Bank stocks rose modestly Tuesday as the central bank's Federal Open Market Committee began a two-day meeting at which it will weigh whether to leave the federal funds rate unchanged in a range of zero to 0.25%.

The KBW Bank Index rose 3.26%, after falling 3.02% Monday, reflecting the sector's continued volatility, said Matthew Shields, a trader at FIG Partners LLC.

"I don't see much of a rally ahead of the Fed announcement, which I suspect will be that there's no change in the fed funds rate," Mr. Shields said.

Peter McCorry, a senior trader at KBW Inc.'s Keefe, Bruyette & Woods Inc., said the sector is likely to experience "whipsaw days" until the market sees what direction the Treasury Department takes with the $350 billion earmarked for the second installment of its Troubled Asset Relief Program.

The Dow Jones industrial average inched up 0.72%, and the Standard & Poor's 500 index rose 1.09%.

Zions Bancorp.'s shares rose 15.5% Tuesday as investors cheered the Salt Lake City company's dividend cut, despite its fourth-quarter loss of $498 million, or $4.36 a share.

The $55 billion-asset Zions slashed its dividend from 32 cents to 4 cents when it reported the loss late Monday, and analysts said investors became more confident that the company would not raise additional, dilutive equity capital.

Zions wrote down the fair value of its banking assets and recorded a $353.8 million impairment charge to goodwill during the quarter to show how its three banking units — National Bank of Arizona, Nevada State Bank, and Vectra Bank Colorado — are now worth less than their book value.

Zions also posted $204.3 million in impairment and valuation losses on securities, including a $177.9 million charge on the devaluation of bank and insurance trust-preferred collateralized debt obligations.

Zions' provision for loan losses rose 82% from the third quarter and more than fourfold from a year earlier, to $285.2 million.

Excluding the one-time charges, Zions lost 32 cents a share. Analysts on average had expected the company to lose 30 cents a share.

Provident Bankshares Corp. rose 2.6%. The $6.6 billion-asset Baltimore company said Tuesday that it lost $26.7 million, or 88 cents a share, in the fourth quarter, mainly due to a $32.7 million pretax impairment charge on certain securities and a doubling of its loan-loss provision from a year earlier, to $21.5 million.

More than $26 million of the charge related to Provident's securities portfolio was due to losses in its pooled trust-preferred securities issued by other bank and insurance companies.

Excluding the one-time charge, analysts on average had expected the $6.6 billion-asset company to earn 19 cents a share.

Last month, Provident said that it was selling itself to M&T Bank Corp. in Buffalo for $401 million. At the time of the announcement, M&T said that, after the deal's expected second-quarter closing, it plans to write down $383 million of Provident's loans and $240 million of its securities.

Citigroup Inc. rose 6.6%. On the heels of announcing that it would split itself in two, Citi on Tuesday named Michael Corbat interim head of its new Citi Holdings division, a group of largely troubled businesses it separated from its core banking operations after posting five straight quarterly losses. Mr. Corbat, who most recently was head of the company's global wealth management division, retains responsibility for wealth management, according to a memo to employees written by chief executive Vikram Pandit and obtained by American Banker. Mr. Pandit named other executives to both Citi Holdings and Citicorp, which holds Citi's more traditional banking operations.

Bank of America rose 8.3%. The Charlotte company launched an $8 billion offering Tuesday under the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, according to a Dow Jones report. Late Monday, B of A sold $5 billion of notes.

Other gainers Tuesday included JPMorgan Chase & Co., up 2.3%; U.S. Bancorp, 5.3%; Bank of New York Mellon Corp., 3.6%; and KeyCorp, 4.9%.

Decliners included Fifth Third Bancorp, off 3%; Regions Financial Corp., 0.5%; and Valley National Corp, 1.5%.

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