Columbia Banking System, Inc. — 2012 Second-Quarter Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc., headquartered in Tacoma, Washington, operates through Columbia Bank, with lending primarily concentrated in Washington and Oregon. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared principally with the corresponding 2011 periods and December 31, 2011 balances.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net interest income | $59.7 million | $49.4 million | $126.8 million | $99.8 million |
| Noninterest income | $11.8 million | $3.5 million | $21.4 million | $(1.9) million |
| Noninterest expense | $39.8 million | $37.2 million | $84.2 million | $74.5 million |
| Net income | $11.9 million | $8.6 million | $20.8 million | $14.4 million |
| Diluted EPS | $0.30 | $0.22 | $0.52 | $0.36 |
| Net interest margin | 5.88% | 5.49% | 6.27% | 5.64% |
Second-quarter revenue, defined by management as net interest income plus noninterest income, was $71.5 million, up 35% year over year. Return on average assets was 1.00% and return on average common equity was 6.31%, compared with 0.80% and 4.81%, respectively, in the prior-year quarter. The reported second-quarter efficiency ratio was 68.54%, compared with 69.49%.
- Total assets were $4.79 billion at June 30, 2012, essentially unchanged from $4.79 billion at year-end 2011.
- Total loans, net, were $2.85 billion, compared with $2.83 billion at year-end. Noncovered loans increased 3.6% to $2.44 billion, while covered loans declined to $463.0 million from $531.9 million.
- Total deposits were $3.83 billion, compared with $3.82 billion at year-end. Core deposits increased approximately 2% to $3.57 billion.
- Cash and cash equivalents were $369.8 million, compared with $294.3 million at year-end.
- Federal Home Loan Bank advances were $113.1 million and repurchase agreements were $25.0 million at June 30, 2012.
- Shareholders’ equity was $758.7 million, or approximately 16% of total assets.
- Six-month operating cash flow was $74.4 million, compared with $42.5 million in 2011. Investing activities provided $14.6 million, compared with $138.2 million used in 2011, and financing activities used $13.5 million.
Material changes versus comparable periods
- Net income increased 38% in the second quarter and 44% for the first six months, primarily from higher net interest income and improved FDIC-related income.
- Net interest income increased 21% in the second quarter. Incremental accretion income from acquired loan portfolios was $15.0 million in the quarter and $37.4 million for the six months, compared with $8.9 million and $21.3 million, respectively, in 2011.
- Net interest margin expanded to 5.88% in the quarter and 6.27% for the six months. Excluding incremental accretion income, the margin was 4.44% for the quarter and 4.46% for the six months, compared with 4.53% and 4.48% in the prior-year periods.
- Noninterest income improved substantially because the change in the FDIC loss-sharing asset was a $0.2 million reduction to income in the quarter versus a $6.4 million reduction in 2011, and a $1.8 million reduction for the six months versus a $21.2 million reduction in 2011.
- Noninterest expense increased 7% in the quarter and 13% for the six months, largely due to compensation, occupancy, data processing and other operating costs associated with the 17 branches acquired in 2011 FDIC-assisted transactions.
- Provision expense increased to $3.8 million for noncovered loans and $11.7 million for covered loans in the second quarter, versus $2.2 million and $2.3 million, respectively, in 2011. The covered-loan provision was partially offset by a $9.4 million favorable adjustment to the FDIC loss-sharing asset.
- Nonperforming noncovered assets declined to $67.1 million, or 1.56% of period-end noncovered assets, from $85.4 million, or 2.02%, at December 31, 2011. Nonaccrual noncovered loans declined to $49.5 million from $53.5 million.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued emphasis on commercial lending and relationship banking. It also states that comparable earnings benefits from additional FDIC-assisted acquisitions are not anticipated because no such transaction had been completed in 2012.
- FDIC-assisted acquisition accounting materially affects reported earnings through loan discount accretion, covered-loan provisions and changes in the FDIC loss-sharing asset. The FDIC loss-sharing asset was $140.0 million at June 30, 2012, down from $175.1 million at year-end 2011.
- Covered-loan provision expense was $27.4 million for the first six months, partly offset by a $21.9 million increase in the FDIC loss-sharing asset.
- The allowance for noncovered loan losses was $52.2 million, equal to 2.14% of noncovered loans and 105.52% of nonperforming noncovered loans. Net noncovered charge-offs were $3.8 million in the quarter and $9.1 million for the six months.
- Management identifies credit quality, local housing and real estate conditions, interest-rate changes, liquidity, reliance on FHLB and Federal Reserve funding, FDIC loss-sharing performance, competition, regulatory changes, operational and legal risks, and potential goodwill impairment as material risks.
- Available-for-sale securities were $997.8 million and included $120.6 million with $0.9 million of unrealized losses. Management did not consider these securities other-than-temporarily impaired at quarter-end. A $3.0 million municipal security previously identified as other-than-temporarily impaired remained outstanding.
- Commitments to extend credit increased to $805.0 million from $709.9 million at year-end. The filing states that routine litigation is not expected to have a material adverse effect.
- The company declared, after quarter-end, a $0.09 quarterly dividend and a $0.21 special dividend per share, subject to regulatory and other restrictions.
- The company and Columbia Bank were classified as well-capitalized. At June 30, 2012, Columbia Bank reported total risk-based capital of 18.09%, Tier 1 risk-based capital of 16.82% and a leverage ratio of 11.25%.
Investor verification points
- Verify the sustainability of earnings excluding the $15.0 million quarterly and $37.4 million year-to-date acquired-loan accretion benefit.
- Monitor covered-loan performance, future impairment provisions, FDIC reimbursements and the remaining $140.0 million loss-sharing asset.
- Assess whether noncovered loan growth, charge-offs and declining nonaccrual balances support management’s reserve adequacy conclusion.
- Review deposit growth, reliance on FHLB and other borrowings, $369.8 million of cash and cash equivalents, and $805.0 million of credit commitments for liquidity implications.
- Evaluate the effect of acquired branch operating costs on future efficiency and profitability after the 2011 acquisition-related comparisons normalize.
- Confirm regulatory capital levels and dividend capacity, including the special dividend declared after quarter-end.