The good news and bad new on Zions Bancorp (Nasdaq:ZION) is basically the same - current results are terrible, but the longer-term outlook is pretty solid. Zions has a number of problems to work through today, but the longer term branch footprint and asset sensitivity are favorable. Unfortunately, the stock just doesn't look cheap enough to be worth major accumulation today.
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A Disappointing First Quarter
If Zions is going to have a bad quarter, it may as well be now - a point in the company's recovery cycle where the results weren't going to be all that good no matter what. Still, it was a disappointing quarter at a time when most other regional banks had encouraging reports.

Operating revenue fell 2% sequentially, and pre-provision net revenue fell 3%. Net interest income fell over 4% on both lower net interest margin (down 13 basis points on a reported basis) and lower earning asset balances. Fee income growth was more muted than the likes of U.S. Bancorp (NYSE:USB) or Wells Fargo (NYSE:WFC) - Zions lacks the large mortgage banking business that has been generating such strong fee income increases for the banking industry this quarter. While expenses were down sequentially, Zions' efficiency ratio is still in need of significant improvement.

Credit was a mixed bag. To the extent that convenient ratios like non-performing asset (NPA) tell the tale, Zions is seeing progress. Not only did the NPA ratio decline another four basis points, but non-performing loans were down quarter on quarter. That said, Zions still saw credit-related costs bleed away a meaningful amount of earnings - 3 cents to OREO expense and 5 cents to foreclosure costs and other credit expenses.

SEE: Earnings: Quality Means Everything

Where's the Growth?
Zions saw its loan balance decline sequentially and it doesn't sound like the company has seen a big recovery in lending activity. This is curious, given the improvements in commercial lending reported by banks like U.S. Bancorp, Wells, Bank of America (NYSE:BAC) and M&T Bank (NYSE:MTB), (although there's zero geographical overlap between M&T and Zions).

This is problematic on several levels. For starters, Zions is geared more towards commercial lending than most banks. Second, Zions is already facing troublesome loan resets that are pressuring net interest margin. If Zions is losing lending share, that does impact the long-term value thesis.

Some Good News
It's not all bad for Zions. For starters, the company created a plan for repaying TARP without going back to the equity markets. The bank has already repaid half of its obligations and will take on a total of $600 million in senior debt as part of the process. The first half of this debt carried a reasonable rate (below 6%), though this repayment plan will limit capital returns to shareholders for a little while.

Zions shareholders can also hope that the bank's asset sensitivity pays off before too long. This bank is geared to benefit from rising rates. While higher rates seem inevitable, the timing is very much in doubt - the Fed has made it clear that rates are going to stay low for some time yet.

SEE: How To Prepare For Rising Interest Rates

The Bottom Line
There's a troubling detail when it comes to modeling out Zions' recovery path - Zions was not an exceptionally good bank before the crisis, at least in terms of generating return on equity (ROE). ROE is admittedly a blunt instrument for evaluating bank stocks, but it generally works.

Even if Zions can regain a 10% return on equity by 2016, the stock is no more than 20% undervalued today. I do appreciate the value of Zions' footprint and there is an opportunity for management to outperform, but it is hard to argue for owning Zions in favor of U.S. Bancorp or Wells Fargo at these prices today.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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