Columbia Banking System, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Columbia Banking System, Inc. is a Washington-based bank holding company operating through Columbia Bank, with lending activities concentrated in Washington and Oregon. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared primarily with the corresponding 2011 periods and December 31, 2011 balance-sheet data.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $56.4 million | $67.0 million | $204.5 million | $164.9 million |
| Net interest income | $57.3 million | $64.8 million | $184.0 million | $164.6 million |
| Net interest margin | 5.52% | 6.53% | 5.99% | 5.96% |
| Net income | $11.9 million | $18.9 million | $32.7 million | $33.3 million |
| Diluted EPS | $0.30 | $0.48 | $0.82 | $0.84 |
| Noninterest expense | $40.9 million | $39.9 million | $125.1 million | $114.4 million |
| Operating cash flow | Not separately presented | Not separately presented | $100.3 million | $70.2 million |
Revenue is defined in the filing as net interest income plus noninterest income. Q3 noninterest income was a loss of $0.9 million, compared with income of $2.2 million in the prior-year quarter. The nine-month effective tax rate was 27% in both years.
Balance Sheet, Liquidity, Debt and Capital
- Total assets increased 2% to $4.90 billion at September 30, 2012, from $4.79 billion at December 31, 2011.
- Total loans, net, were $2.85 billion, including $2.43 billion of noncovered loans and $429.3 million of covered loans. Noncovered loans increased 5.2% from year-end, led by commercial business and commercial real estate lending.
- Total deposits increased to $3.94 billion from $3.82 billion. Core deposits increased approximately 5% to $3.69 billion and represented 93.5% of total deposits.
- Cash and cash equivalents increased to $562.6 million from $294.3 million at year-end.
- Federal Home Loan Bank advances were $113.1 million and repurchase agreements were $25.0 million. The filing identifies FHLB advances, Federal Reserve borrowings and wholesale repurchase agreements as supplemental funding sources.
- Shareholders’ equity was $762.0 million, or approximately 16% of total assets. The Company and Columbia Bank qualified as well-capitalized; the Company’s total risk-based, Tier 1 risk-based and leverage ratios were 20.75%, 19.49% and 12.80%, respectively.
- Commitments to extend credit increased to $853.8 million from $709.9 million at year-end.
Material Changes Versus Comparable Periods
- Q3 net income declined 37% and diluted EPS declined to $0.30 from $0.48, primarily because of higher noncovered loan-loss provisions and lower earnings from acquired loan portfolios.
- Nine-month net income declined 2% and diluted EPS declined to $0.82 from $0.84, despite 12% growth in net interest income. The nine-month comparison benefited from a full period of contribution from the 2011 FDIC-assisted Bank of Whitman acquisition.
- Q3 net interest margin fell 101 basis points to 5.52%. Incremental accretion income from acquired loans declined to $11.9 million from $19.7 million. Excluding incremental accretion, the margin was 4.40% versus 4.59%.
- Nine-month noncovered loan-loss provision increased to $11.1 million from $2.7 million. Net noncovered charge-offs were $12.6 million, compared with $13.2 million in the prior-year period.
- Covered-loan provision expense was $23.4 million for the first nine months, partially offset by an $18.7 million favorable adjustment to the FDIC loss-sharing asset. In Q3, covered-loan provision was recaptured by $4.0 million.
- Noninterest expense increased 3% in Q3 and 9% year to date. Q3 legal and professional expense included $1.1 million related to the proposed West Coast Bancorp merger.
- Nonperforming noncovered assets declined to $53.3 million, or 1.20% of noncovered assets, from $85.4 million, or 2.02%, at year-end. Nonaccrual noncovered loans declined to $41.6 million from $53.5 million.
- Noncovered OREO declined to $10.9 million from $22.9 million at the beginning of 2012; covered OREO was $16.5 million at September 30.
Cash Flow, Margins and Credit Quality
For the first nine months, operating activities provided $100.3 million of cash, investing activities provided $85.0 million, and financing activities provided $83.0 million. Cash and cash equivalents increased by $268.3 million. The noncovered allowance for loan and lease losses was $51.5 million, equal to 2.08% of noncovered loans and 123.9% of nonaccrual noncovered loans.
Noncovered loans were concentrated in commercial business loans and commercial and multifamily real estate. At September 30, $134.4 million of noncovered loans were classified as substandard and $34.3 million as special mention. Management stated that the allowance remained adequate, but noted that changes in economic conditions, collateral values, credit trends or assumptions could require future adjustments.
Outlook, Commentary, Risks and Unusual Items
- The filing does not provide quantitative earnings or revenue guidance. Management expects continued emphasis on commercial lending and relationship banking.
- The company announced a proposed merger with West Coast Bancorp on September 25, 2012. Closing required regulatory and shareholder approvals and other conditions. The company could owe a $5 million termination fee if the agreement is terminated because required company shareholder or regulatory approval is not obtained.
- Management identified risks from local and national economic conditions, real estate and housing markets, credit quality, collateral values, interest-rate changes, liquidity, competition, regulatory actions, FDIC-assisted loan performance, goodwill impairment and merger integration.
- FDIC loss-sharing arrangements covered a substantial portion of losses on acquired assets, generally at 80% and, after specified thresholds for certain agreements, at 95%. The FDIC loss-sharing asset declined to $111.7 million from $175.1 million at year-end, and the estimated FDIC clawback liability was $3.8 million.
- The company changed its annual goodwill impairment testing date from September 30 to July 31 and reported no impairment from the July 31, 2012 assessment.
- A previously impaired $3.0 million municipal bond was expected to be fully repaid; the company received full payment, including accrued interest, on October 1, 2012.
- Quarterly and special dividends were paid during 2012. A regular $0.09-per-share dividend was declared after quarter-end, payable November 21, 2012, subject to regulatory restrictions.
- Routine litigation was reported, but management did not expect it to have a material adverse impact. Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Investor Verification Checklist
- Verify the timing and required approvals for the West Coast Bancorp merger, including the potential $5 million termination fee and expected integration costs.
- Assess the sustainability of earnings as acquired-loan accretion declines and FDIC loss-sharing benefits diminish.
- Monitor noncovered commercial and real estate loan growth, substandard balances, charge-offs, nonaccrual loans and allowance adequacy.
- Review the valuation and collectability of the $111.7 million FDIC loss-sharing asset and the $3.8 million clawback liability.
- Evaluate liquidity and funding dependence, including the maturity schedule of FHLB advances and the $853.8 million of unfunded credit commitments.
- Confirm that the company and bank remain well-capitalized and review the effect of dividends, merger activity and any future credit deterioration on capital ratios.