Zions Tanks on Slow Loan Growth: Financial Loser (Update 1)

Updated with market close information and more on other banks' third-quarter results.

NEW YORK ( TheStreet) -- Zions Bancorporation ( ZION) was the big loser among major U.S. financial companies on Tuesday, with shares down nearly 7% to close at $27.86.

Zions -- based in Salt Lake City -- late on Monday reported third-quarter earnings applicable to common stockholders of $209.7 million, or $1.12 a share, compared to earnings of $55.4 million, or 30 cents a share, during the second quarter, and $62.3 million, or 34 cents a share, during the third quarter of 2013. The results for the most recent quarter included an after-tax benefit of $126 million, or 68 cents a share, from the redemption of $800 million in preferred stock that had a carrying value of $926 million.

The company's underlying trends were clearly of major concern to investors. Net interest income declined to $415.2 million during the third quarter from $430.7 million the previous quarter and $438.2 million a year earlier. The net interest margin -- the spread between the average rate earned on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.22% in the third quarter from 3.44% in the second quarter and 3.58% in the third quarter of 2013.

"Net interest income was primarily impacted this quarter by lower income from FDIC-supported loans, which accounted for nearly 95% of the sequential quarterly decline," according to Zions, which was referring to loans acquired from failed banks that have loss-share coverage from the Federal Deposit Insurance Corp.

The margin decline reflected slow loan growth and stood in contrast to some other regional lenders, including Regions Financial Corp. ( RF) of Birmingham, Ala., which on Tuesday reported an expanding net interest margin and strong commercial and industrial loan growth. Regions' positives weren't enough to outweigh investors' concerns over an increase in core expenses, and the company's shares were down 3% to close at $9.73.

Zions reported that its average loans and leases -- excluding loans with FDIC coverage -- during the third quarter grew 1% sequentially and 2% year over year to $37.8 billion. Quarter-end commercial and industrial (C&I) loan balances were flat quarter over quarter, but up 10% from a year earlier to $19.4 billion.

BMO analysts Lana Chan and Peter Winter in a client note on Tuesday reiterated their "Outperform" rating for Zions, but lowered their price target for the shares to $32 from $33 and lowered their 2014 earnings estimate for the bank to $1.85 a share from $1.95. The cuts were made "to reflect slower loan growth and further margin pressure, partly offset by a wider negative loan-loss provision," the analysts wrote.

FBR analyst Paul Miller has a "market perform" rating on Zions, and on Tuesday maintained his $28 price target but cut his 2014 EPS estimate for the company to $2.00 from $2.05. "The company experienced weaker loan growth this quarter than it had for the past six quarters as loan balances were flat almost across the board," Miller wrote in a note to clients.

Zions' management indicated Monday that C&I loan growth might resume during the fourth quarter because of an increase in unfunded loan commitments. "If there is continued economic uncertainty, however, loan growth will likely remain lackluster, which would impede earnings growth," Miller wrote.

Employment Numbers and Federal Reserve Policy

The broad indices all ended higher, after the Department of Labor released its employment report for September, which was delayed two weeks by the partial shutdown of the federal government that ended last Thursday. The Labor Department on Tuesday said the U.S. economy added 148,000 nonfarm jobs during September and that the national unemployment rate improved to 7.2% during September from 7.3% in August.

Economists polled by Reuters had, on average, expected September payrolls to grow by 180,000, with the unemployment rate remaining at 7.3%.

The Labor Department said, "The employment change for July was revised down by 15,000 (from +104,000 to +89,000), and the employment change for August was revised up by 24,000 (from +169,000 to +193,000)." Average monthly employment growth for the past 12 months was 185,000.

The relative weakness in the September employment numbers may well reinforce investors' expectations that the Federal Open Market Committee (FOMC) will once again decide to stand pat with "QE3" stimulus policy for the Federal Reserve. The Fed has been making monthly purchases of $85 billion in long-term securities since September 2012 in an effort to hold down long-term interest rates.

Investors had long expected the FOMC to "taper" the central bank's bond purchases, leading up to the committee's last meeting on Sept. 17 and 18, and the market rate on 10-year U.S. Treasury bonds had risen by nearly 100 basis points from the end of April until that meeting.

Looking ahead to the next FOMC meeting on Oct. 29 and 30, Credit Suisse economist Neil Soss believes the next policy statement from the committee may "look a lot like the last one." In note to clients that was published before the disappointing September employment growth numbers were available, Soss wrote, "It will take weeks to learn what, if any, effects the fiscal showdown have had on real economic activity. Moreover, the quality of US economic data for October to be released in November and beyond may be compromised."

The FOMC has a strong preference not to alter policy in the absence of clear data.

Soss added that Credit Suisse's "baseline" for Federal Reserve policy is for a modest tapering of monthly securities purchases of $10 billion in January, "followed by cutbacks of growing intensity through September 2014, when we have penciled in the program's conclusion. If this scenario holds, QE3 would total just over $1.65 trillion."

The KBW Bank Index was down 0.4% to 65.17, however, all but eight of the 24 index components ending with gains. The winner on Tuesday among major U.S. banks was BB&T ( BBT) of Winston-Salem, N.C., with shares rising 2% to close at $34.75.

In addition to Zions and Regions Financial, investors were displeased with the third-quarter results of State Street ( STT) of Boston, sending the trust and custody bank's shares down over 3% to close at $67.62.

State Street early on Tuesday reported third-quarter earnings of $531 million, or $1.17 a share, which missed by a penny the consensus estimate among analysts polled by Thomson Reuters. The company's total revenue was up year-over-year, however, State Street saw significant declines in trading services revenue and securities finance revenue. On a brighter note, assets under custody and management continued to grow. Please see TheStreet's earnings coverage for more on State Street's results.


-- 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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