Zions reported OTTI charges of $2.7 million, or a penny a share, during the third quarter, and reported holding $2.088 billion in collateralized debt obligations, measured by amortized cost, as of Sept. 30, with a carrying value of $1.231 billion, with unrealized losses of $857 million. The company has been recording smaller OTTI charges than what Arnold expects for the fourth quarter, as trust preferred securities held by the CDOs are prepaid, because the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 excludes most trust preferred equity from banks' regulatory Tier 1 capital.
The company's updated fourth-quarter guidance also included $10 million in gains on "CDOs previously written down," and a 2% to 3% decline in core net interest income from the third quarter, with declining loan balances and rate pressure as loans renew at lower rates.
After the presentation, JPMorgan Chase analyst Steven Alexopoulos lowered his fourth-quarter core earnings estimate for Zions to 42 cents from 45 cents, and his 2012 EPS estimate to $1.40 from $1.43, noting that "our OTTI assumptions are excluded from our core EPS estimate."
Alexopoulos rates Zions "Overweight," with a $25 price target, and estimates core EPS of $1.55 in 2013. The analyst estimates that the company's tangible book value per share will be $22.66 at the end of 2013.
Earlier on Tuesday, after the revised outlook was released but before Arnold's presentation, Alexopoulos wrote that "the stock will likely be weak given the guided reduction to NII in 4Q12 (2% to 3%)," and that although "the near-term is likely to remain choppy at ZION, we maintain our Overweight rating on the stock," which was trading at "a 25% discount to peers" to tangible book value.
Zions Bancorporation has seen its stock return 23% year-to-date, following a 33% decline in 2013. The shares trade just below times their reported Sept. 30 tangible book value of $20.24, and for 11 times the consensus 2013 EPS estimate of $1.75, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.94.
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Written by Philip van Doorn in Jupiter, Fla.