3rd UPDATE: Zions Up On Exchange Offer, Tax Valuation Plan

Zions Bancorp Inc. (ZION) announced plans to swap about $140 million of preferred shares for up to 7 million common shares as the company looks to boost its common-equity levels.

The company also said in a filing with the Securities and Exchange Commission it has executed transactions involving Fed funds futures that effectively make its balance sheet more "asset sensitive," a move Raymond James analyst Dennis Klaeser said would provide the company with a significant tax benefit and reduce the size of its deferred tax assets.

It will result in Zions being able to recoup taxes paid in 2007, he said.

Before Monday, the stock had been underperforming relative to its peers, and had been in a rather steep selloff since it reported earnings in October, Soleil-Tenner Investment Research analyst Gary Tenner said.

The stock was recently up 16% to $14.59. It's off 40% so far this year and 20% in the last three months.

Klaeser said the recent underperformance was related to concerns about exposure to commercial real estate and construction lending, as well as worries that its capital ratios were light.

James Abbott, Zions director of investor relations, said the company's capital ratios aren't light relative to regulatory capital guidelines, adding Zions has a 10% Tier 1 capital ratio, compared with the regulatory "well-capitalized" level of 6%. There is chatter in the industry that the regulatory ratio may go up, but "even the most onerous chatter that you hear in the marketplace puts it in the high single digits," he said.

Abbott added the company isn't light on capital compared with what regulators want, but is light compared with some other regional bank peers. "However, we feel that's extremely justifiable because our pretax, pre-credit earnings number is one of the best in the industry," he said.

Sterne, Agee & Leach analyst Edward Timmons said there has been a lot of speculation that Zions was going to have to write down some of its deferred tax assets, which led to a lot of the stock weakness. Based on pre-provision cash flow and excluding goodwill impairment, he said he doesn't think it will have to impair the deferred tax assets in the current quarter.

Meanwhile, the exchange offer, while a nearly 50% discount to face value, is close to a 25% premium to where the preferred shares were trading Friday. Zions has about 114 million shares outstanding.

Several analysts pointed out that the amount the exchange offer can raise depends on the number of shares tendered, and Tenner added that it is hard to say what that will be.

Dennis said the exchange offer will "incrementally bolster (tangible common equity)," but won't necessarily increase regulatory capital, since it's just changing out one form of Tier 1 capital for another.

He and Timmons said they thought there was still more capital to be raised.

Timmons said that, depending on its collateralized debt obligation portfolio and how long the current credit cycle lasts, there is talk that Zions could need to raise about $500 million.

The Utah-based bank has been hurt by the woes in the real estate market in the West, helping the company report losses for four consecutive quarters. But Zions last month said it saw some signs of stabilization and more moderate increases in credit costs.

Zions also got an upgrade, to buy from hold, earlier Monday from Soleil's Tenner, before it announced the exchange offering. He said in a note to clients that the recent pullback in the stock is an "attractive entry point."

Several other regional banks were also trading higher Monday, including Regions Financial Corp. (RF), Marshall & Ilsley Corp. (MI) and SunTrust Banks Inc. (STI), which were up 5.8% to $5.76, $3.9% to $5.57 and 5.4% to $23.22, respectively. Oppenheimer analyst Terry McEvoy said M&I is a bank that generally trades in line with Zions, though he added that the news from Zions seemed to be very company specific.

Over the last week or so, he said, the market has seen some rotation back into regional banks that haven't been seen as being at the top end of the sector--places that have had losses and the need to raise more capital, as well as a lower credit profile. Monday's move seems to be some follow-through on that trend, he said.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; [e-mail]

(Kevin Kingsbury contributed to this article.)