Columbia Banking System, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing contains unaudited consolidated financial statements for Columbia Banking System, Inc. and Columbia Bank. The company is a Washington-based commercial bank serving primarily Washington and Oregon.
Business Context and Reporting Period
- During 2011, the company completed three FDIC-assisted acquisitions: Summit Bank on May 20, First Heritage Bank on May 27, and Bank of Whitman on August 5.
- The Bank of Whitman transaction added nine branches and approximately $200.0 million of loans, net of acquisition accounting adjustments, and $401.1 million of deposits.
- Summit Bank and First Heritage included FDIC loss-sharing arrangements under which the FDIC generally absorbs 80% of covered losses and shares 80% of recoveries. The Bank of Whitman transaction was completed without loss share.
Financial Performance and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $64.8 million, versus $47.0 million | $164.6 million, versus $126.0 million |
| Net income | $18.9 million, versus $5.2 million | $33.3 million, versus $18.2 million |
| Net income applicable to common shareholders | $18.9 million, versus $2.5 million | $33.3 million, versus $13.2 million |
| Diluted EPS | $0.48, versus $0.06 | $0.84, versus $0.38 |
| Net interest margin | 6.53%, versus 5.24% | 5.96%, versus 4.90% |
| Return on average assets | 1.60%, versus 0.47% | 1.01%, versus 0.58% |
| Return on average common equity | 10.18%, versus 1.39% | 6.17%, versus 2.97% |
| Total noninterest income | $2.2 million, versus $5.2 million | $0.3 million, versus $36.9 million |
| Total noninterest expense | $39.9 million, versus $33.5 million | $114.4 million, versus $102.2 million |
- Quarterly revenue, defined by management as net interest income plus noninterest income, was $67.0 million, up 28% year over year. Nine-month revenue was $164.9 million, up 1%.
- Net interest income and margin benefited materially from accretion income on acquired loans. Incremental accretion income contributed approximately 194 basis points to the third-quarter margin and 77 basis points in the prior-year quarter.
- Noninterest income was reduced by a $10.9 million decrease in the FDIC loss-sharing asset during the quarter and a $32.0 million decrease for the nine-month period.
- Noninterest expense increased primarily because of acquisition-related personnel and operating costs and the FDIC clawback liability. The reported efficiency ratio, calculated using management’s adjusted definition, was 69.17% versus 68.33%.
Balance Sheet, Liquidity, Debt and Capital
- Total assets were $4.76 billion at September 30, 2011, up 11.7% from $4.26 billion at December 31, 2010, primarily because of the FDIC-assisted acquisitions.
- Total loans, net, were $2.78 billion, compared with $2.37 billion at year-end. Noncovered loans, net of unearned income, were $2.26 billion, up 18.9%; covered loans, net, were $570.8 million.
- Securities available for sale increased to $995.9 million from $763.9 million. The portfolio had $42.5 million of gross unrealized gains and $1.0 million of gross unrealized losses; management did not consider the securities other-than-temporarily impaired.
- Total deposits were $3.80 billion, up from $3.33 billion. Core deposits were $3.46 billion, or 91.3% of deposits. Brokered and other wholesale deposits were $48.7 million, or approximately 1% of deposits.
- Cash and cash equivalents were $347.5 million, compared with $514.1 million at year-end. Nine-month operating cash flow was $70.2 million, investing cash flow was $48.7 million, and financing cash flow was negative $285.5 million, resulting in a $166.7 million decrease in cash and cash equivalents.
- FHLB advances were $122.6 million and repurchase agreements were $25.0 million. Long-term subordinated debt declined to zero after the company redeemed trust preferred obligations for approximately $26.0 million in July 2011.
- Shareholders’ equity was $750.0 million, compared with $706.9 million at year-end. The company and Columbia Bank remained well capitalized. At September 30, 2011, company total risk-based capital, Tier 1 risk-based capital and leverage ratios were 21.87%, 20.61% and 13.97%, respectively; Columbia Bank’s ratios were 19.01%, 17.75% and 11.22%.
- Commitments to extend credit were $725.2 million, compared with $612.0 million at year-end.
Material Changes Versus Prior Comparable Period
- Net income applicable to common shareholders increased 663% in the third quarter and 152% for the first nine months, while diluted EPS increased to $0.48 and $0.84, respectively.
- The provision for noncovered loan losses declined to $0.5 million from $9.0 million for the quarter and to $2.7 million from $37.5 million for the nine months.
- Net noncovered loan charge-offs declined to $4.1 million from $6.4 million for the quarter and to $13.2 million from $28.6 million for the nine months.
- The allowance for noncovered loans declined to $50.4 million from $61.0 million at year-end, while the allowance ratio declined to 2.23% from 3.18%, primarily because of loan growth, improving credit metrics and net charge-offs.
- Nonperforming noncovered assets declined to $89.3 million, or 2.15% of noncovered assets, from $120.2 million, or 3.23%, at year-end. Nonaccrual loans declined to approximately $55.2 million from $89.2 million.
- Noninterest income fell sharply because the prior-year period included larger acquisition gains and a smaller reduction in the FDIC loss-sharing asset.
- Noninterest expense increased 19% for the quarter and 12% for the nine months, reflecting the expanded operating platform and acquisition-related expenses.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management states that interim and nine-month results are not necessarily indicative of full-year results.
- Management expects continued focus on commercial relationship banking and indicates that FHLB advances, Federal Reserve borrowings and repurchase agreements will remain supplemental funding sources.
- Acquisition accounting materially affected results. Pre-tax earnings impact from acquisition accounting was $7.7 million in the third quarter and $5.6 million for the nine months, including acquired-loan accretion, FDIC loss-sharing asset changes and clawback expense.
- The FDIC clawback liability was $3.3 million at September 30, 2011, representing the net present value of management’s estimated liability. The filing states that the related agreements could require payment at the end of the applicable loss-sharing period if losses do not reach specified thresholds.
- Noncovered OREO and other personal property totaled $34.1 million, while total OREO on the balance sheet was $49.9 million. Noncovered OREO write-downs were $5.1 million for the nine months.
- Management identified key risks related to economic and real estate weakness in Washington and Oregon, commercial real estate and construction concentration, future credit losses, FDIC loss-sharing estimates, acquisition integration, goodwill impairment, interest-rate volatility, liquidity, regulatory changes, deposit competition and operational or legal risks.
- Goodwill totaled $118.4 million. The company adopted a qualitative goodwill impairment assessment during the third quarter and concluded that a quantitative impairment test was unnecessary.
- Subsequent to quarter end, the company declared a regular $0.08-per-share dividend and a special one-time $0.05-per-share dividend. In October 2011, the board also authorized repurchases of up to 2 million common shares, subject to maintaining well-capitalized ratios.
- Management stated that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter. Routine litigation was not expected to have a material adverse effect.
Most Important Facts for Investors to Verify
- How much of reported earnings and net interest margin depends on acquired-loan accretion and other acquisition-accounting adjustments, and how those benefits may change over time.
- The sustainability of the sharp reduction in loan-loss provisions and nonperforming assets, particularly given the concentration in commercial business, commercial real estate and construction loans.
- The assumptions underlying the $193.9 million FDIC loss-sharing asset and the $3.3 million clawback liability, including potential changes in expected covered-loan cash flows.
- The integration costs, operating performance and credit quality of the three 2011 FDIC-assisted acquisitions.
- The effect of lower cash balances, increased credit commitments and the planned share repurchase and special dividend on liquidity and capital ratios.
- Potential future impairment of goodwill, investment securities or FHLB stock if economic, market or regulatory conditions deteriorate.