New Banking Powerhouse in the Pacific Northwest?

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In late September of 2012, Columbia Banking System (NASDAQ: COLB) formalized its intention to acquire regional rival West Coast Bancorp (NASDAQ: WCBO) in a cash-and-stock deal valued at about $505 million. The company would become the largest thrift-style community bank based in the Pacific Northwest region of the United States. Although it is currently the subject of a pending class-action lawsuit, the deal still appears likely to close as planned. If nothing happens to change the merger's terms or scuttle the deal completely, it should close by the end of the second quarter of 2013.

About Columbia Banking System and West Coast Bancorp

Tacoma, Washington-based Columbia Banking System is a major regional bank that operates in Washington State and Oregon. The company maintains a business-focused lending portfolio and offers a variety of consumer financial services as well. In addition to its checking and savings accounts, the company also provides certificates of deposit, retirement accounts, investment advice, wealth-management services and various professional banking services. Columbia Banking System also issues credit cards, business loans, mortgage loans, commercial-construction financing and many other credit facilities. In 2012, the company earned $46.1 million on $226.6 million in revenue.

Lake Oswego, Oregon-based West Coast Bancorp is the holding company that owns and operates West Coast Bank. The company operates primarily in Oregon's busy I-5 corridor as well as a small section of southwestern Washington State. Its consumer-focused operations include deposit accounts, CDs, retirement vehicles, wealth-management services, wire services and online banking. The company also offers its own branded credit cards and makes a wide variety of loans, including mortgage, auto and business loans. It also manages a small trust and life insurance division that caters to a range of private individuals. The company owns and operates over 60 branches in its region and employs several hundred people. In 2012, it earned $23.5 million on about $120 million in gross revenue.

How the deal is structured

Based on Columbia's current stock price, this deal values West Coast Bancorp at approximately $23.10 per share. Relative to West Coast's pre-announcement closing price of $20.18 per share, this represents a premium of about 14.5 percent. Relative to the company's current price of $23.55 per share, this represents a discount of about 1.9 percent. However, fluctuations in Columbia's stock price are likely to change the exact value of the deal before its closing. If the company's shares continue to appreciate, the deal has the potential to become considerably more attractive for West Coast's shareholders.

Although Columbia has budgeted nearly $265 million for the deal's cash component, it appears likely that many West Coast shareholders will elect to receive Columbia shares in exchange for their stakes in the bought-out bank. Investors who elect to exchange their stakes for Columbia Banking System's stock would receive exactly 12.25 Columbia shares for every 10 West Coast shares that they own. Given the company's potential upside, this may offer a better value than the deal's relatively small cash premium.

Competition and complications

A class-action lawsuit that was filed in October threatens to derail the deal. However, its merit is uncertain. The suit alleges that West Coast Bancorp's executive management team violated its fiduciary responsibility to the company's shareholders by agreeing to a deal that undervalues the company by up to $2 per share. It cites analysts' price targets of nearly $25 per share and suggests that certain West Coast executives were complicit in negotiating terms that conferred outsize benefits to the company's upper management team. For its part, West Coast Bancorp has dismissed the suit as baseless and has expressed confidence that it will be resolved during the coming weeks.

It should be noted that this merger is well on its way to regulatory and shareholder approval. West Coast Bancorp's board of directors has already voted to approve the deal. Meanwhile, approximately one-quarter of the company's shareholders have voted to authorize the merger. If another 25 percent of its shareholders vote to approve the deal, the lawsuit may be rendered moot.

Long-term prospects and outlook

If this merger is successful, it will create a community-focused bank with over $10 billion in combined assets. This heft will help the combined company in its home market and may help it to finance an expansion into neighboring territories like Idaho, Montana and northern California.

The recent financial crisis seriously damaged the Pacific Northwest's banking infrastructure. Although San Francisco-based Wells Fargo (NYSE: WFC) has achieved market saturation in many of the region's more populous towns and cities, there remains an acute need for a major community-focused bank there. Wells Fargo is widely regarded to have exploited the weaknesses of the region's nationally-recognized banks in the service of an aggressive expansion campaign in the Seattle and Portland metropolitan areas. While this strategy has worked out well for Wells Fargo's bottom line, the strategy has produced some ill will in the local community. The newly-expanded Columbia Banking System could exploit this frustration for its own gain.

As the economy of the Pacific Northwest continues to improve, it is likely that Columbia Banking System's mortgage and business lending divisions will enjoy steadily-growing returns. Investors who believe that the company's stock has more room to run would do well to buy into the company at these levels. Although the premium that is has offered for West Coast Bancorp is unimpressive, the combined company may quickly become a formidable financial force in the region.


mthiessen has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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