Zions Bancorp's (NASDAQ: ZION ) fourth-quarter earnings of $0.19 per share left the stock sagging slightly yesterday, but that earnings tally is in the past. What's really important about the release was what it says about the future, and I think savvy investors are now looking at these three reasons Zions is now an even better buy than before.
1. CDO reclassification
The big news out of the Zions' earning release was the impact that an "other-than-temporary impairment" on collateralized debt obligation securities had on net income for the quarter, affecting earnings per share by $0.25. While such a large impact should not be overlooked, the bank's modeling change that led to the charge should help it better estimate its CDO portfolio going forward.
The OTTI from this quarter was caused by two changes regarding these CDOs: an increase in the "probabilities of default" for the issuers of the CDOs and the increased assumption of near-term prepayment for some of the banks. Both of these factors could impact the performance of the CDOs going forward, so I view this as a smart move to head off the issue and reduce future surprises for investors.
2. Continued improvement in asset quality
The bank continued to reduce the ratio of nonperforming lending assets to loans, with this ever important ratio ending under 2% at the end of the fourth quarter. After reporting $1.1 billion in total nonperforming assets at the end of 2011, the bank was able to reduce this number to $745.6 million by the end of 2012, while increasing total loans $407 million over the year. The bulk of the loan increase was found in two major segments -- commercial and industrial loans and 1-4 family residential loans -- which grew a combined $1.24 billion.
3. Moderate loan growth
As mentioned previously, Zions saw a moderate increase in its total loans over the past year. Going into the year,the bank saw the need to grow loans by $400 to $500 million per quarter in order to combat decreasing net interest margin. Unfortunately, the bank missed on this target, only seeing roughly $100 million in average loan growth per quarter.
This is not all bad news, however. Despite a 34-basis point decline in net interest margin over the course of 2012, management expects the decline to be much lower during 2013. With pressure on net interest margin subsiding, Zions may be able to maintain its net interest income even with more moderate loan growth.
Foolish bottom line
While I would like to see a bit more than a nominal dividend before investing in a bank like Zions, the last year bodes well for the future of the bank, and I am encouraged by some of the changes the bank experienced over the past few months, including repaying its TARP obligation at the end of the third quarter.
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