Columbia Banks Says Strong Core Results Resume, Expense Control May Offer More Upside Raising 2012 EPS, Reiterating BUY Rating

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Columbia reported Q2’12 EPS of $0.30 versus our $0.24 estimate and Thomson One consensus of $0.29.  Results again were impacted by acquired loan accounting, but core trends were positive. Loan growth was strong, NPAs sharply declined and core operating costs were significantly improved from Q1.

  • Loan growth ramped up in the quarter, with loan totals increasing by $65.2 million, representing 11.0 percent annualized growth.  C&I growth led the charge and pipelines were said to be growing according to management.  With $34.6 million in deposit runoff, the bank’s loan to deposit ratio climbed from 74 percent to 76 percent.
  • Net interest margin moved from 6.67 percent last quarter to 5.88 percent.  Backing out additional accretion income, core margins compressed only 5bp to 4.44 percent.  Net interest income was a stout $59.7 million, inflated by the accretion income but also mostly offset by a significant provision on covered loans as well as a modest expense for the change in the FDIC loss-sharing asset.
  • Non interest income increased 6.7 percent on a core basis as service charges and fees grew nicely linked quarter.  Non interest expense dropped nearly 10 percent when backing out FDIC accounting impact, driven by a drop in OREO costs and writedowns.  The efficiency ratio improved from 57.9 percent to 55.7 percent during Q2.
  • NPAs fell $12.1 million to $67.1 million, now amounting to just 1.40 percent of assets, down from 1.64 percent last quarter.  NCOs declined and were nearly offset by the non covered provision, which kept reserve levels essentially flat.  However, with the improved problem loan balance, reserve coverage on NPLs and loans remain a healthy 106 percent and 2.14 percent, respectively.
  • The company announced another special dividend, this time $0.21 to be paid in Q3.  Of the dividends paid or announced so far this year, plus adding the assumed regular quarterly rate in Q4, COLB is on pace to pay out nearly $1 in dividends this year.  And, should a special dividend by paid in Q4 similar to the first three quarters in 2012, the dividend yield for the full year would be north of 6 percent at current trading levels.
  • We are increasing our 2012 EPS estimate from $1.00 to $1.12 mostly due to lower operating costs and higher fee income. Our 2013 estimate is unchanged.
  • Q2’12 represents a return to solid results and momentum is growing outside of interest rate pressures that are not entirely in the bank’s control.  Trading under 1.15x current TBV, we view COLB’s valuation level as attractive given the bank’s above average franchise value and diverse capital options ranging from additional dividend payouts to acquisitions.  We reiterate our BUY rating and $23 target.    
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