An A.G. Edwards & Sons analyst downgraded shares of First Security Corp. of Salt Lake City on Wednesday to "maintain" from "accumulate."
The analyst, Timothy Willi, raised concerns about balance sheet management at the company. Potential buyers of its stock "should stay on the sidelines for the time being," he said.
First Security earned 34 cents a share in the first quarter, only 6.3% more than a year earlier. Shares of a growing list of banks have been downgraded after quarterly reports that raised questions about the sustainability of profit growth in the industry.
The Utah company relies increasingly on gain-on-sale accounting as a way to boost profits, an approach that records revenues before a loan actually pays off, Mr. Willi said.
"While we appreciate that these gains are a normal part of doing business, we do not believe the market will reward this kind of income recognition with a high valuation anytime soon," he said.
He also said that First Security's balance sheet, "while adequate in terms of stability, does not provide a lot of financial flexibility" for share buybacks or other methods of enhancing shareholder value.
"Outside a round of significant mergers and acquisitions activity and subsequent speculation, there is no visible catalyst in our mind that will move the shares higher in the near term," Mr. Willi said.
The company declined to comment on the report. Its shares fell 31.25 cents Wednesday, to $19.1875.
In morning trading, many bank stocks fell as investors booked profits after recent gains.
"Select names are holding up, but by and large you're seeing the group drift lower," Mr. Willi said. "It's not surprising to see some profit taking, considering the run bank stocks have had for the past couple of weeks."
Mr. Willi said he likes Commerce Bancshares of Kansas City, Mo., and FirstMerit Corp. of Akron, Ohio, banking companies with "extremely strong balance sheets and the ability to produce excess capital and reserves."
Stocks also fell early in the day on word of a bigger-than-expected gain in factory orders for March.
The Commerce Department said factory orders rose 2% to a seasonally adjusted $349.912 billion-more than the 1.2% gain that was anticipated by analysts, and the fourth rise in five months.
The report drove bond yields higher and raised concerns that investors would move into bonds from equities.
"If yields break out on the upside, then lending and potentially profits could be somewhat curtailed at banks," said Peter Green, chief technical strategist at Gruntal & Co.
He also said that gold prices may be poised to move higher, which could put a damper on bank stocks. Demand for gold could mean that inflation is ratcheting up, and banks do not perform as well in that type of environment, Mr. Green said.
In an afternoon rally, the Standard & Poor's bank index rose 0.64% and the Dow Jones industrial average 0.64%. The Nasdaq bank index rose by 0.26% and the S&P 500 by 1.15%
Southtrust Corp.'s shares surged 5.25% on merger rumors. Shares of the Birmingham bank have climbed steadily in the last two days after AmSouth Bancorp. told analysts that it was interested in acquiring a Birmingham bank. Shares of Southtrust rose $2.125 to $42.625. J.P. Morgan & Co. shares rose $5.50 to $139.