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FINANCIAL SECTOR, BANKING INDUSTRYNASDAQ STOCK EXCHANGE

ZIONS BANCORPORATION Date: 1/23/2017 Headquarters: SALT LAKE CITY, UT Current price: $43.85 (01/13/17) Ticker symbol: ZION Recommendation: BUY 12M Price Target: $49.95 (13.9%)

Investment RecommendationWe initiate coverage on ZION and issue a BUY recommendation. We have reached a price target of $49.95 using a Price Multiple valuation based on a P/E and P/TBV of 18, and 1.5, respectively. This target projects a return of 13.9%.This price target is based upon the following factors:• Strong sustainable loan growth • Conservative underwriting and appropriate loan loss reserves• Growth of fee-based revenue • Decrease of operation costs• Interest rate increases

Business DescriptionZions Bancorporation is a financial services company that operates in 11 states. (Arizona, California, Colorado, Wyoming, Utah, Oregon, Texas, Nevada, Idaho, New Mexico, Washington). It operates through seven different locally managed affiliates; each with its own name:• Zions Bank• Amegy Bank• California Bank & Trust• National Bank of ArizonaZions operates in a variety of businesses that are comprised of, but not limited to: retail banking, corporate banking, commercial and residential lending, wealth management, and capital markets. Founded in 1873, Zions maintains strong brand recognition, not only through its own name but through each of its affiliates. Zions prides itself with the relationships it has and continues to develop in each of its local communities.

Highlights• Restructured bank charters• Achieved 66% efficiency ratio• Adjusted the mix of interest-earning assets from lower-yielding money market

securities into higher-yielding loans and investment securities• 6.9% increase in customer-related fees compared with prior quarter and 11.2%

from the prior year period.

Industry Overview and Competitive PositioningThe banking industry looks positive due to the recent interest rate hike. Also, the Federal Reserve is forecasting to increase rates three times during 2017. These factors increase the potential interest rate spreads across the industry. The Federal Funds Rate chart shows the median forecast of the Federal Funds rate, and supports our prediction of a continued rising interest rate environment. Zions is asset sensitive which they define as, “net interest income increasing as a result of a rising interest rate environ-ment.” We consider Zions’ asset sensitivity as a competitive advantage to further widen their spread which is 11 basis points higher than the peer average. Three factors that show a rising interest rate environment are:• High forward inflation expectations • Increase in PMI• Increase in GDP per capita.

Executive Summary

• Nevada State Bank• Vectra Bank Colorado• The Commerce Bank of Washington

This report is published for educational purposes only by students competing in the CFA Institute Research

Challenge.

SOURCE: BLOOMBERG

SOURCE: TRADING ECONOMICS

SOURCE: COMPANY FILINGS & TEAM CALCULATIONS

SOURCE: BLOOMBERG & TEAM CALCULATIONS

SOURCE: YAHOO FINANCE & TEAM CALCULATIONS

MANAGEMENT & GOVERNANCEHarris H. Simmons has been CEO of Zions Bancorporation since 1990. In 2015, Paul Burdiss was named CFO, and brings years of experience from other banks such as SunTrust. Michael Morris was named CCO in 2013. During 2015, Keith Maio was hired and will now oversee retail banking, mortgage banking, and wealth management. Key executive compensation has increased 32% in 2015, but still remains 50% lower than its peers (refer to Executive Compensation).Management has shown ability to reach targets such as:• Lower efficiency ratio • Consolidate non-customer facing centersManagement has laid out plans to further decrease costs, increase fee income, and increase loan balances.

The board of directors is comprised of 11 members. Their backgrounds provide a wide range of expertise including banking, healthcare, telecommunications, and government. All directors and officers as a group (34 persons) own 2.06% of Zions’ shares outstanding. 90% of shares held by institutions such as Vanguard, Invesco, BlackRock, and many others. INVESTMENT SUMMARYStrong Sustainable Loan GrowthWe expect Zions to experience strong sustainable loan growth. Zions has branches located in high growth regions of the US. Figure 1 in the appendix illustrates that GDP has historically grown in these states and the trend appears to be continuing with this high growth rate. We expect Zions loan growth to be positively correlated with the GDP trend in those states. Zions has a large exposure in the oil and gas industry and was heavily affected by the price of oil dropping in 2014-2015. Based on OPEC’s announcement regarding production cuts and strong demand for oil, prices are expected to increase and stimulate loan growth in that sector. This is evident in the 3Q 2016 of $190 million in new loans. Management also has plans to use their excess cash reserves in order to stimu-late future loan growth. Management has said the following about the next four quarters:• Solid Growth in Non-O&G C&I and Residential Mortgage• Moderate Growth in Construction and Land Development• Attrition in O&G and NRECRE delinquency rates are at 24-year lows which indicates strong demand for CRE, and Zions is well positioned to capitalize on this demand. Mortgage growth is also important and rising home sales show that this will be another contributor to overall loan growth.

A

Conservative Underwriting and Appropriate Loan Loss ReservesZions has experienced an increase in net charge offs to average total loans during 2016 due to oil and gas exposure. Zions has a TTM net charge offs to average total loans ratio of .1% compared to its peers at .23%. This represents a better ability to man-age and collect on distressed loans. In terms of capital reserve ratios, Zions is relatively conservative. However, the Loan Loss Reserve Balances and Ratios table shows that they are beginning to employ their cash reserves. Loan loss reserves to non-per-forming assets is in line with its peers. Zions’ capital adequacy ratios are almost double the required amount set by the Basel III requirements. Capital levels are above peer average (reference Capital Adequacy section of report for additional information).

Growth on Fee Based RevenueZions continues to focus on wealth management in order to provide stability and create a potential boost to future earnings. Wealth management makes up only 2% of the company’s net revenue, and 6% of adjusted non-interest income 2015. In 3Q2016, it grew to 10% of non-interest income; a 15% growth rate. The company’s banking brands are well positioned to add wealth management services in the regions in which they operate. Keith Mao brings considerable wealth management experience which will support and accelerate wealth management growth. Diversifying non-interest income into wealth management will be a strong contributor to future increase in EPS. Loan sales and servicing also increased in 3Q2016 by 24% when compared to same prior-year period, contributing almost 8% of non-interest income. As mentioned, we expect loan growth to be strong which will result in a continued increase in this area. Mortgages are also a major initiative in 2016-17, adding to the sustainability of the increases in EPS.

As a result of the 2009 credit crisis, Banks faced major losses in Fixed Income securities; Zions was no exception. In 2015, these losses affected non-interest income by 36.7%. They have since liquidated the last of these securities, and we expect that the components previously discussed will begin to provide steady increases to revenue.

SOURCE: BLOOMBERG

SOURCE: MORNING STAR

SOURCE: COMPANY FILINGS & TEAM CALCULATIONS

SOURCE: FEDERAL RESERVE ECONOMIC DATA

Decrease in Operating Costs Which Has Led To Lower Efficiency RatioDuring the past several years, Zions has embarked on a major initiative to reduce their efficiency ratio. For fiscal year 2017, Zions has a goal to have an efficiency ratio in the low 60’s. Since 2014, Zions has shown ability to cut non-interest expenses enough to lower efficiency ratios to target goals. Examples include consolidation of Zions’ affiliates into one charter and reducing processing centers from 11 to 2. Management has also announced investment in infrastructure that will further decrease operating ex-penses. With a 66.3% efficiency ratio, Zions is on track to meet their goal of 66% during 2016. Based on a three-year track record, we expect Zions to achieve the 2017 goal of low 60’s.Continued Increases in Interest Rates Federal policy makers projections have increased from two rate hikes to three for 2017. Policy makers also maintained their forecasts for 2018 and 2019 of 3 rate hikes per year. They predict that rates will be 1.4%, 2.1%, and 2.9% at the end of 2017, 2018, and 2019 respectively. Additionally, during the Fed Chair news conference, Janet Yellen expressed confidence in the economy and affirmed that it will continue.

With the election of a new president, plans have been made to cut corporate taxes, and stimulate the economy with $1 trillion of infrastructure and defense spending. The fed will attempt to make this recovery sustainable by controlling growth through the federal fund rate. In addition, unemployment and jobless claims are at long-term bottom levels further prompting the Fed to increase rates. At the end of 2016, the PMI index was at a two-year high of 54.7. PMI for 2017 to 2020 is expected to remain above 50.

VALUATIONWe used the following methods for valuation:• Price Multiple Valuation • Discounted Cash Flow ValuationThe consensus across all the models signal that Zions is undervalued. Considering that the price multiple model is viewed to be a more accurate valuation by the industry, we put a 12-month $49.95 price target.

Price Multiple Valuation To determine our price multiple valuation, we used the P/E and P/TBV ratios. We ran regressions that confirmed that EPS and tangible book value have strong correlations with price movements and are accurate indicators of possible future movements. We forecasted 2017 and 2018 EPS using company filings and management forecasts of the following: efficiency ratio, net interest margin, loan growth, and non-interest income.Zions has an above-average TTM P/E ratio of 23. The peer average is 15, and we used 18 for our valuation. We gave Zions’ a 20% premium in their P/E multiple because of their above average earnings growth. Using a $3.10 EPS resulted in a price target of $55.80, Zions’ P/TBV is in line with peers at 1.50. This multiple resulted in a price tar-get of $44.10. Taking an average of the two produces an average price target of $49.95.

DCF ValuationA price target of $49.63 was reached by discounting five periods of forecasted EPS and incorporating a terminal value. Considering the future increases in net interest margin and the decreases in operating costs, a growth rate of 11.83% was used to grow EPS for one period. After bringing their efficiency ratio down and increasing their NIM spread, we estimate the growth will slow. The terminal growth rate of 4.73% was reached using Return on Equity and Retention Ratio. A terminal value for 2021 was calculated using the peer average P/E multiple of 15. The terminal value and four EPS cash flows were discounted to reach our price target of $49.63.

A

Monte Carlo ValuationSince January 2011, the average daily price move-ment was .06% with a standard deviation of .0195. By performing 1,000 simulations with these vari-ables, we found the average future price to be $50.30, with a median price $48.13 The most frequent price target falling between $49-$51. Assuming that the stock moves in the same pattern, we expect Zion to appreciate by 14.71% in the coming year.

SOURCE: COMPANY FILINGS & TEAM CALCULATIONS

SOURCE: BLOOMBERG

• Monte Carlo Valuation

SOURCE: BLOOMBERG & TEAM CALCULATIONS

FINANCIAL ANALYSIS

Non-Interest Income:Non-interest income continues to increase as a percentage of revenue. In 2015 it decreased but has increased by 3.77% in 2016. We expect it will continue to rise as management increases fee income. The volatility that is most affecting net revenue is caused by non-interest income. Figure 2 in the appendix illustrates this volatility. The largest volatility is in their fixed income securi-ty gains (losses). Management has disclosed that these securities faced large losses as a result of the credit crisis and have been liquidated. Zions has experienced an increase in customer related fees of 6.9% during 3Q2016. These customer related fees will increase as Zions carries out their initiative to strengthen their wealth management activities. Historically wealth management has accounted for 8% of revenue; however, we expect this figure to contribute more to future revenue. For income statement and common statement, see Figures 3 and 4 in the appendix.

ProfitabilityViewing the tables, Zions TTM ROA and ROE are below peer and industry average. Current ROA is higher than it has been in the past three years. ROE is recovering from its 2015 low, which was caused by the decrease in net income as a result of bad security liquidation. In 2016, the Federal Reserve approved a $180 million share buyback program. We expect that as the remainder of the shares are bought back many of the profitability ratios will increase. Areas most affected are likely to be ROA & ROE; these are areas where Zions has room to improve. For more information on Zions’ profitability ratios compared to its peers, see figure 5 in the appendix.

EarningsStrong management initiatives have put a floor in the company’s net interest margin at 3.13%. We believe this will rise to 3.5% by the end of 2018. Zions’ 2016E net interest margin at 3.2% is largely in line with its peers at 2.98%. This relative parity has come after declining from 3.66% in

2011. According to company filings, NIM bottomed in 2015 as a result of a reduction in FDIC-supported loan income, competitive pricing pressure, and improvement in the underlying quality of borrowers’ financial condition. We expect NIM to grow from its TTM of 3.2% to 3.5% at the end of 2018 because of the increasing interest rate environment and their increased deployment of reserves. Zions’ margin expansion is largely a function of: 1. Higher market interest rates due to equalization of market rates by the Federal Reserve 2. Better underwriting on new loans 3. Clearing out non-performing energy loans 4. Rearrangement of loan mixFollowing the credit crisis in 2008 and 2009, bank NIMs fell due to the decrease in average earnings assets and a lower net interest income. As the sector has healed from the ravages of the credit crisis, management teams have adjusted their operations to improve efficiencies. As we move into a stronger macro environment, particularly with Zions’ service territory, we expect the general macroeconomic environment to be very supportive of our higher NIM projections. While Zions’ revenue growth has experienced large volatility, management has stated that revenue growth is a priority. The tables below show how their revenue is divided between the different sources and their respective growth.

Interest Income:From the Revenue Growth table above, we can see that Zions has been able to increase their net interest income by 7% in 2016. As previously mentioned, there are many factors that will contribute to strong future growth in this component of revenue. Management’s focus on healthy loan growth, and the rising interest en-vironment will add more stability and predictability to revenue growth forecasts.

AEfficiencyZions has made it a major initiative to lower their efficiency ratio to the low 60s by 2017. Their efficiency ratio during 2014 and 2015 was 73.5% and 70.7%, respectively. They set a target of reaching an efficiency ratio of 66% by the end of 2016. Using the most recent data, their efficiency ratio is 66.3%. We expect 4Q2016 to show an efficiency ratio at or below their target of 66%. In order to achieve 2017’s goal, management has instituted the following targets:• Maintain non-interest expense less than $1.6 billion• Achieve annual gross pre-tax savings of $120 millionBased on a three -year track record of management meeting efficiency ratio goals, we believe they will meet their 2017 goal. We can see from the Peer Group Efficiency Ratio table that Zions is nearing the peer average and we expect this to continue to improve in the future.

Balance Sheet AnalysisAssets: From 2015 to 2016, Zions experienced a decline in the quality of their assets. As previously mentioned, this is largely attributed to their exposure to oil and gas. Illustrated by the asset quality tables, NPA Ratios versus historic and peer ratios rank relatively high. Looking at loan loss reserve to non-performing assets we find that Zions ranks in line with their peer average and is becoming more aggressive in 2016. This is likely due to Zions’ initiative to increase net interest margin by deploying more of their cash reserves.

Zions’ net charge offs to total loans (NCO/TL) is better than its peers. This suggests that they do well at managing loans that become distressed. At the beginning of 2016, Zions experienced an adverse effect to their NCO/TL ratio, but the data suggests the beginning of an effort to improve it.

The loan loss provision/net charge offs ratio (LLR/NCO) shows Zions’ ability to antici-pate their loans that will default. This ideal number is as near to 100% as possible. After reviewing this ratio historically and against their peer average, our data shows that Zions has done well forecasting this number since 2015.

Interest Earning Investments:The Investment Securities Portfolio chart illustrates Zions’ exposure to other interest bearing securities. 3Q2016 Zions had $11.076 billion fair value exposure to investment Securities. As of September 30, 2016, the investment securities portfolio had an average yield of 2% which is down from 2.13% as of end of 2Q16. Zions has an investment portfolio duration of 2.8. This shows an adequate resistance to long term exposure in the current rising interest rate environment. Additionally, Zions shows resistance to this exposure through its mix of HTM versus AFS securities. 71% of Zions’ investment portfolio is held in available for sale yielding only 1.82%, and 5% is held to maturity which yields 4.33% (the rest is held in a trading account and money market securities). While many criticize this move arguing that Zions’ is missing out on the higher returns of HTM securities, we prefer higher investments in the lower yielding available for sale while interest rates are rising.

The Investment Securities Portfolio chart also shows Zions’ materially large exposure to agency guaranteed mortgage backed securities. This exposure is also has large exposure in SBA government backed securities as well as regular agency securities.

We commend Zions’ management on their mix of investment as we believe it to bring low default risk with the option to reinvest at higher rates in the future.

Balance Sheet Analysis (cont.)Loans and Leases:As of 3Q2016, the loan portfolio of $42.54 billion represents 69% of total assets. This is 1% larger than the loan book as of 3Q2015, and has increased 100 basis points as a percentage of assets from 2015. Of these Loans and leases, Figure 6 shows that 79% of loans and leases are variable rate. This is beneficial in the current rising interest rate environment because this minimizes their exposure to interest rate risk. This also allows most of their loan book to participate as interest rates rise.

Loan Mix:Zions has managed their mix well. 77% of their loans are in commercial credit rather than consumer credit. We believe this to be a positive for two reasons: Commercial credit on average yields 4.21% while consumer credit only yields 3.86; Commercial lending is largely loaned on a variable rate. Zions also has a large exposure to commercial real estate loans. 82.2% of Zions exposure to CRE is in term loans. This is advantageous because term loans are relatively less risky than land and development loans due to the stability of an established structure, and the ability to more accurately estimate the value of the project. The CRE Exposure table describes the geographic location of the largest exposures. For additional Information on loan mix, see Figure 7 in the appendix.

due to payoffs and pay downs. During the first three quarters of 2016, it continued to decrease another 14.6% to $4.1 billion. Figure 8 shows the breakdown and the change from 2014 to 2015. During 2015 and the first two quarters of 2016, the credit qual-ity of the oil and gas loan portfolio deteriorated. However, Q32016 net credit quality ratios slightly improved. While we can’t call Zions’ large exposure to oil and gas a positive, they do have adequate reserves for the portfolio. Management has also established more effective credit metrics to prevent future loan losses.

In November 2016, OPEC announced to cut output by 1.2 million barrels per day for six months. Oil price is up 15% since the announcement. Saudi Arabia (in hopes to increase oil price ahead of its upcoming IPO of Saudi Aramco) said it is planning even deeper cuts in February. Independent producers like Mexico and others have also agreed to limit production.The IMF has up-graded 2017 growth forecasts for the U.S., China, and UK which will sustain demand for oil. Per the IEA, total demand from Non-OECD countries in 2016 was up 2.3% (49.8 million bpd) from 2015 and may rise an additional 2.4% (51 million bpd) in 2017. With lower production and continued strong demand for crude oil, which we expect over the next three years, most of Zions energy book should continue to perform as expected.

Additionally, criticized and classified oil and gas-related loan balances decreased $3 million and $44 million respectively in the 3Q 2016 relative to the 2Q 2016. Furthermore, criticized loans increased 405 basis points as a percent of total exposure, due to a $700 million reduction to oil and gas related exposure. This may signify a move in the right direction for Zions.

According to the Fidelity quarterly sector update, the U.S. has a strong commercial real-estate outlook as a whole. The update states, “Real Estate fundamentals remain strong amid a favor-able supply/demand backdrop. Vacancy levels are historically low and net operating income for REITs has been growing. New supply of U.S. commercial real estate is below its historical average and below levels needed to keep pace with population growth and the obsolescence of existing buildings”. According to FRED economic data commercial real-estate delinquency rates are at a 24-year low, at .86%. Zions Bancorporation has a materially large exposure to oil and gas which is some cause for concern given the recent political and economic activity in the oil and gas industry. As of December 31, 2015 Zions had a $4.8 Billion exposure to oil. During 2015, approximately 14.7% of total oil and gas related loans were wiped off the books. This was largely

Capital Adequacy Zions is the smallest bank subject to the Dodd-Frank Act Comprehensive Capital Analysis and Review requirement (CCAR). Zions doesn’t have the depth of resources of larger banks and is therefore negatively affected by these requirements. The Dodd-Frank act requires that all large banks be fully compliant with stated capital ratios by 2018. Until then, there is a scaling system which Zions must meet each year to be compliant. Due to the forward-looking nature of the regulation, we will look only at capi-tal requirements Zions will be required to meet by 2018. Suffice to say that 2015 Zions was compliant with scaling system. When fully phased-in on January 1, 2019 Zions will be required to comply with the following Basel three requirements:

• 7% Tier 1 CETR• 8.5% Tier 1 CR• 10.5% Total Capital • 4.0% Leverage Ratio

Zions has maintained high capital ratios since they came into effect in January 1, 2015. In almost every category, Zions manag-es more than enough for fully scaled Basel III requirements. We feel that this reflects management is effectively managing their capital to prevent the type of losses that occurred in 2009. The ratios were slightly lower in 2016 as a result of the losses that they held in their loan portfolio; however, we believe the full effect of those losses to be realized. Moving forward, we expect that their ratios will decrease because management has discussed leveraging a larger amount of their cash reserves in order to increase loan growth. The excess capital they currently hold beyond the Basel III requirements will decrease in the coming years to make room for the additional loans. The tables show that Zions has above average capital adequacy ratios compared with its peers and the industry average.

ANon-Interest Bearing:Due to the consolidation of its charters, Zions has shares in a single FHLB (Des Moines). Previously, each affiliate bank held shares in different FHLB’s, but all shares in other FHLB’s have been redeemed upon consolidation. We believe, along with Zions, their investment in the Federal Reserve will remain relatively stable from where it was on3Q2016. Other noninterest-bearing Investments total a little less than $1 billion. The table illustrates the break down. LiabilitiesDeposits:Total deposits for Zions amount to $46.75 billion. During 2015, total deposits increased by 5.1%. During 3Q2016, average interest bearing deposits grew to 47.1% of average assets. This aids Zions by providing a comparatively low cost funding source. As of 3Q2016, total deposits as a percentage of assets is 83.3%. This is the highest of their peers. The average rate paid on the interest bearing deposits totaled at 18 basis points. Debt:During 2015, Zions reduced long term debt by $275 million (or 25%) which has reduced interest expense by approximately $54.5 million. As of 3Q16, long term debt has been decreased 30% from 2015, which has helped reduce total interest expense by another $28 million. This reduction in interest paid on borrowings for the past three years has is increasing net interest income.

Macroeconomic IndicatorsWhile the interest rate hike is beneficial for banks in the short run of 1-3 years, it shows the fed is managing economic growth. As mentioned in the investment summary, we expect rates to rise three times in 2017 and three times in each of the next two years. Rates are ex-pected to level off at around 3.0% in 2020. Asset sensitive banks, like Zions, will reap extra benefits in the short run as a result of these changes.

The GDP per capita chart has shown growth of 16.97% since the recession, and will con-tinue to increase as the Fed manages growth. As aggregate income in the U.S. continues to rise, saving in the U.S. will increase benefiting the banking industry as a whole. Past trends indicate that GDP per capita and deposits for banks, including Zions, have a positive cor-relation. The GDP per Capita and Total Deposits for Zions graphs show this relationship.

SOURCE: WORLD BANK DATA

SOURCE: BLOOMBERG

AMacroeconomic Indicators (cont.)We can see from the graph that the unemployment rate is decreasing and has remained low during 2016. Most economists estimate that the remaining unemployment in the U.S. is frictional. Furthermore, demand for labor will increase and wages will increase as unemployment rates remain low.

INVESTMENT RISKS

Interest Rate RiskThe banking industry as a whole is affected by the interest rate manipulation and lending practices of the FED. A main risk facing Zions is a decline or stagnation in interest rates. Being an asset sensitive bank, Zions is more vulnerable to risk than its peers. However, it will also benefit more from interest rates rising than its competitors. Zions interest rate spread will benefit from the recent increase in the Federal Fund Rate and will continue to benefit as future rate hikes occur. While the interest environment seems to be in their favor, Zions is taking precautions by using the following methods to evaluate their interest rate risk:• Economic Value of Equity at Risk (“EVE”)• Net Interest Income Simulation

“EVE”:This method measures the expected changes of the fair value of equity in response to changes in interest rates. EVE is calculated by taking the difference of the fair value of assets and fair value of liabilities under different interest rate environments.

Net Interest Income Simulation:This method measures the different values that net interest income could assume in varying interest rate environments. In regards to the net interest income simulation, management made the following statement: “Our policy contains a trigger for a 10% decline in rate sensitive income as well as a risk capacity of 13% decline if rates were to immediately rise or fall in parallel by 200bps.”

With Zions continually testing their sensitivity to interest rates, we are confident that management is taking the appropriate steps to be prepared in the environment of changing rates. One large preventive measure is Zions’ use of derivatives in hedging against interest rate volatility.

Derivatives:Zions uses derivative instruments such as rate swaps and basis swaps as part of their interest rate risk management. They also employ derivatives with commercial banking and other customers to facilitate their risk management strategies.

Being an asset sensitive bank, Zions engages in small portions of balance sheet hedging. Approximately $1.4 billion of notional principal amount of interest rate swaps are designated as cash flow hedges. They receive fixed and pay floating rate swaps which is evident in the positive gap. If interest rates were to rise significantly in the near future, Zions would need to increase the amount of assets being hedged because of the increased sensitivity of the assets to interest rates. We expect to see a gradual increase in hedging as interest rates are expected to slowly rise in the U.S.

Liquidity RiskZions appears to be too conservative with their cash which is a positive for their liquidity risk but also signals that they need to be more efficient with cash assets. Under the Basel III regulation, Zions is required to maintain 4.5% of their CET1 ratio. Currently, Zions ratio is 12.22%. Zions intends employ their excess reserves in the future. If Zions does invest more in the future, they will have a higher liquidity risk. According to management, they plan to put their extra cash to work but still maintain a healthy level of liquidity.

SOURCE: FEDERAL RESERVE ECONIOMIC DATA

Credit RiskAfter the credit crisis, Zions has taken corrective steps toward improving their credit policy and has grown their loans through better diversification and risk analysis. Since then, non-performing loans have been decreasing and loans have been growing.

Zions has had deterioration in their gas and oil portfolio. This has led to an increase in their NPL’s in the past four quarters. While a large percentage of their loans are still in the oil and gas industry, they have taken preventative measures to diversify and ensure that their exposure is limited.

Bond Ratings: Currently Zions credit rating sits at a BBB-, allowing Zions to make a large spread from maintaining good underwriting practices. This is evident in the loan loss reserve ratio.

Modified and Restructured Loans Overall, the impact that modified and restructured loans has on net income is minimal; however, we feel that it will assist Zions in their initiative to cut costs. In the periods between 2009 and 2013, they had large increases in the amount by which their TDRs were affecting their net income. In 2014 TDRs had the slowest increase in actual effect to net income by only increasing by .08%. For a more comprehensive view of Modified & Restructured loans, reference Figure 10 in the appendix.

Operational Risk Zions’ earnings could be adversely affected through operational inefficiencies in their internal systems or processes. To minimize this risk, Zions has put different checks and balances in place to minimize mistakes. Zions has regular audits and reviews by their Internal Audit and Credit Examination departments. There are also data processing systems that ensure the quality of the data being captured. To hedge against any operational risk, Zions has also purchased liability insurance. Zions is continually trying to improve their systems which shows in their technology infrastructure investments. Part of operational risk management includes the protection of private data. Financial institutions are the constant victim of “cyber attacks” where client information can be stolen. Zions has invested heavily in systems to protect against this. Ongoing analyses are performed on Zions’ loan portfolio; however, due to the geographical footprint of the company, they are exposed to specific areas such as the oil and gas industry. They are mitigating risk by adopting limits for various types of CRE lending.

SOURCE: BLOOMBERG

Appendix

Figure 1

Figure 2:

Non-interest Income (In Millions) 2015 % Change 2014 % Change 2013

Service charges/fees on deposit accounts 168.4 0.10% 168.3 -1.60% 171

Other service charges, commissions/fees 206.8 6.60% 194 5.40% 184

Wealth management income 31.2 2.00% 30.6 2.30% 29.9

Capital markets and foreign exchange 25.7 13.70% 22.6 -19.60% 28.1

Dividends and other investment income 30.1 -31.00% 43.6 -5.40% 46.1

Loan sales and servicing income 30.7 5.50% 29.1 -23.60% 38.1

Fair value and nonhedge derivative loss -0.1 99.10% -11.4 37.40% -18.2

Equity securities gains, net 11.9 -11.90% 13.5 58.80% 8.5

Fixed income securities gains (losses), net -138.7 -1433.70% 10.4 458.60% -2.9

Impairment losses on investment securities — — — 100.00% -188.6

Less amounts recognized in other comprehensive

income — — — -100.00% 23.5

Net impairment losses on investment securities — — — 100.00% -165.1

Other 11.1 40.50% 7.9 -55.90% 17.9

Total 377.1 -25.90% 508.6 50.70% 337.4

Figure 3

Zions Consolidated Income Statement

In Millions of USD except Per Share 2012 2013 2014 2015 2016E 2017E 2018E

Net Revenue 2,151.80 2,033.70 2,188.60 2,092.40 2,363.80 2,594.70 2,786.00

Net Interest Income 1,731.90 1,696.30 1,680.00 1,715.30 1,845.00 2,050.00 2,138.30

Total Non-Interest Income 419.9 337.4 508.6 377.1 518.8 544.7 572

- Provision for Loan Losses 14.2 -87.1 -98.1 40 133.8 123.8 128.9

Net Revenue after Provisions 2,137.60 2,120.90 2,286.70 2,052.30 2,230.00 2,470.90 2,657.10

- Total Non-Interest Expense 1,596.00 1,714.40 1,665.30 1,600.50 1,570.00 1,601.40 1,681.30

Operating Income (Loss) 541.6 406.4 621.4 451.9 660 869.5 975.7

Pretax Income (Loss), GAAP 541.6 406.4 621.4 451.9 660 869.5 975.7

- Income Tax Expense (Benefit) 193.4 143 223 142.4 231 304.3 341.5

Net Income, GAAP 349.5 263.8 398.5 309.5 429 565.2 634.3

- Preferred Dividends 170.9 95.5 71.9 62.9 48 50

Net Income Avail to Common, GAAP 178.6 294 326.6 246.6 381 515.2 634.2

Basic EPS, GAAP 0.97 1.58 1.68 1.2 1.86 2.52 3.1

Diluted EPS, GAAP 0.97 1.58 1.68 1.2 1.86 2.52 3.1

Figure 4

Zions Common-Size Income Statement

In Millions of USD except Per Share 2012 2013 2014 2015 2016E 2017E 2018 E

Net Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Net Interest Income 80.49% 83.41% 76.76% 81.98% 78.05% 79.01% 76.75%

Total Non-Interest Income 19.51% 16.59% 23.24% 18.02% 21.95% 20.99% 20.53%

- Provision for Loan Losses 0.66% -4.28% -4.48% 1.91% 5.66% 4.77% 4.63%

Net Revenue after Provisions 99.34% 104.28% 104.48% 98.09% 94.34% 95.23% 95.37%

- Total Non-Interest Expense 74.17% 84.30% 76.09% 76.49% 66.42% 61.72% 60.35%

Operating Income (Loss) 25.17% 19.98% 28.39% 21.60% 27.92% 33.51% 35.02%

Pretax Income (Loss), GAAP 25.17% 19.98% 28.39% 21.60% 27.92% 33.51% 35.02%

- Income Tax Expense (Benefit) 8.99% 7.03% 10.19% 6.81% 9.77% 11.73% 12.26%

Net Income, GAAP 16.24% 12.97% 18.21% 14.79% 18.15% 21.78% 22.77%

- Preferred Dividends 7.94% 4.70% 3.28% 3.00% 2.03% 1.93% 0.00%

Net Income Avail to Common, GAAP 8.30% 14.46% 14.92% 11.79% 16.12% 19.86% 22.76%

Basic EPS, GAAP 0.05% 0.08% 0.08% 0.06% 0.08% 0.10% 0.11%

Diluted EPS, GAAP 0.05% 0.08% 0.08% 0.06% 0.08% 0.10% 0.11%

Figure 5

Income Statement Ratio Comparison

Eps Growth Profit Margin Operating Margin Net Interest Margin Revenue Growth

Zions 30.30% 17.89 25.73 3.13% 1.06%

Comerica Inc. 16.67% 17.94 26.87 2.76% 5.31%

Regions Financial Corp -12.05% 18.49 25.46 2.61% 9.65%

Huntington Bancshares Inc. -6.90% 20.79 28.15 2.86% 1.94%

Suntrust Banks Inc. 40.00% 21.11 30.22 3.15% 5.77%

Citizens Financial Group 10.53% 23.18 30.41 3.13% 10.19%

Key Corp. 27.78% 24.07 33.42 2.87% -0.75%

PNC Financial Services Group 1.06% 26.16 35.89 2.77% -1.62%

People's United Financial 4.55% 21.32 31.74 2.83% 6.09%

First Republic bank/CA 17.57% 28.3 36.75 3.33% 16.82%

Fifth Third Bancorp. 81.82% 32.8 47.38 2.87% 28.25%

US Bancorp. 1.27% 28.61 39.64 3.10% 0.44%

SVB Financial Group 49.12% 22.81 37.46 2.54% -4.28%

East West Bancorp Inc. -4.48% 31.5 50.95 3.43% 6.79%

Signature Bank 24.69% 37.09 62.15 3.28% 22.11%

Average 18.80% 24.8 36.15 2.98% 7.18%

Figure 6

Figure 7

Total loan Mix

Loans 2010 2011 2012 2013 2014 2015

Total Commercial Lending

90+ days past due $11,475 $185,945 $145,054 $100,669 $88,478 $64,645

Nonaccrual $569,769 $19,427,621 - - -

Total non-performing loans $581,244 $19,613,566 $145,054 $100,669 $88,478 $64,645

Total loans $18,233,523 $19,427,621 $19,762,723 $20,863,661 $21,444,364 $21,479,014

Total Commercial Real Estate

90+ days past due $6,673 $167,377 $90,260 $54,829 $40,736 $39,887

Nonaccrual $757,750 $10,148,343 - - - -

Total non-performing loans $764,423 $10,315,720 $90,260 $54,829 $40,736 $39,887

Total loans $11,148,597 $10,148,343 $10,002,232 $10,396,151 $10,113,008 $10,355,903

Total Consumer Loans

90+ days past due $5,070 $75,745 $51,980 $30,073 $33,881 $33,677

Nonaccrual $165,350 $6,931,075 - - - -

Total non-performing loans $170,420 $7,006,820 $51,980 $30,073 $33,881 $33,677

Total loans $6,514,275 $6,931,075 $7,372,051 $7,783,553 $8,506,286 $8,814,625

FDIC-Supported Loans

90+ days past due $118,425 $88,965 $61,501 $185,569 - -

Nonaccrual $35,837 $750,870 - - - -

Total non-performing loans $154,262 $839,835 $61,501 $185,569 $ - -

Total loans $971,377 $74,502 $528,241 $39,043,365 - -

Total

90+ days past due $141,643 $518,032 $348,795 $185,569 $163,095 $138,209

Nonaccrual $1,528,706 $37,257,909 - - - -

Total non-performing loans $1,670,349 $37,775,941 $348,795 $185,569 $163,095 $138,209

Total loans $36,867,772 $37,257,909 $37,665,247 $39,043,365 $40,063,658 $40,649,542

Figure 8

Figure 9

Historical Number of Deposits Compared to GDP Per Capita

Year Number of Deposits GDP Per Capita GDP Per Capita Growth YOY

2004 7,225,661 40948.23 6.27%

2005 7,641,489 43514.08 5.37%

2006 8,911,959 45849.04 4.09%

2007 9,958,340 47723.73 1.07%

2008 10,355,888 48232.31 -3.81%

2009 13,632,358 46394.38 4.09%

2010 12,307,985 48289.72 3.58%

2011 12,409,593 50016.96 3.06%

2012 12,888,784 51545.16 2.26%

2013 14,563,298 52707.65 2.66%

2014 15,303,089 54109.37 1.33%

2015 16,476,161 54830.99

Source: Bloomberg

Figure 10

Historical Efficiency Ratio Peer Comparison

Modified & Restructured Debt YOY Growth

2013 2014 2015

Commercial & Industrial -99.65% 8400.00% 211%

Owner Occupied 189.83% 33.08% -46%

Total Commercial 146.08% 54.62% -10%

Construction & Land Development 25.54% 75.89% -54%

Term 33.67% -22.78% -34%

Total Commercial Real Estate 32.55% -9.84% -39%

Home Equity Credit Line 40.70% -50.00% -60%

1-4 Family Residential -7.32% -9.46% -8%

Construction & Other Consumer Real Estate -35.76% -11.11% -16%

Total Consumer Loans -8.21% -9.81% -9%

Total Decrease to Interest Income Growth 14.69% 0.08% -18%

TDR % of Revenue -1.50% 0.12% 0.10%

Efficiency Ratio Comparison

Zions 66.3

Comerica Inc. 67.1

Regions Financial Corp. 64.87

Huntington Bancshares Inc. 64.5

Suntrust Banks Inc. 63.13

Citizens Financial Group 67.56

Key Corp. 65.9

PNC Financial Services 62

People's United Financial 61.5

First Republic Bank/CA 59.5

Fifth Third Bancorp. 57.6

US Bancorp. 53.8

SVB Financial Group 52.6

East West Bancorp Inc. 41.78

Signature Bank 33.64

Average 58.86

Zions Historical

Efficiency Ratio

2009 85.42%

2010 79.29%

2011 73.57%

2012 74.17%

2013 84.30%

2014 76.09%

2015 76.49%

FY2016 66.3%

Revenue YOY Growth

12 Months Ending 2011 2012 2013 2014 2015 2016

Net Revenue 3.33% -4.55% -5.49% 7.62% -4.51% 12.30%

Net Interest Income 1.67% -1.38% -2.06% -0.96% 2.10% 7.02%

Total Non-Interest Income 9.64% -15.72% -19.64% 50.75% -26.33% 36.48%

GDP Growth By State Since 2012

Date

Real

GDP For

California

Real

GDP For

Idaho

Real GDP

For

Colorado

Real GDP

For

Nevada

Real

GDP For

Texas

Real

GDP For

Utah

Jun-16 2,269,328 59,755 289,379 126,100 1,504,808 134,686

Mar-16 2,256,749 59,344 288,559 125,400 1,507,792 133,611

Dec-15 2,245,476 58,904 288,,147 125,601 1,502,849 132,319

Sep-15 2,228,745 58,939 287,630 125,563 1,512,087 131,341

Jun-15 2,224,077 58,499 286,743 124,370 1,508,204 130,314

Mar-15 2,203,354 58,362 284,638 123,143 1,516,136 129,566

Dec-14 2,170,141 57,996 285,206 123,747 1,478,271 128,222

Sep-14 2,165,494 57,230 280,460 122,971 1,459,981 127,163

Jun-14 2,130,421 56,771 274,864 122,028 1,425,150 125,678

Mar-14 2,106,610 56,544 271,278 121,892 1,397,690 125,039

Dec-13 2,123,158 56,976 269,724 121,425 1,395,148 123,458

Sep-13 2,069,959 56,230 266,171 120,123 1,381,485 123,394

Jun-13 2,040,545 55,890 263,625 119,258 1,366,779 122,173

Mar-13 2,024,723 55,373 263,696 119,738 1,352,244 121,680

Dec-12 2,044,803 54,057 259,440 117,721 1,339,391 120,153

Sep-12 2,011,993 54,941 257,556 119,627 1,310,489 119,061

Jun-12 2,004,543 54,454 258,088 120,077 1,300,312 119,775

Mar-12 1,993,104 54,194 255,404 120,220 1,291,897 119,969

Source: Bloomberg

Revenues As A % Of Revenue

12 Months Ending 2009 2010 2011 2012 2013 2014 2015

Net Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Net Interest Income 70.24% 79.68% 77.90% 80.49% 83.41% 76.76% 81.98%

Total Non-Interest Income 29.76% 20.32% 22.10% 19.51% 16.59% 23.24% 18.02%

Data for Investment Securities Pie Chart.

Investment Securities

Par

Value

Amortized

cost

Estimated fair

value

Par

value

Amortized

cost

Estimated fair

value

Held to maturity 716 715 718 546 546 552

Municipal Securities 716 715 718 546 546 552

Available for sale

Us Government Agencies and Corporations:

Agency securities 1835 1834 1857 1233 1232 1233

Agency guaranteed mortgage-backed securities 5241 5439 5474 3810 3965 1936

Small business administration loan-backed

securities 1973 2193 2186 1741 1933 1937

Municipal securities 691 769 778 387 417 419

Other debt securities 25 25 23 25 25 23

9765 10260 10318 7169 7572 7542

Money Market mutual fund and other 40 40 40 101 101 101

9805 10300 10358 7297 7673 7643

Total 10521 11015 11076 7843 8219 8195

Disclosures: Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making:

The author(s) does not act as a market maker in the subject company’s securities. Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Salt Lake City, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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