Zions: Earnings Pullback Loser

NEW YORK ( TheStreet) -- Zions Bancorporation ( FITB) was the loser among large U.S. banks on Tuesday, with shares sliding 3% to close at $29.90.

The broad indices ended mixed, pulling back after the S&P 500 ( SPX.X) hit another intraday high as second-quarter earnings reports continued to flow. DuPont ( DD) was among the companies beating consensus earnings estimates with second-quarter EPS of $1.28, although sales missed estimates. The company also said it was considering "strategic options" for its core Performance Chemicals business, the sale of which could threaten DuPont's status as a component of the Dow Jones Industrial Average .

The KBW Bank Index ( I:BKX) was up slightly to close at 66.71, although nine of the 24 index components were up for the session.

The tiresome focus on the Federal Reserve continues, as the Federal Open Market Committee is scheduled to meet on July 30-31, after which it will release a statement on central bank policy. The Fed has kept the short-term federal funds rate in a range of zero to 0.25% since late 2008, and has been making monthly purchases of $85 billion in long-term securities since September, in an effort to hold long-term interest rates down as well.

Federal Reserve chairman Ben Bernanke's testimony before Congress last week included several indications that the "highly accommodative" will continue for some time, soothing the market and continuing the long rally for stocks. Credit Suisse Neal Soss in a the firm's research summary on Tuesday wrote "We expect the FOMC will incorporate more details about its asset purchase intentions into its official statement, describing plans to taper and eventually end its net new monthly purchases of MBS and Treasuries."

Soss added that the next FOMC statement "likely will cement the idea of a September tapering into the markets' collective psyche. This risks a bearish fixed-income reaction, given the market's recent proclivity to react to anything taper-related, regardless of how well or frequently it has been telegraphed previously."


Zions Bancorporation of Salt Lake City after Monday's market close announced second-quarter earnings applicable to common shareholders of $55.4 million, or 30 cents a share, declining from $88.3 million, or 48 cents a share, in the first quarter, but rising slightly from $55.2 million, or 30 cents a share, during the second quarter of 2012.

The second-quarter results "included after-tax debt extinguishment cost of $24.9 million, or $0.14 per share, which resulted from the redemption of trust preferred securities and a successful tender offer for approximately $258 million of expensive senior debt," according to the company.

Excluding the costs tied to the trust-preferred redemption and senior debit retirement, the year-over-year earnings improvement mainly reflected the bank's improved credit quality. During the second quarter, Zions transferred $22.0 million from loan loss reserves, compared to a provision for reserves of $10.9 million a year earlier.

Zions had $54.9 billion in total assets as of June 30. Nonperforming assets -- excluding loan balances and repossessed property covered by Federal Deposit Insurance Corp. loss-sharing agreements -- declined to $585.7 million as of June 30, from $669.9 million the previous quarter and $896.6 million a year earlier.

Despite the transfer from loan loss reserves, reserve coverage was still strong, at 2.13% of total loans. The company's annualized ratio of net charge-offs to average loans was a very low 0.06% during the second quarter. The net charge-off ratio has been below 0.50% for the past year.

The bank's loan loss reserves declined by $27.9 billion during the second quarter, boosting pretax earnings, and investors can expect the reserve releases to continue over coming quarters, in line with the industry trend.

Zions reported second-quarter net interest income of $430.7 million, increasing from $418.1 million in the first quarter, and $426.3 million in the second quarter of 2012. The company's average non-covered loans held in portfolio were $37.5 million during the second quarter, up 1% sequentially and 2% year-over-year.

"We are pleased with the continued growth in loans this quarter, and with the progress that we made toward replacing expensive capital and financing issued during the recent crisis with significantly lower cost instruments," said Zions CEO Harris Simmons, adding that he expected "continued progress on both fronts in the third quarter."

FBR analyst Paul Miller has a neutral rating on Zions Bancorporation, with a $28 price target, and in a note to clients on Tuesday wrote "The company benefited from a stable net interest margin, negative credit costs, and slightly higher fee income. However, expenses rose, even excluding the debt extinguishment charge, and asset yields remain under pressure, which will likely make it more challenging for the company to maintain and/or grow earnings in the near term."

Miller estimates the company will earn $1.62 a share this year, with EPS rising to $2.05 in 2014.

Shares of Zions have returned 40% this year, following a 32% return during 2012. The shares trade for 1.4 times their reported June 30 tangible book value of $22.09, and for 15.3 times the consensus 2014 EPS estimate of $1.96 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.81.

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Interested in more on Zions Bancorporation? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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