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Zions Partly Repays TARP Dues

Zacks Equity Research

Zions Bancorporation (ZION) became one of the latest banks to repay its bailout money. On Wednesday, the company redeemed $700 million of its Fixed Rate Cumulative Perpetual Preferred Stock, Series D which were issued to the U.S. Department of the Treasury under the Treasury Department's Troubled Asset Relief Program (:TARP) Capital Purchase Program. The amount signifies the repayment of 50% of Zions’ total dues.

Zions’ repayment was financed by the proceeds from the recent $300 million senior notes offering, in addition to other funds from available resources. Last week, the company had announced the pricing of its fixed-rate senior unsecured notes, which the company offered with a maturity date of March 27, 2017 and a coupon rate of 4.50%.

The notes were priced at 94.25% of the face value. Including commissions and fees, the net proceeds are anticipated to amount $280.5 million.

In mid-March, Zions received an approval for its capital plan, which was submitted to the Federal Reserve for the 2012 Capital Plan and Review (CapPR). Following the approval, the company came up with the partial repayment of the TARP and it is anticipated that the remaining dues will be repaid by the end of 2012.

However, the payment of the second installment is subject to certain conditions. These conditions require the parent company to have sufficient liquidity and no significant weakness in its overall condition. Additionally, Zions’ subsidiary banks need to return $500 million of capital to the parent company in 2012, after seeking the approval of the primary bank regulator.

The U.S. government had granted a $1.4 billion worth of TARP loan to Zions in November 2008 in the form of preferred stock warrants to help it recover from the financial crisis. Over the last three years, total dividends paid by the company on the TARP preferred stock sums up to $270.4 million.

However, due to its moderately improving earnings after the economic crisis, Zions was finding it difficult to get permission to pay back the bail-out money. But, during the last earnings conference call, the company claimed that it has ample liquidity to repay the TARP dues without diluting its shares. This claim was authenticated by the Fed’s approval.

Meeting the stress test criteria signifies that Zions is comfortably positioned in terms of capital and can survive another economic downturn. In addition, after settling the TARP obligation, Zions will look forward to deploy its capital through dividend hike and share repurchase, which will further enhance investors’ confidence on the stock.

Additionally, Zions also announced the issuance of $600 million of senior debt, redemption of Temporary Liquidity Guarantee Program (:TLGP) debt of $255 million on its maturity in June as well as unchanged quarterly dividend of 1 cent per share throughout 2012.

Of the total $245 billion handed out to banks, more than $15 billion is still due. Many of the regional banks have still not repaid the entire bailout money. Of the 31 banks under stress test, apart from Zions, Regions Financial Corp. (RF) also announced its plans to clear off TARP dues.

In March, Regions priced a public offering of 152.9 million shares of its common stock at $5.90 per share. The common stock offering will generate gross proceeds of about $900 million, which are expected to be used for repurchasing the $3.5 billion of Series A Preferred Stock that were partly issued to the U.S. Treasury Department’s TARP Capital Purchase Program.

While the larger Wall Street banks had repaid the TARP money earlier in 2009 and 2010, many regional banks stepped back due to continued high levels of losses in their loan portfolios. The economy was also under tremendous stress. However, the recent repayment of the TARP loan by a large number of these banks can be viewed as a sign of economic recovery.

Furthermore, the TARP loan repayment is essentially a positive for Zions. It will remove restrictions on both financial and executives’ pay package flexibility that the company was subject to upon being a TARP receiver.

Zions currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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