Stock of Zions, First Security hurt by merger delay

Phil Levine

Monday, Dec. 27, 1999 | 11:02 a.m.

Stock prices of First Security Corp. and Zions Bancorporation fell this morning as investors reacted to news of the postponement of their merger because of an accounting issue that will lower the combined banks' future earnings.

Zions -- owner of Nevada State Bank and the recently acquired Pioneer Citizens Bank -- saw its stock fall 9 percent to $60.75 this morning, while First Security stock fell about 12 percent to $25.75.

Joe Morford, industry analyst with San Francisco-based Dain Rauscher Wessels, and other analysts said they doubt the merger will fall apart.

"We're still saying it's a buy opportunity and it doesn't shake our confidence in the merger."

Standard & Poors bank analyst Vincent Piazza also expressed confidence in the proposed union.

"So far, I have not seen any information that would provide a roadblock to the completion of the merger," he said. "I am still confident the deal will close, and I believe the management of both banks have produced well in the past and should continue to do so."

Shareholders were scheduled to meet Tuesday for a final vote on the proposed merger of the two Salt Lake City-based regional financial companies. That meeting is now postponed to an as yet undetermined date.

Merrill Lynch bank analyst Sandra Flannigan said the merger likely will be delayed until late in the first quarter of 2000.

Flannigan said Zions' stock could "initially drop 5 to 10 percent, pending the sorting out of delays in deal close and synergy realizations."

Morford said completion of the merger would likely be postponed until "at least late February;" Piazza declined comment on when the merger would close.

The postponement of this week's scheduled merger of First Security and Zions was caused by Zions' announcement last week that it would revise previous financial statements because of 1997 and 1998 bank acquisitions.

The move came after officials from the Securities and Exchange Commission ruled the previous acquisitions must be accounted for as "purchase" transactions, rather than "pooling of interest" deals. This means that in accounting for some bank purchases, Zions must include the value of their non-tangible goodwill and write off that value over time.

As a result, Zions expects to record approximately $500 million in purchase premiums, resulting in a non-cash amortization expense of $25 million annually.

In Nevada, Zions-owned Nevada State Bank currently operates 45 branches, while its recently-acquired Pioneer Citizens has 13 offices; First Security currently operates 22 Nevada branches.

Bank officials downplayed the importance of the postponement.

"We deeply regret that the shareholders' meetings must be postponed," said Zions' Chief Executive Officer Harris H. Simmons. "We proceeded with the accounting for each merger ... only after obtaining the advice of our independent auditor that the pooling treatment was proper.

"We are confident that the change in accounting treatment in no way reduces the benefits of the merger with First Security."

First Security CEO Spencer Eccles said he was surprised by the postponement.

"The need for this restatement has caught all of us by surprise, and we are disappointed that we will now need to delay the timing of our shareholders meeting," he said.

Earlier this month, the Department of Justice ruled the merger didn't require either bank to divest holdings in Nevada to comply with federal competition laws. However, the Justice Department ordered the two banks to divest 68 branches -- with about $2.1 billion in deposits -- in Utah and Idaho.

To avoid overlap, the banks announced last week plans to close 11 Nevada branches.

Although stocks of both banks were hit hard by today's trading, industry watchers believe their fundamentals remain sound.

"The best I can tell, this is really over an interpretation of accounting," said Morford. "Although we're clearly disappointed by the need to restate past financials, we remain confident in management's ability to successfully integrate the two companies and achieve the projected synergies."

S & P's Piazza concurs.

"If people take a step back, I think they'll see the merger of First Security and Zions provides a strong platform for growth," he said. "I believe today's decline in stock value is really an overreaction."

Still, Merrill Lynch's Flannigan took a more hard line view of the accounting error.

"Zions' accountants and the SEC 'stole' Christmas for shareholders," she said. "While economics of poolings and purchases are basically the same, restatement will lower earnings by the amount of related goodwill amortization -- roughly $25 million annually.

"Frankly, we find it beyond belief this restatement has occurred so close to deal completion and that Zions' accountants -- who had previously signed off on the questioned previous deals' accounting treatment -- requested SEC review that led to this SEC proclamation."