls and the Control Self-Assessment related to financial reporting under the 2013 framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and the Federal Deposit Insurance Corporation Improvement Act of 1991.
To manage and minimize our operational risk, we have in place transactional documentation requirements; systems and procedures to monitor transactions and positions; systems and procedures to detect and mitigate attempts to commit fraud, penetrate our systems or telecommunications, access customer data, and/or deny normal access to those systems to our legitimate customers; regulatory compliance reviews; and periodic reviews by the Company’s Internal Audit and Credit Examination departments. Reconciliation procedures have been established to ensure that data processing systems consistently and accurately capture critical data. Further, we undertake significant efforts to maintain contingency and business continuity plans for operational support in the event of natural or other disasters. We also mitigate operational risk through the purchase of insurance, including errors and omissions and professional liability insurance.
We are continually improving our oversight of operational risk, including enhancement of risk identification, risk and control self-assessments, and antifraud measures, which are reported on a regular basis to enterprise management committees. The Operational Risk Committee reports to the ERMC, which reports to the ROC. Additional measures have been taken to increase oversight by ERM and Operational Risk Management through the strengthening of new initiative reviews, enhancements to the Vendor Management and Vendor Risk Management framework, enhancements to the Business Continuity and Disaster Recovery program, and the establishment of Fraud Risk Oversight, Incident Response Oversight and Technology Project Oversight programs. Significant

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enhancements have also been made to governance and reporting, including the establishment of Policy and Committee Governance programs and the creation of an Enterprise Risk Profile and Operational Risk Profile.
The number and sophistication of attempts to disrupt or penetrate our critical systems, sometimes referred to as hacking, cyberfraud, cyberattacks, cyberterrorism, or other similar names, also continue to grow. On a daily basis, the Company, its customers, and other financial institutions are subject to a large number of such attempts. We have established systems and procedures to monitor, thwart or mitigate damage from such attempts. However, in some instances we, or our customers, have been victimized by cyberfraud (our related losses have not been material), or some of our customers have been temporarily unable to routinely access our online systems as a result of, for example, distributed denial of service attacks. We continue to review this area of our operations to help ensure that we manage this risk in an effective manner
CAPITAL MANAGEMENT
We believe that a strong capital position is vital to continued profitability and to promoting depositor and investor confidence.
Capital Plan and Stress Tests
As a bank holding company with assets greater than $50 billion, we are required by the Dodd-Frank Act to participate in annual stress tests known as the Dodd-Frank Act Stress Test (“DFAST”) and Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”). We timely submitted our stress test results and 2016 capital plan to the FRB on April 5, 2016. In our capital plan, we were required to forecast, under a variety of economic scenarios, for nine quarters ending the first quarter of 2018, our estimated regulatory capital ratios, including our Common Equity Tier 1 (“CET1”) ratio. Under the implementing regulations for CCAR, a bank holding company may generally raise and redeem capital, pay dividends, and repurchase stock and take similar capital-related actions only under a capital plan as to which the FRB has not objected.
On June 23, 2016 we filed a Form 8-K presenting the results of the 2016 DFAST. The results of the stress test demonstrated that the Company has sufficient capital to withstand a severe economic downturn. Detailed disclosure of the stress test results can also be found on our website. In addition, we submitted our Dodd-Frank Act mid-cycle stress test, based upon the Company’s June 30, 2016 financial position, on October 5, 2016.
On June 29, 2016 we filed a Form 8-K announcing that the Federal Reserve did not object to our 2016 capital plan. The plan included (1) the increase of the quarterly common dividend to $0.08 per share beginning in the third quarter of 2016, (2) up to $180 million in total repurchases of common equity and (3) up to $144 million in total repurchases of preferred equity. These capital actions are expected to reduce preferred dividends and improve the Company’s return on equity.
In July 2016, we announced that our board of directors approved (1) a quarterly dividend of $0.08 per common share in August 2016 and (2) the commencement of a stock buyback program, including $45 million in the third quarter of 2016. See subsequent discussion regarding the buyback of Company common stock during the fourth quarter of 2016. The ultimate determination of future reductions of common and/or preferred stock will depend on a number of factors, including actual earnings performance, market conditions, and the receptivity of investors to the terms of any preferred stock redemption offers, as well as the effect of other steps we may explore as we seek to manage our capital, any of which could result in a delay of or reduction in the amount of common or preferred equity redemptions, repurchases, or dividend increases.
On April 25, 2016, we launched tender offers for up to $120 million par amount of certain outstanding shares of preferred stock. This $120 million is the remaining amount of the $300 million total reduction of preferred stock that was included in our 2015 capital plan, to which the Federal Reserve did not object. On May 23, 2016, we announced the results of the preferred stock tender offers. Preferred stock was reduced by $119 million, including $27 million, $59 million, and $33 million for Series I, J, and G, respectively. As a result of the preferred stock redemption, preferred dividends are expected to be $12.4 million for the fourth quarter of 2016 and the second quarter of 2017, and are expected to be $10.4 million for the first quarter of 2017.

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Basel III
The Basel III capital rules, which effectively replaced the Basel I rules, became effective for the Company on January 1, 2015 (subject to phase-in periods for certain of their components). Basel III requirements established a new comprehensive capital framework for U.S. banking organizations. We met all capital adequacy requirements under the Basel III Capital Rules based upon phase-in rules as of September 30, 2016, and believe that we would meet all capital adequacy requirements on a fully phased-in basis if such requirements were currently effective.
A detailed discussion of Basel III requirements, including implications for the Company, is contained on page 9 in “Capital Standards – Basel Framework” under Part 1, Item 1 in our 2015 Annual Report on Form 10-K.
Capital Management Actions
Total shareholders’ equity increased by $0.2 billion to $7.7 billion at September 30, 2016 from $7.5 billion at December 31, 2015. The increase in total shareholders’ equity is primarily due to net income of $332 million and to an improvement of $54 million in the fair value of the Company’s AFS securities portfolio due largely to changes in the interest rate environment, partially offset by $126 million paid to purchase and redeem our preferred stock as a result of our tender offer, $81 million of dividends paid on preferred and common stock, and repurchases of our common stock totaling $45 million. Since September 30, 2016, the Company has repurchased $45 million of our common stock, leaving $90 million of buyback capacity remaining in the 2016 capital plan (which spans the timeframe of July 2016 to June 2017).
Our quarterly dividend on common stock increased to $0.08 per share during the third quarter of 2016. The quarterly dividend had been $0.06 per share since the second quarter of 2015. We paid $41.4 million in dividends on common stock during the first nine months of 2016 compared with $32.8 million during the first nine months of 2015. During its October 2016 meeting, the Board of Directors declared a quarterly dividend of $0.08 per common share payable on November 23, 2016 to shareholders of record on November 16, 2016.
We paid dividends on preferred stock of $39.7 million and $46.9 million for the first nine months of 2016 and 2015, respectively. We also recorded a one-time $9.8 million reduction to net earnings applicable to common shareholders as a result of the preferred stock redemption during the second quarter of 2016.
See Note 8 for additional detail about capital management transactions during the first nine months of 2016.
Capital Ratios
Banking organizations are required by capital regulations to maintain adequate levels of capital as measured by several regulatory capital ratios.
The following schedule shows the Company’s capital and performance ratios as of September 30, 2016, December 31, 2015, and September 30, 2015.
CAPITAL RATIOS
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
 
 
 
 
 
 
Tangible common equity ratio
9.91
%
 
9.63
%
 
9.76
%
Tangible equity ratio
11.09
%
 
11.05
%
 
11.51
%
Average equity to average assets (three months ended)
12.81
%
 
12.93
%
 
13.11
%
Basel III risk-based capital ratios1:
 
 
 
 
 
Common equity tier 1 capital
12.04%
 
12.22%
 
12.16
%
Tier 1 leverage
11.27%
 
11.26%
 
11.63
%
Tier 1 risk-based
13.48%
 
14.08%
 
11.41
%
Total risk-based
15.31%
 
16.12%
 
16.46
%
Return on average common equity (three months ended)
6.66
%
 
5.17
%
 
5.02
%
Tangible return on average tangible common equity (three months ended)
7.88
%
 
6.20
%
 
6.05
%
 
1 
Based on the applicable phase-in periods.

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At both September 30, 2016 and December 31, 2015, Basel III regulatory tier 1 risk-based capital and total risk-based capital was $6.6 billion and $7.5 billion, respectively. A more comprehensive discussion of our capital management is contained in our 2015 Annual Report on Form 10-K.
GAAP to NON-GAAP RECONCILIATIONS
1. Tangible return on average tangible common equity
This Form 10-Q presents “tangible return on average tangible common equity” which excludes, net of tax, the amortization of core deposit and other intangibles from net earnings applicable to common shareholders, and average goodwill and core deposit and other intangibles from average common equity.
TANGIBLE RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)
 
 
Three Months Ended
(Amounts in thousands)
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
 
 
 
 
 
 
 
Net earnings applicable to common shareholders (GAAP)
 
$
116,895

 
$
88,197

 
$
84,238

Adjustment, net of tax:
 
 
 
 
 
 
Amortization of core deposit and other intangibles
 
1,210

 
1,446

 
1,461

Net earnings applicable to common shareholders, excluding the effects of the adjustment, net of tax (non-GAAP)
(a)
$
118,105

 
$
89,643


$
85,699

 
 
 
 
 
 
 
Average common equity (GAAP)
 
$
6,986,376

 
$
6,765,737

 
$
6,655,513

Average goodwill
 
(1,014,129
)
 
(1,014,129
)
 
(1,014,129
)
Average core deposit and other intangibles
 
(11,576
)
 
(17,453
)
 
(19,726
)
Average tangible common equity (non-GAAP)
(b)
$
5,960,671

 
$
5,734,155

 
$
5,621,658

 
 
 
 
 
 
 
Number of days in quarter
(c)
92

 
92

 
92

Number of days in year
(d)
366

 
365

 
365

 
 
 
 
 
 
 
Tangible return on average tangible common equity (non-GAAP)
(a/b/c)*d
7.88
%
 
6.20
%
 
6.05
%
2. Total shareholders’ equity to tangible equity and tangible common equity
This Form 10-Q presents “tangible equity” and “tangible common equity” which excludes goodwill and core deposit and other intangibles for both measures and preferred stock for tangible common equity.
TANGIBLE EQUITY (NON-GAAP) AND TANGIBLE COMMON EQUITY (NON-GAAP)
(Amounts in thousands)
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
 
 
 
 
 
 
 
Total shareholders’ equity (GAAP)
 
$
7,679,307

 
$
7,507,519

 
$
7,638,095

Goodwill
 
(1,014,129
)
 
(1,014,129
)
 
(1,014,129
)
Core deposit and other intangibles
 
(10,329
)
 
(16,272
)
 
(18,546
)
Tangible equity (non-GAAP)
(a)
6,654,849

 
6,477,118

 
6,605,420

Preferred stock
 
(709,601
)
 
(828,490
)
 
(1,004,159
)
Tangible common equity (non-GAAP)
(b)
$
5,945,248

 
$
5,648,628

 
$
5,601,261

 
 
 
 
 
 
 
Total assets (GAAP)
 
$
61,038,860

 
$
59,664,543

 
$
58,405,718

Goodwill
 
(1,014,129
)
 
(1,014,129
)
 
(1,014,129
)
Core deposit and other intangibles
 
(10,329
)
 
(16,272
)
 
(18,546
)
Tangible assets (non-GAAP)
(c)
$
60,014,402

 
$
58,634,142

 
$
57,373,043

 
 
 
 
 
 
 
Common shares outstanding
(d)
203,850

 
204,417

 
204,279

Tangible equity ratio
(a/c)
11.09
%
 
11.05
%
 
11.51
%
Tangible common equity ratio
(b/c)
9.91
%
 
9.63
%
 
9.76
%
Tangible book value per common share
(b/d)
$
29.16

 
$
27.63

 
$
27.42


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3. Efficiency ratio and adjusted pre-provision net revenue
This Form 10-Q presents calculations of “efficiency ratio” and adjusted PPNR that include adjustments for certain line items and amounts in noninterest expense and noninterest income. The following schedule provides a reconciliation of noninterest expense (GAAP), taxable-equivalent net interest income (GAAP) and noninterest income (GAAP) to the efficiency ratio (non-GAAP) and adjusted PPNR (non-GAAP). The schedule also shows the efficiency ratio and adjusted PPNR for six-month time periods, in addition to the three-month periods, in order to illustrate the trend over longer periods as quarterly fluctuations may not be reflective of the prevailing trend, while annual results may not accurately reflect the pace of change. We show a nine-month efficiency ratio to illustrate the progress towards our annual target.
EFFICIENCY RATIO AND ADJUSTED PRE-PROVISION NET REVENUE
(Amounts in thousands)
 
Three Months Ended
 
Six Months Ended
 
Nine Months Ended
 
September 30,
2016
 
June 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense (GAAP)
(a)
$
403,292

 
$
381,894

 
$
391,280

 
$
785,186

 
$
790,277

 
$
1,180,759

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Severance costs
 
481

 
201

 
3,464

 
682

 
5,171

 
4,153

Other real estate expense, net
 
(137
)
 
(527
)
 
(40
)
 
(664
)
 
(485
)
 
(1,993
)
Provision for unfunded lending commitments
 
(3,165
)
 
(4,246
)
 
1,428

 
(7,411
)
 
(898
)
 
(13,223
)
Debt extinguishment cost
 

 
106

 

 
106

 
2,395

 
353

Amortization of core deposit and other intangibles
 
1,951

 
1,979

 
2,298

 
3,930

 
4,616

 
5,944

Restructuring costs
 
356

 
47

 
1,630

 
403

 
2,309

 
1,399

Total adjustments
(b)
(514
)
 
(2,440
)
 
8,780

 
(2,954
)
 
13,108

 
(3,367
)
Adjusted noninterest expense
(non-GAAP)
(a-b)=(c)
$
403,806

 
$
384,334

 
$
382,500

 
$
788,140

 
$
777,169

 
$
1,184,126

Taxable-equivalent net interest income (GAAP)
(d)
$
475,699

 
$
470,913

 
$
429,782

 
$
946,612

 
$
857,797

 
$
1,404,854

Noninterest income (GAAP)
(e)
144,887

 
125,717

 
125,944

 
270,604

 
121,262

 
387,365

Combined income
(d+e)=(f)
620,586

 
596,630

 
555,726

 
1,217,216

 
979,059

 
1,792,219

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value and nonhedge derivative income (loss)
 
(184
)
 
(1,910
)
 
(1,555
)
 
(2,094
)
 
289

 
(4,679
)
Equity securities gains, net
 
8,441

 
2,709

 
3,630

 
11,150

 
8,469

 
10,600

Fixed income securities gains (losses), net
 
39

 
25

 
(53
)
 
64

 
(138,489
)
 
92

Total adjustments
(g)
8,296

 
824

 
2,022

 
9,120

 
(129,731
)
 
6,013

Adjusted taxable-equivalent revenue (non-GAAP)
(f-g)=(h)
$
612,290

 
$
595,806

 
$
553,704

 
$
1,208,096

 
$
1,108,790

 
$
1,786,206

Adjusted pre-provision net revenue (PPNR)
(h-c)
$
208,484

 
$
211,472

 
$
171,204

 
$
419,956

 
$
331,621

 
$
602,080

Efficiency ratio 1
(c/h)
66.0
%
 
64.5
%
 
69.1
%
 
65.2
%
 
70.1
%
 
66.3
%
1During the first quarter of 2016, to be consistent with industry practice, we reclassified bankcard rewards expense from noninterest expense into noninterest income in order to offset the associated revenue (interchange fees) to align with industry practice. This reclassification within other service charges, commission and fees lowered noninterest income in the first quarter of 2016 (and also decreased other noninterest expense by the same amount). For comparative purposes we also adjusted prior period amounts. This reclassification had no impact on net income.
The identified adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are included where applicable in financial results or in the balance sheet presented in accordance with GAAP. We consider these adjustments to be relevant to ongoing operating results and financial position.
We believe that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for period-to-period and company-to-company comparisons, which will assist

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regulators, investors, and analysts in analyzing our operating results or financial position and in predicting future performance. These non-GAAP financial measures are used by management to assess the performance of the Company’s business or its financial position for evaluating bank reporting segment performance, for presentations of our performance to investors, and for other reasons as may be requested by investors and analysts. We further believe that presenting these non-GAAP financial measures will permit investors and analysts to assess our performance on the same basis as that applied by management.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate and market risks are among the most significant risks regularly undertaken by us, and they are closely monitored as previously discussed. A discussion regarding our management of interest rate and market risk is included in the section entitled “Interest Rate and Market Risk Management” in this Form 10-Q.
ITEM 4.
CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2016. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016. There were no changes in the Company’s internal control over financial reporting during the third quarter of 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
The information contained in Note 11 of the Notes to Consolidated Financial Statements is incorporated by reference herein.
ITEM 1A.
RISK FACTORS
We believe there have been no material changes in the risk factors included in Zions Bancorporation’s 2015 Annual Report on Form 10-K.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following schedule summarizes the Company’s share repurchases for the third quarter of 2016:
SHARE REPURCHASES
Period
 
Total number
of shares
repurchased 1
 
Average
price paid
per share
 
Total number of shares
purchased as part of
publicly announced
plans or programs
 
Approximate dollar
value of shares that
may yet be purchased
under the plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July
 
 
1,224

 
 
$
24.92

 
 

 
 
 
$
180,000,000

 
August
 
 
822

 
 
28.34

 
 

 
 
 
180,000,000

 
September
 
 
1,471,644

 
 
30.64

 
 
1,468,800

 
 
 
135,000,000

 
Third quarter
 
 
1,473,690

 
 
30.63

 
 
1,468,800

 
 
 
 
 
1 
Represents common shares acquired from employees in connection with our stock compensation plan. Shares were acquired from employees to pay for their payroll taxes and stock option exercise cost upon the vesting of restricted stock and restricted stock units, and the exercise of stock options, under provisions of an employee share-based compensation plan.


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ITEM 6.
EXHIBITS
a)Exhibits
Exhibit
Number
 
Description
 
 
 
 
 
3.1
 
Restated Articles of Incorporation of Zions Bancorporation dated July 8, 2014, incorporated by reference to Exhibit 3.1 of Form 8-K/A filed on July 18, 2014.
*
 
 
 
 
3.2
 
Restated Bylaws of Zions Bancorporation dated February 27, 2015, incorporated by reference to Exhibit 3.2 of Form 10-Q for the quarter ended March 31, 2015.
*
 
 
 
 
10.1
 
Zions Bancorporation 2016-2018 Value Sharing Plan (filed herewith).
 
 
 
 
 
31.1
 
Certification by Chief Executive Officer required by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (filed herewith).
 
 
 
 
 
31.2
 
Certification by Chief Financial Officer required by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (filed herewith).
 
 
 
 
 
32
 
Certification by Chief Executive Officer and Chief Financial Officer required by Sections 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 (15 U.S.C. 78m) and 18 U.S.C. Section 1350 (furnished herewith).
 
 
 
 
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, (ii) the Consolidated Statements of Income for the three months ended September 30, 2016 and September 30, 2015 and the nine months ended September 30, 2016 and September 30, 2015, (iii) the Consolidated Statements of Comprehensive Income for the three months ended September 30, 2016 and September 30, 2015 and the nine months ended September 30, 2016 and September 30, 2015, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2016 and September 30, 2015, (v) the Consolidated Statements of Cash Flows for the three months ended September 30, 2016 and September 30, 2015 and the nine months ended September 30, 2016 and September 30, 2015, and (vi) the Notes to Consolidated Financial Statements (filed herewith).
 
* Incorporated by reference


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    
 
ZIONS BANCORPORATION
 
/s/ Harris H. Simmons
Harris H. Simmons, Chairman and
Chief Executive Officer
 
/s/ Paul E. Burdiss
Paul E. Burdiss, Executive Vice President and Chief Financial Officer
Date: November 7, 2016

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