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Zions Bancorporation

(ZION) - Get Report

has one of the lowest stock-price values among big banks, its regulatory capital is rising and the profit margin it makes on lending is the highest after

Wells Fargo

(WFC) - Get Report


But the Salt Lake City-based company is being weighed down by problem loans and concerns about its securities investments and accounting policies, which has pushed down the company's shares by 43% this year. The

S&P 500 Financials index

, in contrast, has risen 25%.

Zions' shares sell for 0.65 times tangible book value, the lowest price-to-tangible-book ratio among the 20 largest domestic bank holding companies behind

Marshall & Ilsley


, according to SNL Financial. At the end of 2007, Zions' price-to-tangible book was 1.73, and in 2006 it was 3.28.

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The stock has dragged since third-quarter results were released in mid-October, with investors concerned about mounting loan losses. Zions reported a net loss of $153 million, its fourth consecutive quarterly loss. Net loan charge-offs (actual loan losses) totaled $381 million, or an annualized 3.63% of average loans. The company's nonperforming-asset ratio was 4.28%, exceeded only by Marshall & Ilsley,


(STI) - Get Report



(FITB) - Get Report

among the 20 biggest banks.

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Despite the bad news, Zions' regulatory capital ratios have increased, with tier 1 leverage, tier 1 risk-based and total risk-based capital ratios coming in at 8.47%, 11.49% and 13.72% as of Sept. 30, up from 7.64%, 10.4% and 12.68% a year earlier. Those ratios are well ahead of the 5%, 6% and 10% required for most banks to be considered


by regulators.

Rather than raise additional capital through a major secondary offering such as the recent issuance by

Bank of America

(BAC) - Get Report

and plans by


(C) - Get Report

to repay the government in the Troubled Asset Relief Program, Zions has conducted ongoing common stock issuances, raising $311 million in common equity during the second and third quarters.

A discussion on the company's accounting treatment of distressed securities in

The Wall Street Journal's

Heard On the Street column last week took the company to task for following new rules easing the effect of mark-to-market accounting, and also quoted

Morgan Stanley

(MS) - Get Report

analyst Ken Zerbe as saying the company's collateralized debt obligation (CDO) model had predicted only a 35% likelihood of default for preferred securities issued by the failed United Commercial Bank, which were underlying CDOs held by Zions.

Zerbe actually has an "overweight" rating on the stock, which translates to a "buy" recommendation, saying "we recognize that Zions is higher risk than most other midcap banks, but at the current price, we believe the risk-reward is compelling enough to justify the risk."

Another factor in the low valuation on the shares is the company's deferred tax assets of $688 million as of Sept. 30, which some investors and analysts expect will need to be written down, as the tax benefits can only be realized during times of profitability. Not all analysts agree, however.

It's more likely there will be additional write-downs on $2.2 billion in trust-preferred securities available for sale, and Zions probably will report more losses on securities tied to United Commercial in the fourth quarter.

Still, Zions had a third-quarter net interest margin (the difference between the average rate earned on loans and investments, and the average cost of funds) of 3.94%, trailing only Wells Fargo, which had a margin of 4.37%.

In a report supporting a "neutral" rating on the shares, Macquarie Equities Research analyst John Pancari estimated Zions would need to raise another $700 million to $1 billion in common equity, while Morgan Stanley's Zerbe put the estimate at $638 million. Both analysts emphasized a "compelling" value of the shares and management's increasingly upbeat tone on credit quality.

An investment in Zions Bancorporation isn't for the faint of heart. With a couple years of pain lying ahead, patience will be required. But this risky play could lead to stellar returns.

Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.