Bank avoided toxic loans, not pain

What happens on Wall Street doesn't stay on Wall Street. Just ask Harris Simmons, CEO of Zions Bancorp.

During the past 12 months, the implosion of the mortgage-backed securities market has blasted holes in the balance sheets of the world's biggest commercial banks, forcing them to write off more than $300 billion in assets. Investors, in turn, have fled from the stocks of these banks.

Zions zion, which ranks 30th among U.S. banks, is located here 2,000 miles from Wall Street and boasts a balance sheet that remained uninfected by the toxic subprime mortgage-related securities that wreaked havoc on the industry.

But that doesn't mean it has escaped fallout from the credit crisis. Zions is an example of how many regional banks that avoided the lure of big profits from subprime mortgages saw their stocks dragged down anyway after the subprime blowup — the stock market's version of throwing the baby out with the bathwater.

Knee-jerk reaction

On July 3, the bank raised $45 million in capital by selling preferred stock through its own brokerage arm, an innovative way to shore up its own balance sheet in an uncertain market, says analyst Richard Bove at Ladenburg Thalmann.

But Zions had said it wanted to raise a total of $150 million, so investors interpreted the sale as a failure. Zions stock fell 14% that day to $27.05, continued falling the following week, staged a strong rebound in early August, then started sliding again to its $25.35 close on Wednesday.

Bove says the volatility is a knee-jerk reaction by an investment community conditioned to panic at even a hint of problems at a bank after so many industry leaders have delivered dire news.

The roller coaster ride doesn't seem to faze Simmons, who controls about 1% of the company's stock. He says the industry was in much worse shape 20 years ago, at the height of the savings-and-loan crisis. Today, the big issue, he says, is investor reaction, not any overarching problem with banking industry fundamentals.

"The external environment, in the markets and in the media, is harsher today," he says. Simmons, 54, says he prefers this to the problems plaguing a wide swath of the industry when he became CEO in 1990 at the apex of the S&L crisis.

"That was a trying time," he says, pointing out that there were 1,500 banks on the Federal Deposit Insurance Corp.'s "troubled" list then. The FDIC on Tuesday said there were 117 troubled banks at the end of the second quarter.

In the 1980s, many banks had sloppy internal controls, weak risk-assessment programs and incentives that rewarded bankers who invested in risky real estate ventures. In response to the ensuing meltdown, Congress passed tough legislation forcing banks to maintain adequate levels of capital, enough to offset losses from bad loans.

"Most people don't understand the strength that came out of that experience," says Simmons. "I refer to it as our 'Clorox enema' era."

Proud of his record

Simmons says he's proud that just 0.59% of his bank's loans result in losses. By comparison, among the nation's five biggest banks, the rate is more than twice as high, averaging 1.48%.

In addition to its namesake bank, Zions owns seven other banks in the Southwest, including California Bank & Trust, National Bank of Arizona and Nevada State Bank.

Because of its presence in those states, among the hardest hit by the real estate bust, Zions' earnings have suffered, down some 40% the past year. But Brent Christ, analyst at Fox-Pitt Kelton, predicts earnings will rebound by 35% in 2009. "This is a higher-quality bank with a great footprint," says Christ. "They've been dragged down by a function of what's going on in their markets."

James Abbott, analyst at Friedman Billings & Ramsey, says the need for Zions to conserve capital forced it to cut back on making loans. "When the storm moves past, Zions' growth rate will return to a nice strong clip."

That mirrors Simmons' forecast: "We'll come out of this cycle stronger, with less competition from players on the fringe who do silly things."