Company Quick10K Filing
Quick10K
Zions Bancorporation
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$51.28 188 $9,620
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-22 Earnings, Exhibits
8-K 2018-11-07 Other Events
8-K 2018-10-22 Earnings, Exhibits
8-K 2018-09-30 M&A, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Control, Officers, Other Events, Exhibits
8-K 2018-09-14 Shareholder Vote
8-K 2018-09-12 Other Events, Exhibits
8-K 2018-07-23 Earnings, Other Events, Exhibits
8-K 2018-07-23 Earnings, Exhibits
8-K 2018-07-18 Other Events, Exhibits
8-K 2018-06-21 Regulation FD, Exhibits
8-K 2018-06-06 Shareholder Vote
8-K 2018-05-14 Regulation FD, Exhibits
8-K 2018-04-23 Earnings, Exhibits
8-K 2018-04-10 Enter Agreement, Regulation FD, Exhibits
8-K 2018-01-22 Earnings, Exhibits
HBAN Huntington Bancshares
FFBC First Financial Bancorp
UCBI United Community Banks
TCBK Trico Bancshares
GBNK Guaranty Bancorp
MSBI Midland States Bancorp
CZNC Citizens & Northern
MFSF Mutualfirst Financial
INBK First Internet Bancorp
SSFN Stewardship Financial
ZION 2018-09-30
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 1. Financial Statements (Unaudited)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-4.3 exh43firstamendmenttowarra.htm
EX-10.1 exh101thirdamendmenttopens.htm
EX-10.2 exh102seventhamendmenttotr.htm
EX-10.3 exh103eighthamendmenttopay.htm
EX-31.1 exh311certofceo10-q20180930.htm
EX-31.2 exh312certofcfo10-q20180930.htm
EX-32 exh32certofceocfo10-q20180.htm

Zions Bancorporation Earnings 2018-09-30

ZION 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 zion-20180930x10xq.htm 10-Q 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, 2018
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, NATIONAL ASSOCIATION
(Exact name of registrant as specified in its charter)
UNITED STATES OF AMERICA
87-0189025
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
One South Main
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock ($0.001 par value) outstanding at October 31, 2018
192,185,109 shares

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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Table of Contents


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

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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

PART I.
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements in this Quarterly Report on Form 10-Q that are based on other than historical information, or that express the Bank’s expectations regarding future events or determinations, 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, National Association and its subsidiaries (collectively “Zions Bancorporation, N.A.,” “the Bank,” “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,” and the negative thereof and similar words and expressions.
Zions Bancorporation, National Association is the successor to the merger of Zions Bancorporation into ZB, N.A. on September 30, 2018. References to “Zions Bancorporation, N.A.,” “the Bank,” “we,” “our,” and “us” are intended to refer to Zions Bancorporation and its subsidiaries for periods prior to the merger and to Zions Bancorporation, National Association, and its subsidiaries for periods on and after the merger.
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 by their nature address matters that are, to different degrees, uncertain, including without limitation, future financial and operating results. 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. Important risk factors that may cause such material differences include, but are not limited to:
the Bank’s ability to successfully execute its business plans, manage its risks, and achieve its objectives, including its operating leverage goals and its capital plan;
risks and uncertainties related to the ability to obtain shareholder and regulatory approvals, or the possibility that such approvals may be delayed;
changes in local, national and international political and economic conditions, including without limitation the political and economic effects of the economic and fiscal imbalance in the United States (“U.S.”) 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 Bank conducts its operations, including without limitation rates of business formation and growth, commercial and residential real estate development, real estate prices, agricultural-related commodity prices, and oil and gas-related commodity prices;
changes in markets for equity, fixed income, commercial paper and other securities, commodities, including availability, market liquidity levels, and pricing;
any impairment of our goodwill or other intangibles, or any adjustment of valuation allowances on our deferred tax assets due to adverse changes in the economic environment, declining operations of the reporting unit, or a change to the corporate statutory tax rate or other similar changes if and as implemented by local and national governments, or other factors;
changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;

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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

the rate of change of the Bank’s interest-sensitive assets and liabilities relative to changes in benchmark interest rates;
the impact of acquisitions, dispositions, and corporate restructurings;
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 United States Department of Treasury, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (“FDIC”), the Securities and Exchange Commission, and the Consumer Financial Protection Bureau (“CFPB”);
the impact of executive compensation rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and banking regulations, which may impact the ability of the Bank 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, 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;
new legal claims against the Bank, 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;
economies of scale attendant to the development of digital and other technologies by much larger bank and non-bank competitors, and the possible entry of very large technology “platform” companies into the financial services business;
inflation and deflation;
the Bank’s implementation of new technologies;
the Bank’s ability to develop and maintain secure and reliable information technology systems;
legislation or regulatory changes which adversely affect the Bank’s operations or business;
the Bank’s ability to comply with applicable laws and regulations;
changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board 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 Bank 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
ATM
Automated Teller Machine
AFS
Available-for-Sale
bps
basis points
ALCO
Asset/Liability Committee
CB&T
California Bank & Trust, a division of Zions Bancorporation, National Association
ALLL
Allowance for Loan and Lease Losses
CFPB
Consumer Financial Protection Bureau
Amegy
Amegy Bank, a division of Zions Bancorporation, National Association
CLTV
Combined Loan-to-Value Ratio
AOCI
Accumulated Other Comprehensive Income
CRE
Commercial Real Estate
ASC
Accounting Standards Codification
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
ASU
Accounting Standards Update
DTA
Deferred Tax Asset

4


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

EaR
Earnings at Risk
OREO
Other Real Estate Owned
ERM
Enterprise Risk Management
OTTI
Other-Than-Temporary Impairment
EVE
Economic Value of Equity at Risk
PAGA
Private Attorney General Act
FAMC
Federal Agricultural Mortgage Corporation, or “Farmer Mac”
PEI
Private Equity Investment
FDIC
Federal Deposit Insurance Corporation
PPNR
Pre-provision Net Revenue
FTP
Funds Transfer Pricing
ROC
Risk Oversight Committee
FHLB
Federal Home Loan Bank
RULC
Reserve for Unfunded Lending Commitments
FRB
Federal Reserve Board
S&P
Standard and Poor's
GAAP
Generally Accepted Accounting Principles
SBA
Small Business Administration
HECL
Home Equity Credit Line
SBIC
Small Business Investment Company
HTM
Held-to-Maturity
TARP
Troubled Asset Relief Program
IMG
International Manufacturing Group
TCBW
The Commerce Bank of Washington, a division of Zions Bancorporation, National Association
LIBOR
London Interbank Offered Rate
TDR
Troubled Debt Restructuring
Municipalities
State and Local Governments
Tier 1
Common Equity Tier 1 (Basel III)
NASDAQ
National Association of Securities Dealers Automated Quotations
Topic 606
ASC Topic 606, “Revenue from Contracts with Customers”
NBAZ
National Bank of Arizona, a division of Zions Bancorporation, National Association
U.S.
United States
NIM
Net Interest Margin
Vectra
Vectra Bank Colorado, a division of Zions Bancorporation, National Association
NSB
Nevada State Bank, a division of Zions Bancorporation, National Association
Zions Bancorporation, N.A.
Zions Bancorporation, National Association
OCC
Office of the Comptroller of the Currency
Zions Bank
Zions Bank, a division of Zions Bancorporation, National Association
OCI
Other Comprehensive Income
 
 
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Bank has made no significant changes in its critical accounting policies and significant estimates from those disclosed in its 2017 Annual Report on Form 10-K.
GAAP to NON-GAAP RECONCILIATIONS
This Form 10-Q presents non-GAAP financial measures, in addition to generally accepted accounting principles (“GAAP”) financial measures, to provide investors with additional information. The adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are presented in the following schedules. The Bank considers these adjustments to be relevant to ongoing operating results and provide a meaningful base for period-to-period and company-to-company comparisons. These non-GAAP financial measures are used by management to assess the performance and financial position of the Bank and for presentations of Bank performance to investors. The Bank further believes that presenting these non-GAAP financial measures will permit investors to assess the performance of the Bank on the same basis as that applied by management.
Non-GAAP financial measures have inherent limitations, and are not required to be uniformly applied by individual entities. Although non-GAAP financial measures are frequently used by stakeholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.

5


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

The following are non-GAAP financial measures presented in this Form 10-Q and a discussion of why management uses these non-GAAP measures:
Return on Average Tangible Common Equity – this schedule also includes “net earnings applicable to common shareholders, excluding the effects of the adjustment, net of tax” and “average tangible common equity.” Return on average tangible common equity is a non-GAAP financial measure that management believes provides useful information about the Bank’s use of shareholders’ equity. Management believes the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income.
Tangible Equity Ratio, Tangible Common Equity Ratio, and Tangible Book Value per Common Share – this schedule also includes “tangible equity,” “tangible common equity,” and “tangible assets.” Tangible equity ratio, tangible common equity ratio, and tangible book value per common share are non-GAAP financial measures that management believes provides additional useful information about the levels of tangible assets and tangible equity between each other and in relation to outstanding shares of common stock. Management believes the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income.
Efficiency Ratio – this schedule also includes “adjusted noninterest expense,” “taxable-equivalent net interest income,” “adjusted taxable-equivalent revenue,” and “adjusted pre-provision net revenue (“PPNR”).” The methodology of determining the efficiency ratio may differ among companies. Management makes adjustments to exclude certain items as identified in the subsequent schedule which it believes allows for more consistent comparability among periods. Management believes the efficiency ratio provides useful information regarding the cost of generating revenue. Adjusted noninterest expense provides a measure as to how well the Bank is managing its expenses, and adjusted PPNR enables management and others to assess the Bank’s ability to generate capital to cover credit losses through a credit cycle. Taxable-equivalent net interest income allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources.
RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)
 
 
Three Months Ended
(Dollar amounts in millions)
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
 
September 30,
2017
 
 
 
 
 
 
 
 
 
Net earnings applicable to common shareholders (GAAP)
 
$
215

 
$
187

 
$
231

 
$
152

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

 

 

 
1

Net earnings applicable to common shareholders, excluding the effects of the adjustment, net of tax (non-GAAP)
(a)
$
215

 
$
187

 
$
231

 
$
153

Average common equity (GAAP)
 
$
7,024

 
$
7,072

 
$
7,061

 
$
7,230

Average goodwill and intangibles
 
(1,015
)
 
(1,016
)
 
(1,016
)
 
(1,018
)
Average tangible common equity (non-GAAP)
(b)
$
6,009

 
$
6,056

 
$
6,045

 
$
6,212

Number of days in quarter
(c)
92

 
91

 
90

 
92

Number of days in year
(d)
365

 
365

 
365

 
365

Return on average tangible common equity (non-GAAP)
(a/b/c)*d
14.2
%
 
12.4
%
 
15.5
%
 
9.8
%

6


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

TANGIBLE EQUITY (NON-GAAP) AND TANGIBLE COMMON EQUITY (NON-GAAP)
(Dollar amounts in millions, except per share amounts)
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
 
September 30,
2017
 
 
 
 
 
 
 
 
 
Total shareholders’ equity (GAAP)
 
$
7,553

 
$
7,621

 
$
7,644

 
$
7,761

Goodwill and intangible
 
(1,015
)
 
(1,015
)
 
(1,016
)
 
(1,017
)
Tangible equity (non-GAAP)
(a)
6,538

 
6,606

 
6,628

 
6,744

Preferred stock
 
(566
)
 
(566
)
 
(566
)
 
(566
)
Tangible common equity (non-GAAP)
(b)
$
5,972

 
$
6,040

 
$
6,062

 
$
6,178

Total assets (GAAP)
 
$
66,731

 
$
66,457

 
$
66,481

 
$
65,564

Goodwill and intangible
 
(1,015
)
 
(1,015
)
 
(1,016
)
 
(1,017
)
Tangible assets (non-GAAP)
(c)
$
65,716

 
$
65,442

 
$
65,465

 
$
64,547

Common shares outstanding (thousands)
(d)
192,169

 
195,392

 
197,050

 
199,712

Tangible equity ratio (non-GAAP)
(a/c)
9.95
%
 
10.09
%
 
10.12
%
 
10.45
%
Tangible common equity ratio (non-GAAP)
(b/c)
9.09
%
 
9.23
%
 
9.26
%
 
9.57
%
Tangible book value per common share (non-GAAP)
(b/d)
$
31.08

 
$
30.91

 
$
30.76

 
$
30.93

EFFICIENCY RATIO (NON-GAAP) AND ADJUSTED PRE-PROVISION NET REVENUE (NON-GAAP)
(Dollar amounts in millions)
 
Three Months Ended
 
Nine Months Ended
 
Year Ended
 
September 30,
2018
 
June 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense (GAAP)
(a)
$
420

 
$
428

 
$
413

 
$
1,259

 
$
1,232

 
$
1,649

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Severance costs
 
2

 
1

 
1

 
1

 
6

 
7

Other real estate expense, net
 
1

 

 
(1
)
 
1

 
(1
)
 
(1
)
Provision for unfunded lending commitments
 

 
7

 
(4
)
 

 
(6
)
 
(7
)
Amortization of core deposit and other intangibles
 

 

 
2

 
1

 
5

 
6

Restructuring costs
 
1

 

 
1

 
1

 
3

 
4

Total adjustments
(b)
4

 
8

 
(1
)
 
4

 
7

 
9

Adjusted noninterest expense (non-GAAP)
(a-b)=
(c)
$
416

 
$
420

 
$
414

 
$
1,255

 
$
1,225

 
$
1,640

Net interest income (GAAP)
(d)
$
565

 
$
548

 
$
522

 
$
1,654

 
$
1,539

 
$
2,065

Fully taxable-equivalent adjustments
(e)
5

 
5


9

 
16

 
26

 
35

Taxable-equivalent net interest income (non-GAAP)1
(d+e)=f
570

 
553

 
531

 
1,670

 
1,565

 
2,100

Noninterest income (GAAP)
g
136

 
138

 
139

 
412

 
404

 
544

Combined income (non-GAAP)
(f+g)=
(h)
706

 
691

 
670

 
2,082

 
1,969

 
2,644

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value and nonhedge derivative income (loss)
 

 

 

 
2

 
(1
)
 
(2
)
Securities gains (losses), net
 
(1
)
 
1

 
5

 
(1
)
 
13

 
14

Total adjustments
(i)
(1
)
 
1

 
5

 
1

 
12

 
12

Adjusted taxable-equivalent revenue (non-GAAP)
(h-i)=
(j)
$
707

 
$
690

 
$
665

 
$
2,081

 
$
1,957

 
$
2,632

Pre-provision net revenue (PPNR)
(h)-(a)
$
286

 
$
263

 
$
257

 
$
823

 
$
737

 
$
995

Adjusted PPNR (non-GAAP)
(j-c)
291

 
270

 
251

 
826

 
732

 
992

Efficiency ratio (non-GAAP)
(c/j)
58.8
%
 
60.9
%
 
62.3
%
 
60.3
%
 
62.6
%
 
62.3
%

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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

RESULTS OF OPERATIONS
Executive Summary
The Bank reported net earnings applicable to common shareholders of $215 million, or $1.04 per diluted common share for the third quarter of 2018, compared with net earnings applicable to common shareholders of $152 million, or $0.72 per diluted common share for the third quarter of 2017, and $187 million, or $0.89 per diluted common share for the second quarter of 2018. The financial performance in the third quarter of 2018 reflects strong net interest income, moderate customer-related fee income growth, progress on key initiatives, including expense control, continued strong credit quality; and modest linked-quarter loan growth.
Net income in the third quarter of 2018 increased from the third quarter of 2017 primarily due to a $43 million increase in net interest income, a $16 million decrease in the provision for loan losses, and a $14 million decrease in income taxes, partially offset by a $7 million increase in noninterest expense. The market value of the Bank’s Small Business Investment Company (“SBIC”) decreased by $7 million from the third quarter of 2017 to the third quarter of 2018.
Net interest income increased from the third quarter of 2017 to the third quarter of 2018 due to increases in short-term interest rates that positively impacted loan yields and growth in our lending portfolio, partially offset by an increase in interest expense. The provision for loan losses decreased from $5 million in the third quarter of 2017 to a provision of $(11) million in the third quarter of 2018 primarily due to continued credit quality improvement. When comparing the third quarter of 2018 to the third quarter of 2017, customer-related fees increased by 2%.
Highlights from the Third Quarter of 2018
Net interest income, which is more than three-quarters of our revenue, improved by $43 million from $522 million in the third quarter of 2017, and by $17 million from $548 million in the second quarter of 2018, to $565 million in the third quarter of 2018. The increase from both prior periods was due to increases in short-term interest rates that positively impacted loan yields and growth in consumer and commercial loans, partially offset by an increase in interest expense. Net Interest Margin (“NIM”) was 3.63% in the third quarter of 2018 compared with 3.45% in the third quarter of 2017 and 3.56% in the second quarter of 2018. For more discussion on the changes in net interest income and NIM, including the positive impact of interest income recoveries, see “Net Interest Income” and “Net Interest Margin and Interest Rate Spreads.”
Adjusted PPNR of $291 million for the third quarter of 2018 was up $40 million, or 16%, from the third quarter of 2017. The current year period included $3 million of interest income recoveries of at least $1 million per loan, while there were no such recoveries in the same prior year period. Adjusted for these interest income recoveries, the increase in adjusted PPNR would be 15%. The increase in PPNR reflects operating leverage improvement resulting from moderate loan growth and increases in short-term interest rates, partially offset by increased interest expense and noninterest expense primarily from increased salaries and employee benefits. See “Noninterest Expense” for a discussion regarding the increased salary and employee benefits expense. The Bank’s efficiency ratio was 58.8% in the third quarter of 2018 compared with 62.3% in the third quarter of 2017 and 60.9% in the second quarter of 2018. See “GAAP to Non-GAAP Reconciliations” on page 5 for more information regarding the calculation of adjusted PPNR.
Our average loan portfolio increased $1.5 billion, or 4%, since the third quarter of 2017. We have seen widespread growth across most products and geographies, with particular strength in 1-4 family residential, municipal, and owner-occupied lending. Term commercial real estate (“CRE”) loans continued to decline slightly from the prior year, reflecting heightened levels of payoffs and underwriting restraint in a highly competitive lending market.
Asset quality has continued to improve during the past several quarters. Credit quality in the oil and gas-related portfolio continues to strengthen and it has remained strong in the rest of the lending portfolio. Overall, from the third quarter of 2017 to the third quarter of 2018, criticized, classified, and nonaccrual loans declined by $585 million, $464 million, and $177 million, respectively.

8


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

In a rising interest rate environment, our average noninterest-bearing demand deposits increased $0.4 billion from $23.6 billion in the second quarter of 2018 to $24.0 billion in the third quarter of 2018, and comprised approximately 45% of average total deposits for both the second and third quarters of 2018.
We continue to increase the return on- and of- capital. Return on average tangible common equity was 14.2% for the third quarter of 2018, up 440 basis points (“bps”) from the same prior year period. Our return on average assets increased by 36 bps during the same period. Regarding the return of capital, during the third quarter of 2018, the Bank repurchased 3.5 million shares of common stock for $185 million, which is equivalent to 1.8% of common stock outstanding as of June 30, 2018. During the last 12 months the Bank has repurchased a total of 10.1 million shares of common stock for $535 million, which is equivalent to 5.1% of common stock outstanding as of September 30, 2017. Dividends per common share were $0.30 in the third quarter of 2018, compared with $0.12 for the third quarter of 2017. In October 2018, the Bank announced that its board of directors declared a regular quarterly dividend of $0.30 per common share, payable November 21, 2018 to shareholders of record on November 14, 2018. Additionally, the Board approved a plan to repurchase $250 million of common shares during the fourth quarter of 2018. See “Capital Management” on page 32 for more information regarding the Bank’s capital plan.
On September 30, 2018, the Bank completed the merger of Zions Bancorporation, its former bank holding company, with, and into, the Bank formerly known as ZB, N.A., in order to further reduce organizational complexity. The restructuring eliminated the bank holding company structure and associated regulatory framework, and resulted in ZB, N.A. being renamed Zions Bancorporation, National Association and becoming the top-level entity within our corporate structure. The merger is expected to result in the elimination of duplicative regulatory efforts, leaving the OCC as the Bank’s primary regulator. As a result of the Financial Stability Oversight Council’s action on September 12, 2018 and the merger of the holding company on September 30, 2018, the Bank is no longer considered a systemically important financial institution under the Dodd-Frank Act. See “Capital Management” on page 32 for more information regarding the merger.
Areas of focus for 2018
In 2018, we are focused on ongoing initiatives related to Bank profitability, including returns on equity. Both our profitability and returns on equity have improved in the third quarter of 2018 when compared with the third quarter of 2017 and the second quarter of 2018. We continue to implement technology upgrades and process simplification to ensure current and future performance. See “Areas of focus for 2018” in our 2017 Annual Report on Form 10-K for a discussion of the major areas of emphasis in 2018.
Net Interest Income
Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income increased to $565 million in the third quarter of 2018 from $522 million in the third quarter of 2017. The $43 million, or 8%, increase in net interest income was primarily due to a $69 million increase in interest and fees on loans, resulting from increases in short-term interest rates and loan growth in consumer and commercial loans, partially offset by an increase in interest expense. Interest income in the third quarter of 2018 was positively impacted by $3 million of interest income recoveries of at least $1 million per loan, while there were no such recoveries in the same prior year period. Adjusting for these interest income recoveries, net interest income would have increased by $40 million.
Interest expense increased $31 million from the third quarter of 2017 to the third quarter of 2018 due to a $23 million increase in interest on deposits due to higher rates paid and an $8 million increase in interest on short- and long-term borrowings. We have remained disciplined in our deposit pricing, as over the past twelve months the Federal Reserve has increased the overnight benchmark Federal Funds rate by 100 bps, while the rate paid on the Bank’s interest-bearing deposits increased 31 bps and the rate paid on total deposits increased 16 bps.
Net Interest Margin and Interest Rate Spreads
The NIM was 3.63% and 3.45% for the third quarters of 2018 and 2017, respectively, and 3.56% for the second quarter of 2018. Excluding the effect of the previously mentioned interest income recoveries and adjusting for the

9


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

effect of the change to the corporate tax rate on fully taxable-equivalent yields, the NIM would have been 3.61% for the third quarter of 2018 compared with 3.42% for the third quarter of 2017 and 3.55% for the second quarter of 2018. The NIM for the third quarter of 2018, compared with the same prior year period, benefited from the recent increases in short-term interest rates and deposit pricing discipline.
Average interest-earning assets increased $1.1 billion from the third quarter of 2017 to the third quarter of 2018, with average rates improving 39 bps. Adjusting for the same items as mentioned previously, the yield on interest-earning assets would have increased 40 bps from the same prior year period.
Average interest-bearing liabilities increased $1.0 billion in the third quarter of 2018 compared with the third quarter of 2017 as a result of increased interest-bearing deposits and long-term debt. During the third quarter of 2018 the Bank issued $500 million of senior long-term debt to fund some of its balance sheet growth. The average rate on interest-bearing liabilities increased 36 bps during from the third quarter of 2017 to the third quarter of 2018 due to rising interest rates and increased rates paid on deposits.
The average loan portfolio increased $1.5 billion, or 4%, between the third quarter of 2017 and the third quarter of 2018. Most of this growth was in 1-4 family residential, municipal, and owner-occupied loans. The average loan yield increased 44 bps over the same period, with increases in the average rates for commercial, CRE, and consumer loans of 52 bps, 55 bps, and 21 bps, respectively. Benchmark interest rates have increased several times beginning in the fourth quarter of 2015, which has had a positive impact on NIM and spreads, as our earning assets generally reprice quicker than our funding sources. A portion of our variable-rate loans were not affected by these changes primarily due to having longer reset frequencies, or because a substantial portion of our earning assets are tied to longer-term rate indices. The longer-term rates were impacted by a relatively flat yield curve during the last several quarters. We expect overall loan growth to be slightly to moderately increasing.
Average available-for-sale (“AFS”) securities balances decreased $0.6 billion from the third quarter of 2017 to the third quarter of 2018. Yields on average AFS securities increased slightly by 8 bps over the same period. The increased yield was a result of rising market interest rates on variable-rate and recently purchased fixed-rate agency mortgage-backed securities.
Average noninterest-bearing demand deposits provided us with low cost funding and comprised approximately 45% and 46% of average total deposits for the third quarters of 2018 and 2017, respectively. Average total deposits were $53.6 billion for the third quarter of 2018 compared with $51.9 billion for the third quarter of 2017. Average interest-bearing deposits were $29.6 billion in the third quarter of 2018, compared with $28.1 billion for the same prior year period, and the average rate paid increased 31 bps, which was generally a modest increase when compared with the industry. Although we consider a wide variety of sources when determining our funding needs, we benefit from access to deposits from a significant number of small to mid-sized business customers, particularly noninterest-bearing deposits, that provide us with a low cost of funds and have a positive impact on our NIM. Further information regarding deposit assumptions is discussed in “Interest Rate and Market Risk Management” on page 26.
Average short-term borrowings decreased $0.7 billion compared with the same prior year period and the average interest rate paid increased by 92 bps as a result of rising short-term interest rates. During the third quarter of 2018 we issued $500 million of senior long-term debt which reduced the need for short-term borrowing.
The rate paid on total deposits and interest-bearing liabilities increased 22 bps from 0.23% for the third quarter of 2017 to 0.45% for the third quarter of 2018. Also, the total cost of deposits for the third quarter of 2018 was 0.28%, compared with 0.12% for the third quarter of 2017. These increases were primarily due to increases in short-term interest rates.
The NIM was 3.59% and 3.45% for the first nine months of 2018 and 2017, respectively. The increase in the year-to-date NIM was also due to the recent increases in short-term interest rates and deposit pricing discipline.

10


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

The spread on average interest-bearing funds was 3.29% and 3.26% for the third quarters of 2018 and 2017, respectively, and 3.29% and 3.28% for the first nine months of 2018 and 2017, respectively. The spread on average interest-bearing funds for these periods was affected by the same factors that had an impact on the NIM.
We expect the mix of interest-earning assets to continue to change over the next several quarters primarily due to growth in commercial loans, including municipal loans, and modest growth in CRE construction loans.
Interest rate spreads and margin are impacted by the mix of assets we hold, the composition of our loan and securities portfolios and the type of funding used. Assuming no additional increases in the Federal Funds rate or prepayment speeds of securities purchased at a premium, we expect the yield on the securities portfolio to increase slightly, as the cash flow from the portfolio is redeployed into securities with yields that are accretive to the overall portfolio.
Our estimates of the Bank’s interest rate risk position are highly dependent upon a number of assumptions regarding the repricing behavior of various deposit and loan types in response to changes in both short-term and long-term interest rates, balance sheet composition, and other modeling assumptions, as well as the actions of competitors and customers in response to those changes. Further detail on interest rate risk is discussed in “Interest Rate and Market Risk Management” on page 26.
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.

11


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
(Unaudited)
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
(Dollar amounts in millions)
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
 
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Money market investments
$
1,327

 
$
8

 
2.25
%
 
$
1,246

 
$
5

 
1.44
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
848

 
7

 
3.52

 
750

 
7

 
3.96

Available-for-sale
14,592

 
81

 
2.20

 
15,197

 
81

 
2.12

Trading account
65

 
1

 
3.43

 
43

 

 
3.73

Total securities 2
15,505

 
89

 
2.28

 
15,990

 
88

 
2.21

Loans held for sale
53

 
1

 
4.82

 
52

 
1

 
4.29

Loans and leases 3
 
 
 
 
 
 
 
 
 
 
 
Commercial
23,263

 
286

 
4.88

 
22,261

 
245

 
4.36

Commercial real estate
11,009

 
139

 
5.01

 
11,192

 
126

 
4.46

Consumer
11,096

 
113

 
4.07

 
10,379

 
101

 
3.86

Total loans and leases
45,368

 
538

 
4.71

 
43,832

 
472

 
4.27

Total interest-earning assets
62,253

 
636

 
4.06

 
61,120

 
566

 
3.67

Cash and due from banks
516

 
 
 
 
 
767

 
 
 
 
Allowance for loan losses
(489
)
 
 
 
 
 
(540
)
 
 
 
 
Goodwill and intangibles
1,015

 
 
 
 
 
1,018

 
 
 
 
Other assets
3,079

 
 
 
 
 
2,974

 
 
 
 
Total assets
$
66,374

 
 
 
 
 
$
65,339

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings and money market
$
25,483

 
23

 
0.36
%
 
$
25,190

 
10

 
0.16
%
Time
4,118

 
15

 
1.49

 
2,933

 
5

 
0.70

Total interest-bearing deposits
29,601

 
38

 
0.52

 
28,123

 
15

 
0.21

Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and other short-term borrowings
3,917

 
21

 
2.09

 
4,609

 
14

 
1.17

Long-term debt
572

 
7

 
4.91

 
383

 
6

 
5.71

Total borrowed funds
4,489

 
28

 
2.45

 
4,992

 
20

 
1.52

Total interest-bearing liabilities
34,090

 
66

 
0.77

 
33,115

 
35

 
0.41

Noninterest-bearing deposits
23,974

 
 
 
 
 
23,798

 
 
 
 
Total deposits 4 and interest-bearing liabilities
58,064

 
66

 
0.45


56,913

 
35

 
0.23

Other liabilities
720

 
 
 
 
 
630

 
 
 
 
Total liabilities
58,784

 
 
 
 
 
57,543

 
 
 
 
Shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred equity
566

 
 
 
 
 
566

 
 
 
 
Common equity
7,024

 
 
 
 
 
7,230

 
 
 
 
Total shareholders’ equity
7,590

 
 
 
 
 
7,796

 
 
 
 
Total liabilities and shareholders’ equity
$
66,374

 
 
 
 
 
$
65,339

 
 
 
 
Spread on average interest-bearing funds
 
 
 
 
3.29
%
 
 
 
 
 
3.26
%
Taxable-equivalent net interest income and net yield on interest-earning assets
 
 
$
570

 
3.63
%
 
 
 
$
531

 
3.45
%
1 
Rates are calculated using amounts in thousands and taxable-equivalent rates used where applicable. The taxable-equivalent rates used are the rates that were applicable at the time of each respective reporting period.
2 
Quarter-to-date interest on total securities includes $35 million and $34 million of taxable equivalent premium amortization, as of September 30, 2018 and September 30, 2017, respectively.
3 
Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
4 The total cost of deposits, annualized, for September 30, 2018 and September 30, 2017 was 0.28% and 0.12%, respectively.

12


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
(Dollar amounts in millions)
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
 
Average
balance
 
Amount of
interest 1
 
Average
yield/rate
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Money market investments
$
1,379

 
$
20

 
1.98
%
 
$
1,598

 
$
14

 
1.15
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
806

 
22

 
3.55

 
795

 
23

 
3.94

Available-for-sale
14,760

 
240

 
2.17

 
14,873

 
236

 
2.12

Trading account
116

 
3

 
3.92

 
61

 
2

 
3.61

Total securities 2
15,682

 
265

 
2.26

 
15,729

 
261

 
2.22

Loans held for sale
59

 
2

 
4.31

 
95

 
2

 
3.42

Loans and leases 3
 
 
 
 
 
 
 
 
 
 
 
Commercial
23,193

 
825

 
4.75

 
21,920

 
712

 
4.34

Commercial real estate
11,049

 
403

 
4.88

 
11,222

 
377

 
4.49

Consumer
10,917

 
326

 
4.00

 
10,076

 
289

 
3.84

Total loans and leases
45,159

 
1,554

 
4.60

 
43,218

 
1,378

 
4.26

Total interest-earning assets
62,279

 
1,841

 
3.95

 
60,640

 
1,655

 
3.65

Cash and due from banks
551

 
 
 
 
 
844

 
 
 
 
Allowance for loan losses
(497
)
 
 
 
 
 
(551
)
 
 
 
 
Goodwill and intangibles
1,016

 
 
 
 
 
1,020

 
 
 
 
Other assets
3,066

 
 
 
 
 
2,967

 
 
 
 
Total assets
$
66,415

 
 
 
 
 
$
64,920

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings and money market
$
25,420

 
51

 
0.27
%
 
$
25,515

 
28

 
0.15
%
Time
3,738

 
36

 
1.27

 
2,946

 
15

 
0.65

Total interest-bearing deposits
29,158

 
87

 
0.40

 
28,461

 
43

 
0.20

Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and other short-term borrowings
4,844

 
66

 
1.82

 
3,951

 
29

 
0.98

Long-term debt
447

 
18

 
5.42

 
428

 
18

 
5.81

Total borrowed funds
5,291

 
84

 
2.12

 
4,379

 
47

 
1.45

Total interest-bearing liabilities
34,449

 
171

 
0.66

 
32,840

 
90

 
0.37

Noninterest-bearing deposits
23,669

 
 
 
 
 
23,694

 
 
 
 
Total deposits 4 and interest-bearing liabilities
58,118

 
171

 
0.39

 
56,534

 
90

 
0.21

Other liabilities
679

 
 
 
 
 
609

 
 
 
 
Total liabilities
58,797

 
 
 
 
 
57,143

 
 
 
 
Shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred equity
566

 
 
 
 
 
653

 
 
 
 
Common equity
7,052

 
 
 
 
 
7,124

 
 
 
 
Total shareholders’ equity
7,618

 
 
 
 
 
7,777

 
 
 
 
Total liabilities and shareholders’ equity
$
66,415

 
 
 
 
 
$
64,920

 
 
 
 
Spread on average interest-bearing funds
 
 
 
 
3.29
%
 
 
 
 
 
3.28
%
Taxable-equivalent net interest income and net yield on interest-earning assets
 
 
$
1,670

 
3.59
%
 
 
 
$
1,565

 
3.45
%
1 
Rates are calculated using amounts in thousands and taxable-equivalent rates used where applicable. The taxable-equivalent rates used are the rates that were applicable at the time of each respective reporting period.
2 
Year-to-date interest on total securities includes $104 million and $101 million of taxable equivalent premium amortization, as of September 30, 2018 and September 30, 2017, respectively.
3 
Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
4 The total cost of deposits, annualized, for September 30, 2018 and September 30, 2017 was 0.22% and 0.11%, respectively.

13


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

Provision for Credit Losses
The provision for credit losses is the combination of both the provision for loan losses and the provision for unfunded lending commitments. Note 6 of our 2017 Annual Report on Form 10-K and “Credit Risk Management” on page 20 contains information on how we determine the appropriate level for the allowance for loan and lease losses (“ALLL”) and the reserve for unfunded lending commitments (“RULC”).
The provision for loan losses was $(11) million in the third quarter of 2018, compared with $5 million in both the same prior year period and the second quarter of 2018. The $(11) million provision primarily reflects net recoveries and ongoing improvements of credit quality metrics in the entire loan portfolio, partially offset by increases in qualitative adjustments mostly related to economic uncertainty arising from tariffs and their impact on trade. Asset quality during the third quarter of 2018 continued to improve for the entire loan portfolio when compared with the third quarter of 2017, primarily due to continued improvements in the oil and gas-related portfolio. Classified and nonaccrual loans in the total portfolio declined by $464 million and $177 million, respectively, from the third quarter of 2017. During the third quarter of 2018, there were net recoveries of $1 million, compared with net charge-offs of $8 million during the third quarter of 2017.
The provision for loan losses was $(46) million during the first nine months of 2018, compared with $35 million during the first nine months of 2017. This decrease was primarily as a result of the previously mentioned improving credit quality, particularly in the oil and gas-related portfolio, and net recoveries.
During the third quarter of 2018, we did not record a provision for unfunded lending commitments, compared with a $(4) million provision in the third quarter of 2017. This increase was due to increased unfunded lending commitments, partially offset by credit quality improvement in the oil and gas-related portfolio. From quarter to quarter, the provision for unfunded lending commitments may be subject to sizable fluctuations due to changes in the timing and volume of loan commitments, originations, fundings, and changes in credit quality.
The allowance for credit losses (“ACL”), which is the combination of both the ALLL and the RULC, decreased $62 million, when compared with the third quarter of 2017. This was mainly due to the credit quality improvements described previously.
Noninterest Income
Noninterest income represents revenues we earn for products and services that have no associated interest rate or yield. We believe a subtotal of customer-related fees provides a better view of income over which we have more direct control. It excludes items such as dividends, insurance-related income, mark-to-market adjustments on certain derivatives, and securities gains and losses. For the third quarter of 2018, noninterest income decreased $3 million, or 2%, compared with the third quarter of 2017, primarily due to a $6 million decrease in net securities gains. The following schedule presents a comparison of the major components of noninterest income.
NONINTEREST INCOME
 
Three Months Ended
September 30,
 
Amount
change
 
Percent
change
 
Nine Months Ended
September 30,
 
Amount
change
 
Percent
change
(Dollar amounts in millions)
2018
 
2017
 
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and fees on deposit accounts
$
42

 
$
42

 
$

 
 %
 
$
125

 
$
127

 
$
(2
)
 
(2
)%
Other service charges, commissions and fees
59

 
55

 
4

 
7

 
168

 
160

 
8

 
5

Wealth management and trust income
12

 
11

 
1

 
9

 
38

 
30

 
8

 
27

Loan sales and servicing income
5

 
6

 
(1
)
 
(17
)
 
18

 
19

 
(1
)
 
(5
)
Capital markets and foreign exchange
7

 
8

 
(1
)
 
(13
)
 
23

 
21

 
2

 
10

Customer-related fees
125

 
122

 
3

 
2

 
372

 
357

 
15

 
4

Dividends and other investment income
11

 
9

 
2

 
22

 
34

 
31

 
3

 
10

Securities gains (losses), net
(1
)
 
5

 
(6
)
 
(120
)
 
(1
)
 
13

 
(14
)
 
(108
)
Other
1

 
3

 
(2
)
 
(67
)
 
7

 
3

 
4

 
133

Total noninterest income
$
136

 
$
139

 
$
(3
)
 
(2
)
 
$
412

 
$
404

 
$
8

 
2


14


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

In the third quarter of 2017 the Bank’s SBIC investments increased in market value compared with a slight decline in market value in the third quarter of 2018. This decrease in noninterest income was partially offset by a $3 million, or 2%, increase in customer-related fees, primarily related to increased loan syndication fees, bankcard fees, corporate investment services and wealth management income. Improvements in platform and product simplifications contributed to this increase. We have experienced a decrease in mortgage fees due to higher interest rates resulting in lower origination and mortgage-related activity.
Customer-related fees increased $15 million, or 4% from the first nine months of 2017 to the first nine months of 2018. This increase was a result of the same factors as the increase from the third quarter of 2017 to the third quarter of 2018. Relative to third quarter of 2018 results, we expect customer-related fees to increase slightly over the next twelve months.
Noninterest Expense
Noninterest expense increased by $7 million, or 2%, from the third quarter of 2017 to the third quarter of 2018. The Bank remains focused on expense control efforts, while continuing to invest in technology and simplification initiatives. This 2% increase is within our targeted growth rate of low single-digit percentage range relative to the prior year.
The following schedule presents a comparison of the major components of noninterest expense.
NONINTEREST EXPENSE
 
Three Months Ended
September 30,
 
Amount
change
 
Percent
change
 
Nine Months Ended
September 30,
 
Amount
change
 
Percent
change
(Dollar amounts in millions)
2018
 
2017
 
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
$
264

 
$
251

 
$
13

 
5
 %
 
$
800

 
$
753

 
$
47

 
6
 %
Occupancy, net
33

 
35

 
(2
)
 
(6
)
 
96

 
101

 
(5
)
 
(5
)
Furniture, equipment and software, net
30

 
32

 
(2
)
 
(6
)
 
95

 
96

 
(1
)
 
(1
)
Other real estate expense, net
1

 
(1
)
 
2

 
200

 
1

 
(1
)
 
2

 
200

Credit-related expense
5

 
7

 
(2
)
 
(29
)
 
19

 
23

 
(4
)
 
(17
)
Provision for unfunded lending commitments

 
(4
)
 
4

 
100

 

 
(6
)
 
6

 
100

Professional and legal services
12

 
15

 
(3
)
 
(20
)
 
37

 
43

 
(6
)
 
(14
)
Advertising
8

 
6

 
2

 
33

 
20

 
17

 
3

 
18

FDIC premiums
18

 
15

 
3

 
20

 
44

 
40

 
4

 
10

Other
49

 
57

 
(8
)
 
(14
)
 
147

 
166

 
(19
)
 
(11
)
Total noninterest expense
$
420

 
$
413

 
$
7

 
2

 
$
1,259

 
$
1,232

 
$
27

 
2

Adjusted noninterest expense 1
$
416

 
$
414

 
$
2

 

 
$
1,255

 
$
1,225

 
$
30

 
2

1 For information on non-GAAP financial measures see “GAAP to Non-GAAP Reconciliations” on page 5
Salary and employee benefits expense was up $13 million in the third quarter of 2018 compared with the third quarter of 2017 primarily due to an $8 million increase in base salaries due to increased headcount and annual merit increases and a $2 million increase in incentive compensation. The provision for unfunded lending commitments increased by $4 million, primarily due to increased unfunded lending commitments that was partially offset by credit quality improvement in the oil and gas-related portfolio. For further information see “Provision for Credit Losses” on page 14. FDIC premiums increased due to a $4 million expense in the third quarter of 2018 that represents the cumulative effect of an adjustment related to the estimated uninsured deposits since the consolidation of bank charters. These increases in noninterest expense were partially offset by a $8 million decrease in other noninterest expense, primarily due to reduced operational losses, lower regulatory fees, and other miscellaneous expenses in the third quarter of 2018.
Net occupancy decreased by $5 million from the first nine months of 2017 to the first nine months of 2018 as additional rental income was received on a newly constructed building in Houston. Over the same year-to-date period, credit-related fees decreased by $4 million as a result of lower fees related to repossessions and professional and legal services decreased by $6 million as a result of a decrease in consulting fees. Other changes between the

15


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

first nine months of 2018 and 2017 are due to the same factors as for the changes between the third quarters of 2018 and 2017.
In October 2018, the Bank decided to terminate its pension plan subject to obtaining necessary regulatory approval. Completion of this termination is expected in early 2020. Plan participant benefits will not be disadvantaged because of this decision. At the time of final liquidation additional noninterest expense will be recognized for pension amounts remaining in other comprehensive income (“OCI”), as well as expense related to purchasing annuities for participants who elect that distribution method. The qualified pension OCI balance at September 30, 2018 was a $28 million loss before adjusting for tax effects. The expense related to purchasing annuities is highly dependent on individual participant elections between lump-sum distribution options and an annuity option, in addition to market competitiveness in the annuity bid process. The current estimate of this expense is $5 to $15 million, and is subject to change depending upon the previously mentioned factors.
Adjusted noninterest expense for the third quarter of 2018 increased $2 million, or less than 1%, to $416 million, compared with $414 million for the same prior year period. To arrive at adjusted noninterest expense, GAAP noninterest expense is adjusted to exclude certain expense items, which are the same as those items excluded in arriving at the efficiency ratio (see “GAAP to Non-GAAP Reconciliations” on page 5 for more information regarding the calculation of the efficiency ratio). Adjusted noninterest expense for the first nine months of 2018 increased by 2% from the first nine months of 2017 and we still expect adjusted noninterest expense for 2018 to experience an increase in the low single-digit percentage range relative to the prior year.
Income Taxes
Income tax expense for the third quarter of 2018 was $69 million compared with $83 million for the same prior year period. The effective income tax rates were 23.6% and 34.2% for the third quarters of 2018 and 2017, respectively. Income tax expense for the first nine months of 2018 was $195 million compared with $207 million for the first nine months of 2017. The effective tax rates for these year-to-date periods were 22.9% and 30.6%, respectively. Note 12 of the Notes to Consolidated Financial Statements contains additional information about the factors that influenced the income tax rates and information about deferred income tax assets and liabilities. The effective tax rate for 2018 is expected to be approximately 23%, including the effects of stock-based compensation.
Preferred Dividends
Preferred dividends were $8 million during both the third quarter of 2018 and the third quarter of 2017. Preferred dividends for the first nine months of 2018 decreased by $5 million compared with the first nine months of 2017. This decrease was a result of our redemption of all outstanding shares of our 7.9% Series F preferred stock during the third quarter of 2017. The total one-time reduction to net earnings applicable to common shareholders associated with the preferred stock redemption was $3 million.
BALANCE SHEET ANALYSIS
Interest-Earning Assets
Interest-earning assets are those assets that have interest rates or yields associated with them. One of our goals is to maintain a high level of interest-earning assets relative to total assets while keeping nonearning assets at a minimum. Interest-earning assets consist of money market investments, securities, loans, and leases.
Another goal is to maintain a higher-yielding mix of interest-earning assets, such as loans, relative to lower-yielding assets, while maintaining adequate levels of highly liquid assets. As a result of this goal we redeployed funds from lower-yielding money market investments, in addition to using wholesale borrowings, to purchase agency securities.
For information regarding the average balances of our interest-earning assets, the amount of revenue generated by them, and their respective yields, see the average balance sheet on page 12.

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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

Average interest-earning assets were $62.3 billion for the first nine months of 2018, compared with $60.6 billion for the first nine months of 2017. Average interest-earning assets as a percentage of total average assets for the first nine months of 2018 and 2017 were 94% and 93%, respectively.
Average loans were $45.2 billion and $43.2 billion for the first nine months of 2018 and 2017, respectively. Average loans as a percentage of total average assets for the first nine months of 2018 were 68%, compared with 67% in the same prior year period.
Average money market investments, consisting of interest-bearing deposits, federal funds sold, and security resell agreements, decreased by 14% to $1.4 billion for the first nine months of 2018, compared with $1.6 billion for the first nine months of 2017. Average securities remained stable for the first nine months of 2018, compared with the first nine months of 2017.
Investment Securities Portfolio
We invest in securities to actively manage liquidity and interest rate risk, in addition to generating revenue for the Bank. Refer to the “Liquidity Risk Management” section on page 30 for additional information on management of liquidity and funding. 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 3 of our 2017 Annual Report on Form 10-K.
INVESTMENT SECURITIES PORTFOLIO
 
September 30, 2018
 
December 31, 2017
(In millions)
Par value
 
Amortized
cost
 
Estimated
fair
value
 
Par value
 
Amortized
cost
 
Estimated
fair
value
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
751

 
$
751

 
$
734

 
$
771

 
$
770

 
$
762

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
25

 
25

 
25

 
25

 
25

 
25

U.S. Government agencies and corporations:
 
 
 
 
 
 
 
 
 
 
 
Agency securities
1,482

 
1,480

 
1,448

 
1,830

 
1,830

 
1,818

Agency guaranteed mortgage-backed securities
10,004

 
10,159

 
9,824

 
9,605

 
9,798

 
9,666

Small Business Administration loan-backed securities
1,888

 
2,069

 
2,020

 
2,007

 
2,227

 
2,222

Municipal securities
1,182

 
1,313

 
1,284

 
1,193

 
1,336

 
1,334

Other debt securities
25

 
25

 
24

 
25

 
25

 
24

Total available-for-sale debt securities
14,606

 
15,071

 
14,625

 
14,685

 
15,241

 
15,089

Money market mutual funds and other

 

 

 
72

 
72

 
72

Total available-for-sale
14,606

 
15,071

 
14,625

 
14,757

 
15,313

 
15,161

Total
$
15,357

 
$
15,822

 
$
15,359

 
$
15,528

 
$
16,083

 
$
15,923

The amortized cost of investment securities at September 30, 2018 decreased by 2% from the balances at December 31, 2017.
The investment securities portfolio includes $465 million of net premium that is distributed across various asset classes as illustrated in the preceding schedule. The purchase premiums and discounts for both held-to-maturity (“HTM”) and AFS securities are amortized and accreted at a constant effective yield to the contractual maturity date and no assumption is made concerning prepayments. As principal prepayments occur, the portion of the unamortized premium or discount associated with the principal reduction is recognized as interest income in the period the principal is reduced. For the nine months ended September 30, 2018, premium amortization reduced the yield on securities by 94 bps compared with a 90 bps impact for the same period in 2017.
As of September 30, 2018, under the GAAP fair value accounting hierarchy, 0.2% of the $14.6 billion fair value of the AFS securities portfolio was valued at Level 1, 99.8% was valued at Level 2, and there were no Level 3 AFS

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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

securities. At December 31, 2017, 1% of the $15.2 billion fair value of AFS securities portfolio was valued at Level 1, 99% was valued at Level 2, and there were no Level 3 AFS securities. See Note 3 of our 2017 Annual Report on Form 10-K 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 to collectively as “municipalities”), including deposit services, loans, and investment banking services, and we invest in securities issued by the municipalities.
The following schedule summarizes our exposure to state and local municipalities:
MUNICIPALITIES
(In millions)
September 30,
2018
 
December 31,
2017
 
 
 
 
Loans and leases
$
1,563

 
$
1,271

Held-to-maturity – municipal securities
751

 
770

Available-for-sale – municipal securities
1,285

 
1,334

Trading account – municipal securities
47

 
146

Unfunded lending commitments
147

 
152

Total direct exposure to municipalities
$
3,793

 
$
3,673

At September 30, 2018, one municipal loan with a balance of $1 million was on nonaccrual. A significant amount of the municipal loan and lease portfolio is secured by real estate and equipment, and 78% of the outstanding loans and leases were originated by California Bank & Trust (“CB&T”), Zions Bank, and Vectra Bank Colorado (“Vectra”). See Note 6 of the Notes to Consolidated Financial Statements for additional information about the credit quality of these municipal loans.
Foreign Exposure and Operations
Our credit exposure to foreign sovereign risks and total foreign credit exposure is not significant. We also do not have significant foreign exposure to derivative counterparties. We had no foreign deposits at September 30, 2018 and December 31, 2017.
Loan Portfolio
For the first nine months of 2018 and 2017, average loans accounted for 68% and 67%, respectively, of total average assets. As presented in the following schedule, the largest category was commercial and industrial loans, which constituted 31% of our loan portfolio at September 30, 2018.

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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

LOAN PORTFOLIO
 
September 30, 2018
 
December 31, 2017
(Dollar amounts in millions)
Amount
 
% of
total loans
 
Amount
 
% of
total loans
Commercial:
 
 
 
 
 
 
 
Commercial and industrial
$
14,096

 
31
%
 
$
14,003

 
31
%
Leasing
332

 
1

 
364

 
1

Owner-occupied
7,548

 
17

 
7,288

 
16

Municipal
1,563

 
3

 
1,271

 
3

Total commercial
23,539

 
52

 
22,926

 
51

Commercial real estate:
 
 
 
 
 
 
 
Construction and land development
2,295

 
5

 
2,021

 
5

Term
8,752

 
19

 
9,103

 
20

Total commercial real estate
11,047

 
24

 
11,124

 
25

Consumer:
 
 
 
 
 
 
 
Home equity credit line
2,884

 
6

 
2,777

 
6

1-4 family residential
7,039

 
16

 
6,662

 
15

Construction and other consumer real estate
644

 
1

 
597

 
1

Bankcard and other revolving plans
483

 
1

 
509

 
1

Other
174

 

 
185

 
1

Total consumer
11,224

 
24

 
10,730

 
24

Total net loans
$
45,810

 
100
%
 
$
44,780

 
100
%
Loan portfolio growth during the first nine months of 2018 was widespread across loan products and geographies with particular strength in 1-4 family residential, municipal, construction and land development, and owner-occupied loans. The impact of these increases was partially offset by a decrease in the CRE term portfolio.
Commercial owner-occupied loans increased during the first nine months of 2018; however, we experienced continued runoff and attrition of the National Real Estate portfolio. The National Real Estate business is a wholesale business that depends on loan referrals from other community banking institutions. Due to generally soft loan demand nationally, many community banking institutions are retaining, rather than selling, their loan production.
Other Noninterest-Bearing Investments
During the first nine months of 2018, the Bank decreased its short-term borrowings with the Federal Home Loan Bank (“FHLB”) by $700 million. This decrease also led to a decline in FHLB activity stock, which consequently decreased by $28 million during the year. Aside from this decrease, other noninterest-bearing investments remained relatively stable as set forth in the following schedule.
OTHER NONINTEREST-BEARING INVESTMENTS
(In millions)
September 30,
2018
 
December 31,
2017
 
 
 
 
Bank-owned life insurance
$
516

 
$
506

Federal Home Loan Bank stock
126

 
154

Federal Reserve stock
185

 
184

Farmer Mac stock
52

 
43

SBIC investments
134

 
127

Non-SBIC investment funds
11

 
12

Other
3

 
3

Total other noninterest-bearing investments
$
1,027

 
$
1,029


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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

Premises, Equipment, and Software
Net premises, equipment, and software increased $17 million, or 1.6%, during the first nine months of 2018. The Bank continues to capitalize certain costs related to its technology initiatives, but associated depreciation has also increased approximately $2 million per quarter following the successful implementation, in 2017, of the first phase of our core lending and deposit systems replacement project, which replaced the Bank’s primary consumer lending systems. The second phase of the project, which replaces the Bank’s primary commercial lending systems, is expected to be complete in the first half of 2019. The third phase would replace the Bank’s deposit systems, and is still in the preliminary stages of development and a decision to move forward with this phase will be made in the first half of 2019. The total core replacement project spend amount is comprised of both capitalized amounts and amounts that are expensed as incurred. The useful life for most of the capitalized costs is 10 years. The following schedule shows the total amount of costs capitalized by phase for the core replacement project.
 
September 30, 2018
(In millions)
Phase 1
 
Phase 2
 
Phase 3
 
Total
Core replacement project costs
 
 
 
 
 
 
 
Total amount capitalized
$
78

 
$
70

 
$
30

 
$
178

Deposits
Deposits, both interest-bearing and noninterest-bearing, are a primary source of funding for the Bank. Average total deposits for the first nine months of 2018 increased by 1.3%, compared with the first nine months of 2017, with average interest-bearing deposits increasing by 2.4% and average noninterest-bearing deposits decreasing by 0.1%. The average interest rate paid for interest-bearing deposits was 20 bps higher during the first nine months of 2018, compared with the first nine months of 2017.
Demand and savings and money market deposits were 92% and 94% of total deposits at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, total deposits included $2.3 billion and $1.6 billion, respectively, of brokered deposits.
See “Liquidity Risk Management” on page 30 for additional information on funding and borrowed funds.
RISK ELEMENTS
Since risk is inherent in substantially all of the Bank’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 Bank’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 Bank’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 is the focal point for the monitoring and review of enterprise risk.
Credit Risk Management
Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risk arises primarily from our lending activities, as well as from off-balance sheet credit instruments. For a more comprehensive discussion of credit risk management, see “Credit Risk Management” in our 2017 Annual Report on Form 10-K.
Government Agency Guaranteed Loans
We participate in various guaranteed lending programs sponsored by U.S. government agencies, such as the Small Business Administration (“SBA”), Federal Housing Authority, Veterans’ Administration, Export-Import Bank of the

20


ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES

U.S., and the U.S. Department of Agriculture. As of September 30, 2018, the principal balance of these loans was $565 million, and the guaranteed portion of these loans was $429 million. Most of these loans were guaranteed by the SBA.
The following schedule presents the composition of government agency guaranteed loans.
GOVERNMENT GUARANTEES
(Dollar amounts in millions)
September 30,
2018
 
Percent
guaranteed
 
December 31,
2017
 
Percent
guaranteed
 
 
 
 
 
 
 
 
Commercial
$
544

 
76
%
 
$
507

 
75
%
Commercial real estate
13

 
77

 
14

 
75

Consumer
8

 
100

 
16

 
92

Total loans
$
565

 
76

 
$
537

 
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