Zions Bancorp.’s chief executive, Harris H. Simmons, is asking investors to look beyond its underperforming nonbank investments and recognize that its core business is booming in high-growth areas.
In a recent interview, Mr. Simmons defended the Salt Lake City company’s nonbank ventures, despite a third-quarter writedown related to its purchase of the electronic bond trader Van der Moolen UK Ltd. and slack sales of the NetDeposit check-imaging system.
“By and large, our acquisition record has been very good,” Mr. Simmons said.
But what is driving the $31 billion-asset company’s performance is its community banking network in the high-growth areas of the West, he said. Loan growth is in the high teens in Arizona and Nevada and about 10% in Utah, Idaho, and southern California.
People mistake Zions as a company interested in businesses other than banking, when “what we really are” is a community bank franchise, Mr. Simmons said.
Some on Wall Street are taking note.
Analyst Heather Wolf reinstated Merrill Lynch & Co.’s coverage of Zions in late October with a “buy” rating, saying that the western operations have helped the company outperform its peers.
The stock is undervalued in part because investors have not forgiven Zions’ missteps, Ms. Wolf said. The company has garnered a reputation for wasting money on questionable technology ventures. The image lingers, despite a $50 million cost-cutting effort in 2002 and 2003. Zions sold or shut down several tech units, including Digital Signature Trust, Lexign, Enterprise Vault, and Phaos Technology Corp.
On the banking side, Zions has sold branches in Colorado as it tried to refocus the $2.8 billion-asset Vectra Bank Colorado on business lending.
Memories of those troubled investments have weighed on the stock and on the minds of some observers.
“I think the management of this company is bored with banking,” Punk, Ziegel & Co. analyst Richard Bove said in an interview. “You talk to this guy and his eyes light up whenever you talk about technology,” he said of Mr. Simmons. “And he goes back to sleep when you talk about banking.”
Mr. Bove concedes that Mr. Simmons’ enthusiasm for technology may be motivated by a desire for new challenges simply because Zions seems to succeed so easily at banking. The analyst also has a “buy” rating on the stock because of its presence in fast-growing states.
Still, Mr. Bove said, the purchase of Van der Moolen “made no sense.”
Zions took a third-quarter charge of $1 million related to the deal, which was completed in April. The unit suspended euro-denominated bond trading during the third quarter and moved its dollar bond trading from London to the United States.
On the earnings conference call last month, Zions executives said they expect the division to incur additional restructuring charges of $800,000 this quarter and $1.5 million next quarter.
At an investor conference Nov. 16, Mr. Simmons said volume at the unit had fallen to 100 trades a day, from 300 a day early this year. The acquisition “in the short-term has not worked as well as expected.”
Still, Zions executives say that the business fits with its fixed-income trading operation and that volume will increase in coming weeks when the company begins distributing bond data across hundreds of thousands of Reuters screens.
Mr. Simmons predicted that the Van der Moolen purchase will shine, despite the $762,000 impairment charge and $370,000 restructuring charge in the third quarter.
“We aren’t concerned about that,” he said. The Reuters deal could add 1,000 trades a day to its bond operation, which makes $20 to $30 per trade, he said.
Zions is also grappling with the failure of large banks to warm up to its NetDeposit check imaging system as quickly as it had expected.
Mr. Simmons said that the $7 million put into developing NetDeposit was a small investment for Zions. “Anybody who is too focused on that is missing the main event,” he said.
Zions had third-quarter revenue of $410 million, and the bank had a strong quarter, Mr. Simmons said. Credit quality was good, and commercial loan growth was strong thanks to the focus on small business. Deposits and loans rose 11% and net interest income rose 6% from a year earlier. It reported earnings per share were 66% higher, to $1.13. Restructuring charges had knocked 37 cents off EPS in the third quarter of 2003.
NetDeposit cost Zions 1.5 cents a share in the third quarter and 1.7 cents in the second. The company did not break out results for Van der Moolen, which it folded into the electronic bond trading operations. That business had gross revenue of $30 million in 2003, said Clark Hinckley, the director of investor relations.
Mr. Simmons insists that Zions is being judicious about its nonbanking investments. “The only notable investment is NetDeposit, and we’re using it very successfully in our own business and with our own customers,” he said.
NetDeposit’s toaster-size device lets business banking and correspondent banking customers save on courier services and branch visits by scanning checks and transmitting the digital images to Zions.
Chief financial officer Doyle Arnold was asked on the conference call last month when NetDeposit would turn a profit and when he would be able to explain its revenue stream. He replied jokingly, “I guess you wouldn’t be satisfied with ‘I don’t know’ and ‘I’m not sure.’ ”
Executives had said the unit might be profitable in the first quarter, but W. David Hemingway, Zions’ executive vice president for capital markets and investments, said on the call that it probably will not.
“We are a little disappointed by the pace of the ramp-up,” Mr. Hemingway said. But the volume of contracts with commercial banking customers is picking up, he said.
Mr. Simmons said NetDeposit should be profitable next year, though he would not predict exactly when. “We expect it is going to be a successful venture,” he said.
Since 1998, Zions’ deposit, loan, and EPS growth have exceeded the average for its peers, even though return on equity — a measure of profitability — has lagged. And even if NetDeposit does not catch on with large banks, it could reduce Zions costs and increase opportunities to cross-sell services to business customers.
Ms. Wolf at Merrill said Zions has learned its lesson.
The misconception “is that they are investing in these new initiatives as much as they did in past initiatives, which is not the case,” she said.
The main risk for Zions is an economic slowdown in its western markets, which she said is not likely unless there is a nationwide downturn.
