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Zions Finally Exits TARP

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Zions Bancorporation (ZION - Free Report) has finally redeemed the remaining $700 million of its Fixed Rate Cumulative Perpetual Preferred Stock, Series D, issued to the U.S. Department of the Treasury as part its participation to the Troubled Asset Relief Program (TARP). With this redemption, the company has completed the full repayment of $1.4 billion in TARP funds.

In March, Zions had received Federal Reserve’s approval for its capital plan. Consequently, the company repaid 50% of its TARP money in the same month. The remaining TARP money was supposed to be repaid by the end of this year, subject to fulfillment of certain conditions.

These conditions required the parent company to have sufficient liquidity and no significant weakness in its overall condition. Additionally, Zions’ subsidiary banks were to return $500 million of the capital to the parent company this year.

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 years, total dividends paid by the company on the TARP preferred stock summed up to $253 million. The Treasury still holds warrants to purchase Zions’ common stock, which are expected to be disposed-off for additional profit for the taxpayers.

The Treasury Department stated that with Zions’ final repayment, it has now recovered a total of $266 billion through repayments, dividends, interest and other income. It had actually invested $245 billion in about 707 banks under TARP.

As a result of the redemption, Zions will record a one-time dividend expense of $16.6 million in the current quarter. As there would be no further subordinated debt conversions, the company’s preferred dividend expenses would come down to $23 million in the fourth quarter of 2012 compared with $37 million recorded in the second quarter. Moreover, the redemption will improve the company’s annualized return on equity (ROE) in the fourth quarter by about 1% on a sequential basis.

Also, during the second quarter 2012 conference call, Zions had stated that for the next two years its capital plan does not involve any dividend hikes and share buybacks. The company would focus on lowering the cost of capital, which would, in turn, enhance ROE.

The TARP repayment is essentially a positive for Zions. It will remove restrictions on its financial and executives’ pay packages.

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.

Among other major regional bank, Regions Financial Corp. (RF - Free Report) repaid its TARP dues in March.

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