Big Bailout Bounce for Zions: FBR (Update 3)

Updated with today's price decline for Zions Bancorp. and comments from Sterne Agee analyst Todd Hagerman, who has an opposing viewpoint on the stock.

NEW YORK (TheStreet) -- Zions Bancorporation (ZION) is expected soon to announce a plan to repay government bailout funds, which could set the stage for significant earnings improvement and gravy for investors.

Saying that the coming repayment of $1.4 billion in federal bailout funds would be a "catalyst" for the shares, FBR analyst Paul Miller on Monday reiterated his "outperform" rating on Zions, and raised his price target for the shares to $22 from $20.

During the Salt Lake City lender's Investor Day on Thursday, the company's management made a strong case for the franchise's continued viability, improved loan quality and credit administration, capital strength, and efforts to mitigate the pressure on its net interest margin from continued low rates and weak loan demand. Investors responded, sending the shares up over 8% last week, to close Friday at $19.86.

Zions Bancorporation CEO Harris Simmons

In the company's Investor Day presentation, Zions addressed discussed its collateralized debt obligation investments, which had a par value of $2.6 billion as of Dec. 30, with an amortized cost of $2.2 billion, but had been written down to an impaired carrying value of just $1.2 billion, because many of the issuers of the trust-preferred CDOs were troubled banks that were deferring interest payments.

With the CDO portfolio already discounted by 43% to cost and 53% to par, Zions sees "more upside potential vs. downside risk" for the portfolio. Miller on the other hand says that over the next year or two, "a significant amount of banks deferring payments will need to make a decision whether to bring the dividends back into repaying status, sell, or declare bankruptcy," and that he does "not believe it will be a positive outcome when it is all said and done."