Columbia Banking System, Inc. — Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. is a commercial bank holding company serving primarily Washington and Oregon through Columbia State Bank and subsidiaries. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. Results include the West Coast Bancorp acquisition for the full six-month period in 2014, versus only three months in the comparable 2013 period, limiting year-over-year comparability.
Key financial metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Net interest income | $75.1 million | $80.0 million | $149.1 million | $133.5 million |
| Noninterest income | $14.6 million | $6.8 million | $28.6 million | $8.5 million |
| Noninterest expense | $57.8 million | $64.5 million | $115.2 million | $102.6 million |
| Net income | $21.2 million | $14.6 million | $41.1 million | $26.8 million |
| Diluted EPS | $0.40 | $0.28 | $0.77 | $0.58 |
| Net interest margin, tax equivalent | 4.86% | 5.19% | 4.86% | 5.13% |
- Revenue, defined by management as net interest income plus noninterest income, was $89.8 million in the second quarter and $177.7 million for the first six months.
- Total assets were $7.30 billion at June 30, 2014, up 2% from $7.16 billion at December 31, 2013.
- Total loans, net, were $4.65 billion, including $4.40 billion of noncovered loans and $242.1 million of covered loans. Noncovered loans increased 6% from year-end, primarily from loan originations.
- Total deposits were $5.99 billion, up modestly from $5.96 billion at year-end. Core deposits represented 95.8% of total deposits.
- Cash and cash equivalents were $224.5 million, compared with $179.6 million at December 31, 2013.
- Federal Home Loan Bank advances were $110.6 million, compared with $36.6 million at year-end; repurchase agreements were $25.0 million.
- Shareholders’ equity was $1.09 billion, or approximately 15% of total assets. The Company and Columbia Bank remained well capitalized; the Company’s total risk-based capital, Tier 1 risk-based capital, and leverage ratios were 14.52%, 13.27%, and 10.52%, respectively.
- Operating cash flow for the first six months was $63.4 million. Investing activities used $99.1 million, while financing activities provided $80.6 million, producing a $44.9 million increase in cash and cash equivalents.
- The noncovered loan allowance was $49.5 million, or 1.11% of noncovered loans, compared with 1.24% at year-end. Nonaccrual noncovered loans were $30.6 million, and nonperforming noncovered assets were $45.8 million, or 0.65% of noncovered assets.
Material changes versus comparable periods
- Second-quarter net income increased 45% to $21.2 million, while diluted EPS rose to $0.40 from $0.28. Six-month net income increased 53% to $41.1 million.
- Second-quarter net interest income declined 6% because of lower incremental accretion income on acquired loans. Six-month net interest income increased 12%, primarily because the West Coast acquisition contributed for the entire current-year period.
- Tax-equivalent net interest margin declined to 4.86% from 5.19% in the quarter and from 5.13% for the six-month comparison. Operating net interest margin declined modestly to 4.27% for the quarter and 4.23% year to date.
- Noninterest income increased substantially, primarily because the expense recorded for the FDIC loss-sharing asset was lower. The FDIC loss-sharing asset adjustment was a $5.1 million expense in the quarter versus a $13.1 million expense in the prior-year quarter.
- Second-quarter noninterest expense declined 10%, primarily because West Coast acquisition-related costs fell to $672 thousand from $9.2 million. Six-month noninterest expense increased 12% because the acquisition contributed for a longer period and ongoing expenses increased.
- Noncovered nonperforming assets declined $12.1 million from year-end, driven by loan payments, loans returning to accrual status, and OREO sales, partly offset by new nonaccrual loans.
- Other comprehensive income was $8.6 million in the quarter and $15.6 million year to date, primarily reflecting improved unrealized gains on available-for-sale securities. Accumulated other comprehensive income was $3.6 million at June 30, compared with a $12.0 million loss at year-end.
Outlook, commentary, risks, and unusual items
- No formal earnings or financial guidance is provided in the filing. Management expects continued emphasis on commercial lending, relationship banking, and growth in its primary markets.
- The filing identifies declining accretion from acquired loans as a continuing pressure on net interest income and margin. Incremental accretion income was $11.3 million in the second quarter, down from $18.1 million in the prior-year quarter.
- Covered loans remain subject to FDIC loss-sharing arrangements. Approximately 94% of covered loans were subject to an agreement at June 30, 2014; the five-year loss-sharing period for certain 2010 acquisitions expires March 31, 2015. The estimated FDIC clawback liability was $4.0 million.
- The Company recorded $1.5 million of provision for covered loan losses in the quarter and $3.9 million year to date, substantially offset by favorable adjustments to the FDIC loss-sharing asset.
- Investment securities had a net unrealized gain of $8.0 million at June 30, although $742.7 million of securities had gross unrealized losses of $18.1 million. Management did not consider these losses other-than-temporary.
- Commitments to extend credit were $1.36 billion. Lending is geographically concentrated in Washington and Oregon, exposing the Company to local economic, housing, and commercial real estate conditions.
- Key risks include credit deterioration, changes in interest rates, liquidity and funding conditions, regulatory costs, competition, operational and compliance risks, and potential impairment of acquisition-related goodwill of $344.0 million.
- On July 23, 2014, the Company announced an agreement to acquire Intermountain Community Bancorp. The stated transaction value was approximately $121.5 million based on Columbia’s stock price at announcement, subject to stock-price changes, regulatory approvals, shareholder approval, and other closing conditions.
- The filing states that disclosure controls were effective and that no material change occurred in internal controls over financial reporting during the quarter. No material change to previously disclosed risk factors was reported.
Facts investors should verify
- Whether loan growth can continue without a corresponding deterioration in credit quality, particularly in commercial and commercial real estate portfolios.
- The sustainability of earnings as acquired-loan accretion and FDIC loss-sharing benefits decline.
- The timing and final economics, capital impact, and integration risks of the proposed Intermountain transaction.
- The effect of the March 31, 2015 expiration of certain FDIC loss-sharing provisions and any related clawback exposure.
- Whether the increase in Federal Home Loan Bank advances reflects temporary balance-sheet management or a more persistent funding requirement.
- The Company’s future net interest margin sensitivity to interest-rate changes and deposit repricing.
- Potential valuation changes in the available-for-sale securities portfolio and any future other-than-temporary impairment assessments.