COLB

Columbia Banking System, Inc. - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Columbia Banking System, Inc. (Columbia) is a Washington-based bank holding company. The quarter was defined by two significant FDIC-assisted acquisitions: Columbia River Bank (closed January 22, 2010) and American Marine Bank (closed January 29, 2010). These transactions expanded the company's geographic footprint in Oregon and Washington and significantly increased its asset base.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisition Impact: Total assets increased by approximately $933 million from year-end 2009, driven by the acquisitions of Columbia River Bank and American Marine Bank. Total loans increased by $566 million.
• Revenue Growth: Net interest income rose 37% year-over-year, primarily due to the accretion of discounts on acquired loan portfolios. Noninterest income surged 165% due to a $9.8 million pre-tax gain on the American Marine Bank acquisition (bargain purchase).
• Expense Increase: Noninterest expenses increased 46% year-over-year, largely attributable to the integration of the two acquired banks and increased operating costs.
• Provision for Losses: The provision for loan and lease losses increased to $15.0 million from $11.0 million, reflecting continued economic recession effects and declining property values in Washington and Oregon. Net charge-offs were $11.5 million.
• Capital Raise: Subsequent to the quarter end (May 5, 2010), the company completed a public offering of 11.04 million shares, raising approximately $229.1 million in net proceeds.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the strong earnings performance primarily to the acquisition gain and the accretion of acquired loan discounts. The company maintains a focus on commercial lending and relationship banking. The efficiency ratio (excluding nonrecurring gains/losses) was 67.03% for Q1 2010.

Risks and Contingencies:

• Credit Quality: Nonperforming assets (noncovered) totaled $126.6 million, or 3.62% of noncovered assets. Commercial real estate and residential construction loans remain the primary components of nonperforming assets.
• Economic Conditions: The company faces risks from the national recession, specifically declining housing prices and commercial real estate values in its service areas (Washington and Oregon).
• Integration Risk: Challenges in integrating the two recent acquisitions could impact cost savings and operational efficiency.
• Regulatory Capital: The company is subject to restrictions on dividends and stock repurchases due to its participation in the U.S. Treasury's Capital Purchase Program (CPP).
• FDIC Loss-Sharing: While the FDIC covers a significant portion of losses on acquired loans (80-95%), there is a risk that the company may fail to manage these agreements in accordance with terms, potentially losing coverage.

Investor Verification Checklist

• Acquisition Accounting: Verify the sustainability of the $9.8 million bargain purchase gain and the accretion income from acquired loans, as these are non-recurring or temporary drivers of current earnings.
• Credit Trends: Monitor the trend of nonperforming assets and the adequacy of the Allowance for Loan and Lease Losses (ALLL), which stands at 2.92% of noncovered loans.
• Capital Deployment: Assess how the $229 million raised in the May 2010 offering will be deployed (e.g., further acquisitions, loan growth, or preferred stock redemption) and its impact on future ROE.
• FDIC Loss-Sharing Compliance: Confirm ongoing compliance with FDIC loss-sharing agreements to ensure continued coverage on the $875 million portfolio of covered loans.
• Preferred Stock Costs: Note the Series A Preferred Stock dividend rate increases to 9.0% after five years if not redeemed, which could materially impact future earnings.