Business Context and Reporting Period
Columbia Banking System, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company operates Columbia Bank and West Coast Trust, with lending activities concentrated in Washington and Oregon. On April 1, 2013, Columbia completed its acquisition of West Coast Bancorp, materially increasing its assets, loans, deposits, employees, operating expenses and geographic footprint.
Financial Performance and Condition
| Metric | Three months ended June 30, 2013 | Comparable 2012 period | Six months ended June 30, 2013 | Comparable 2012 period |
|---|---|---|---|---|
| Revenue | $86.8 million | $71.5 million | $141.9 million | $148.2 million |
| Net interest income | $80.0 million | $59.7 million | $133.5 million | $126.8 million |
| Net income | $14.6 million | $11.9 million | $26.8 million | $20.8 million |
| Diluted EPS | $0.28 | $0.30 | $0.58 | $0.52 |
| Net interest margin | 5.19% | 5.88% | 5.13% | 6.27% |
| Operating net interest margin | 4.34% | 4.44% | 4.28% | 4.46% |
| Noninterest expense | $64.5 million | $39.8 million | $102.6 million | $84.2 million |
Quarterly revenue increased 21% and net income increased 23%, primarily from West Coast-related loan interest income and lower credit-loss provisions. Six-month revenue declined because of lower accretion income from previously acquired loan portfolios, while net income increased because of lower provisions.
- Total assets were $7.07 billion at June 30, 2013, up 44% from $4.91 billion at December 31, 2012.
- Total loans, net, were $4.47 billion, compared with $2.86 billion at year-end 2012. Noncovered loans increased 66% to $4.18 billion, including $1.41 billion acquired from West Coast and $236.0 million of organic growth.
- Available-for-sale securities were $1.51 billion, up from $1.00 billion at year-end, primarily due to $730.8 million of acquired securities and $162.0 million of purchases.
- Total deposits were $5.75 billion, compared with $4.04 billion at year-end. Core deposits represented 95.2% of total deposits.
- FHLB advances were $179.7 million, versus $6.6 million at year-end. Repurchase agreements remained $25.0 million.
- Cash and cash equivalents declined to $192.7 million from $513.9 million at year-end.
- Shareholders’ equity increased to $1.03 billion from $764.0 million, principally from shares issued in the West Coast transaction. The company and Columbia Bank remained well-capitalized, although regulatory capital ratios declined from year-end levels.
Cash Flow, Credit and Liquidity
- For the six months, operating activities provided $29.9 million of cash, investing activities used $158.8 million, and financing activities used $192.3 million, resulting in a $321.2 million decrease in cash and cash equivalents.
- Investing cash uses included $194.3 million of net loan originations and acquisitions, $162.0 million of securities purchases and $154.2 million of net cash paid for the West Coast acquisition.
- Financing cash flows included $756.1 million of FHLB borrowings and $711.0 million of repayments, as well as repayment of $51.0 million of subordinated debt.
- The noncovered loan allowance was $51.7 million, or 1.24% of noncovered loans, compared with 2.07% at year-end. Management stated that no additional allowance was established for the acquired West Coast loan portfolio because the $88.8 million acquisition-accounting loan discount was considered sufficient at quarter-end.
- Noncovered nonaccrual loans were $43.6 million and total nonperforming noncovered assets were $68.0 million, or 1.01% of noncovered assets. The increase from $48.5 million at year-end primarily reflected nonperforming assets acquired from West Coast.
- Commitments to extend credit were $1.36 billion, compared with $908.5 million at year-end.
Material Changes, Outlook and Unusual Items
- The West Coast acquisition added approximately $2.63 billion of assets, $1.41 billion of fair-valued loans, $1.88 billion of deposits, $230.8 million of goodwill and $15.3 million of core deposit intangibles. Acquisition accounting remained provisional for certain deferred tax, mortgage repurchase liability and payment-system intangible amounts.
- Acquisition-related expenses were $9.2 million in the second quarter and $10.0 million for the six months. Management expects further operating cost savings and business synergies, but the filing provides no quantified earnings guidance.
- FDIC-related items materially affected results. The FDIC loss-sharing asset declined to $67.4 million from $96.4 million at year-end, producing a $13.1 million reduction to second-quarter noninterest income and a $23.6 million reduction for the six months.
- Covered-loan provisions were recaptured by $1.7 million in the quarter and $732 thousand for the six months, compared with provisions of $11.7 million and $27.4 million, respectively, in the 2012 periods.
- Net unrealized losses on available-for-sale securities were $12.1 million at June 30, 2013, compared with a $32.3 million net unrealized gain at year-end. Management did not consider the securities other-than-temporarily impaired.
- The company adopted ASU 2012-06 effective January 1, 2013. The adoption resulted in $5.7 million of additional indemnification-asset amortization, reducing six-month net income by $3.7 million and EPS by $0.08.
- Management identified economic weakness, real estate-market conditions, interest-rate changes, credit quality, liquidity, reliance on FHLB and Federal Reserve funding, integration execution, goodwill impairment, regulatory changes and competition as principal risks.
- West Coast-related litigation includes a previously filed claim against West Coast Trust seeking $215.6 million and shareholder litigation challenging the merger. The merger litigation was subject to a proposed settlement requiring court approval; the filing states that no assurance exists that the settlement will be completed or approved.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the final purchase-accounting adjustments for West Coast and the sustainability of the recorded $230.8 million goodwill balance.
- Assess the quality and performance of the substantially larger commercial and multifamily real estate loan portfolio, including acquired loans and nonaccrual trends.
- Evaluate whether the $88.8 million acquisition discount adequately replaces additional allowance requirements for West Coast loans.
- Separate recurring earnings from loan-discount accretion, FDIC loss-sharing adjustments, acquisition costs, securities valuation changes and the FHLB prepayment charge.
- Monitor liquidity after the decline in cash balances and the sharp increase in FHLB advances and credit commitments.
- Review the effect of rising interest rates on the securities portfolio, accumulated other comprehensive income and net interest margins.
- Determine the potential financial and reputational exposure from the West Coast Trust and merger-related legal proceedings.
- Confirm dividend capacity and capital ratios in light of regulatory requirements, acquisition integration and future balance-sheet growth.