COLUMBIA BANKING SYSTEM, INC. annual report, FY2013

Columbia Banking System, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2013, with selected fourth-quarter information. Columbia is a Tacoma, Washington-based bank holding company operating Columbia State Bank and West Coast Trust. The Bank served Washington and Oregon through 142 branches at year-end.

Business Context and Strategic Developments

  • On April 1, 2013, Columbia completed its acquisition of West Coast Bancorp, adding approximately $2.63 billion of assets, $1.41 billion of loans measured at fair value, and $1.88 billion of deposits.
  • The acquisition expanded the branch network from 99 to 142 locations and increased full-time equivalent employees from 1,198 to approximately 1,695.
  • Management’s strategy emphasizes Pacific Northwest commercial and community banking, core deposit growth, relationship lending, operating efficiency, asset quality, and selective acquisitions.

Key Financial Metrics

Metric20132012Change or commentary
Net interest income$291.1 million$238.9 millionUp 22%
Net income$60.0 million$46.1 millionUp 30%
Diluted earnings per share$1.21$1.16Up $0.05
Noninterest income$26.7 million$27.1 millionDown 1%
Noninterest expense$230.9 million$162.9 millionUp 42%; included $25.5 million of acquisition-related costs
Net interest margin5.16%5.77%Declined primarily because of lower security yields and reduced acquisition-related accretion
Operating net interest margin4.32%4.36%Declined four basis points
Return on average assets0.92%0.96%Lower despite higher net income
Return on average common equity6.14%6.06%Slightly higher
Total assets at year-end$7.16 billion$4.91 billionUp 46%, primarily from the West Coast acquisition
Loans, excluding covered loans$4.22 billion$2.53 billionUp 67%
Total deposits$5.96 billion$4.04 billionUp 47%
Core deposits$5.70 billion$3.80 billion96% of total deposits versus 94% in 2012
Shareholders’ equity$1.05 billion$764.0 millionIncreased primarily through shares issued for the acquisition

Fourth-Quarter 2013 Results

  • Net income was $20.0 million, compared with $13.5 million in the fourth quarter of 2012.
  • Diluted earnings per share were $0.38, compared with $0.34 in the prior-year quarter.
  • Net interest income was $77.2 million; noninterest income was $10.6 million; and noninterest expense was $63.6 million.
  • The quarter included a $2.1 million recapture of the noncovered loan-loss provision and a $1.6 million recapture for covered loans.

Credit Quality, Cash Flow, Debt, and Liquidity

  • Noncovered loan-loss provision declined to $3.2 million from $13.5 million. Net noncovered charge-offs declined to $3.1 million from $14.3 million.
  • The allowance for noncovered loan and lease losses was $52.3 million, or 1.24% of noncovered loans, compared with 2.07% at year-end 2012. Management noted that acquired loans had fair-value discounts that reduced the comparable allowance ratio; excluding acquired loans, the ratio was 1.58%.
  • Total nonperforming assets, excluding covered assets, were $57.9 million, or 0.84% of year-end assets, compared with $48.5 million, or 1.08%, in 2012. The dollar increase was primarily attributable to assets acquired from West Coast.
  • Cash provided by operating activities was $79.6 million. Investing activities used $281.1 million, including $154.2 million of net cash paid in the West Coast acquisition. Financing activities used $132.9 million. Cash and cash equivalents declined to $179.6 million from $513.9 million.
  • Year-end FHLB advances were $36.6 million, securities sold under repurchase agreements were $25.0 million, and no long-term subordinated obligations remained after repayment of $51.0 million during 2013.
  • Available supplemental borrowing capacity was approximately $1.04 billion from the FHLB and $85.5 million from the Federal Reserve Bank.
  • Off-balance-sheet loan commitments were $1.37 billion, compared with $888.5 million in 2012. Standby letters of credit were $36.7 million.
  • The Company and Bank remained well capitalized. Company total risk-based capital was 14.68%, Tier 1 risk-based capital was 13.43%, and the leverage ratio was 10.19%. Columbia Bank’s corresponding ratios were 13.52%, 12.27%, and 9.29%.

Material Changes Versus the Prior Comparable Period

  • The West Coast acquisition materially increased assets, loans, deposits, branches, employees, goodwill, intangible assets, and operating expenses.
  • Interest income rose 19%, while interest expense fell 39%, producing a 22% increase in net interest income. The benefit was partly acquisition-related and included $58.2 million of incremental loan accretion income.
  • Noninterest expense increased substantially because of acquired operations and integration costs. Compensation and employee benefits increased 47%, and occupancy expense increased 65%.
  • The FDIC loss-sharing asset declined to $39.8 million from $96.4 million, primarily due to cash received, amortization, and improved expected cash flows.
  • Goodwill increased to $344.0 million, including $228.4 million recognized in the West Coast transaction. The annual impairment test identified no impairment.
  • Other comprehensive loss was $32.2 million, primarily reflecting unrealized losses on available-for-sale securities. The securities portfolio had $38.9 million of gross unrealized losses at year-end, which management did not consider other-than-temporary.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

  • The filing does not provide formal numerical earnings or revenue guidance. Management expects continued core deposit growth, commercial lending activity, market-share expansion, and operating efficiencies, while continuing to evaluate branches and potential acquisitions.
  • Management stated that it expects to meet Basel III capital requirements on a fully phased-in basis as of year-end 2013, although implementation was scheduled to begin in 2015.
  • Principal risks include economic weakness in Washington and Oregon, commercial real estate and commercial business concentration, collateral-value declines, higher nonperforming assets, interest-rate movements, liquidity and funding pressures, acquisition integration, goodwill impairment, regulatory and compliance costs, competition, cybersecurity, legal proceedings, and changes in accounting standards.
  • The company adopted ASU 2012-06 concerning government-assisted acquisition indemnification assets. The adoption resulted in $12.3 million of additional indemnification-asset amortization, reducing 2013 net income by $8.0 million and diluted EPS by $0.16.
  • West Coast-related facility exit activities produced $2.8 million of 2013 expense; total expected expense was $4.0 million, with $1.2 million expected in 2014.
  • A consolidated legal action challenging the West Coast merger was settled, with court approval entered on February 18, 2014. A separate West Coast Trust matter sought a $215.6 million surcharge; management believed the claims were without merit, and the appeal decision was pending at filing.
  • The Board declared a $0.12 per share quarterly dividend on January 23, 2014. Future dividends remain subject to earnings, capital, regulatory, and other conditions.

Important Facts for Investors to Verify

  1. Whether the West Coast acquisition generates the expected revenue growth, cost savings, customer retention, and integration benefits after the elevated 2013 acquisition expenses.
  2. The sustainability of earnings excluding loan accretion, FDIC loss-sharing effects, acquisition costs, and other unusual items.
  3. Credit trends in the enlarged commercial business and commercial real estate portfolios, including potential problem loans, nonperforming assets, charge-offs, and allowance adequacy.
  4. The effect of future interest-rate changes on net interest margin, deposit costs, securities values, loan demand, and borrower performance.
  5. The future realizability of the $344.0 million goodwill balance and the $39.8 million FDIC loss-sharing asset.
  6. Liquidity and capital requirements as deposits, loan commitments, acquisitions, dividends, and Basel III implementation evolve.
  7. The terms and ultimate exposure associated with merger-related litigation, FDIC loss-sharing agreements, leases, off-balance-sheet commitments, and other contingencies.