Columbia Banking System, Inc. — 2013 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2013. Columbia Banking System is a Washington-based bank holding company operating primarily through Columbia Bank in Washington and Oregon. On April 1, 2013, the company completed its acquisition of West Coast Bancorp, adding approximately $2.63 billion of assets, $1.41 billion of fair-value-measured loans and $1.88 billion of deposits.
Key financial metrics
| Metric | Three months ended September 30, 2013 | Nine months ended September 30, 2013 |
|---|---|---|
| Revenue: net interest income plus noninterest income | $88.0 million | $230.0 million |
| Net interest income | $80.4 million | $213.9 million |
| Net income | $13.3 million | $40.0 million |
| Diluted EPS | $0.25 | $0.83 |
| Net interest margin | 5.37% | 5.21% |
| Operating net interest margin | 4.41% | 4.33% |
| Efficiency ratio | 66.59% | 66.65% |
Third-quarter revenue increased 56% year over year, while net income increased from $11.9 million to $13.3 million. Nine-month revenue increased from $204.5 million to $230.0 million, and net income increased from $32.7 million to $40.0 million. Diluted EPS rose from $0.82 to $0.83 for the nine-month period but declined from $0.30 to $0.25 in the quarter because of the substantial increase in shares outstanding following the acquisition.
- Total assets were $7.15 billion at September 30, 2013, up 46% from $4.91 billion at December 31, 2012.
- Total loans, net, were $4.44 billion, up from $2.86 billion at year-end; noncovered loans grew 66% to $4.19 billion, including $241.1 million of organic growth.
- Total deposits were $5.95 billion, up from $4.04 billion. Core deposits represented 95.2% of total deposits.
- Available-for-sale securities were $1.57 billion, compared with $1.00 billion at year-end.
- Shareholders’ equity was $1.05 billion, compared with $764.0 million at year-end. The company issued preferred stock, common stock and warrants in connection with the West Coast transaction.
- FHLB advances were $34.6 million and repurchase agreements were $25.0 million at quarter-end. The company and Columbia Bank were classified as well-capitalized; Columbia Bank’s total risk-based capital, Tier 1 risk-based capital and leverage ratios were 13.18%, 11.92% and 8.87%, respectively.
- Net cash provided by operating activities was $59.8 million. Investing activities used $178.1 million, including $154.2 million of net cash paid for the acquisition. Financing activities used $140.9 million. Cash and cash equivalents declined to $254.8 million from $513.9 million at year-end.
Material changes versus comparable periods
- Net interest income increased 40% in the third quarter and 16% year to date, primarily from the larger loan and securities portfolios and West Coast loan discount accretion.
- Noninterest income was $7.6 million in the quarter versus a $0.9 million loss in the prior-year quarter. Year-to-date noninterest income declined 21% to $16.1 million because the FDIC loss-sharing asset generated a $35.4 million reduction in income, versus $14.8 million in the prior-year period.
- Noninterest expense increased 58% in the quarter and 34% year to date. Acquisition-related costs were $7.6 million in the quarter and $17.6 million year to date, with additional ongoing expenses from the West Coast transaction.
- The noncovered loan-loss provision increased to $4.3 million in the quarter, largely because acquired West Coast loans transitioned from initial fair-value accounting to the company’s standard allowance methodology. The covered-loan provision was recaptured by $947 thousand in the quarter and $1.7 million year to date.
- Net interest margin declined from 5.52% to 5.37% in the quarter and from 5.99% to 5.21% year to date. Management attributed the decline primarily to lower contribution from acquired-loan accretion and generally lower market rates. Operating net interest margin was comparatively stable.
- Noncovered nonperforming assets were $59.6 million, or 0.87% of noncovered assets, versus $48.5 million, or 1.08%, at year-end. The increase in dollars was primarily attributable to $33.6 million of nonperforming assets acquired from West Coast; excluding the acquisition, nonperforming assets declined.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects to continue emphasizing commercial and commercial real estate lending and expects to continue using FHLB advances, Federal Reserve borrowings and repurchase agreements as supplemental funding sources.
- The company recorded $229.7 million of goodwill and $15.3 million of core deposit intangibles from the West Coast acquisition. Acquisition accounting remained provisional for certain deferred-tax, mortgage-repurchase and payment-system items.
- Adoption of ASU 2012-06 resulted in an additional $9.9 million of indemnification-asset amortization during the first nine months, reducing net income by $6.4 million and diluted EPS by $0.13.
- The FDIC loss-sharing asset declined to $53.6 million from $96.4 million at year-end. The related estimated clawback liability was $3.8 million.
- Unrealized losses on available-for-sale securities were $29.7 million at quarter-end; management did not consider the securities other-than-temporarily impaired. Interest-rate changes remain a key market risk.
- Credit risk is concentrated in Washington and Oregon commercial, commercial real estate and multifamily lending. The noncovered allowance was $55.8 million, or 1.33% of noncovered loans, and 155% of noncovered nonaccrual loans.
- Commitments to extend credit increased to $1.42 billion from $908.5 million at year-end. Management states that allowance estimates may change with economic conditions, collateral values, delinquencies and credit performance.
- Legal contingencies assumed with West Coast include an estate-related fiduciary-duty matter involving a claimed $215.6 million loss and consolidated litigation challenging the West Coast merger. The company believes the claims lack merit, but a proposed settlement remained subject to final documentation and court approval.
- Other principal risks include integration and retention risk from West Coast, interest-rate and liquidity risk, FDIC loss-sharing effects, goodwill impairment, competition, regulatory changes, and potential uninsured legal liabilities.
Important facts for investors to verify
- Whether West Coast integration produces the expected cost savings, revenue growth and customer and employee retention.
- The sustainability of earnings after acquisition-related expenses, loan discount accretion and FDIC loss-sharing effects decline.
- Trends in net interest margin, operating margin, deposit costs and reliance on acquired-loan accretion.
- Credit quality, nonperforming assets, charge-offs, the allowance methodology and the performance of acquired loans.
- Liquidity levels, deposit stability, borrowing capacity and the effect of the $1.42 billion of unfunded credit commitments.
- Resolution and potential financial exposure from the disclosed legal proceedings and the status of provisional acquisition accounting.
- Capital ratios and the potential effect of goodwill, intangible assets, accumulated other comprehensive losses and future growth on regulatory capital.