Business Context and Reporting Period
Columbia Banking System, Inc. is a Washington-based bank holding company whose principal subsidiary, Columbia State Bank, provides commercial, consumer, wealth-management and trust services in Washington, Oregon and Idaho. The fiscal year ended December 31, 2019; fourth-quarter information is unaudited. The Company operated 146 branches and employed 2,162 full-time-equivalent employees at year-end.
Financial Performance and Condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net interest income | $493.4 million | $478.8 million | 3% |
| Provision for loan losses | $3.5 million | $14.8 million | Down 76% |
| Noninterest income | $97.2 million | $88.3 million | Up 10% |
| Noninterest expense | $345.5 million | $340.5 million | Up 1% |
| Net income | $194.5 million | $172.9 million | Up 12% |
| Diluted EPS | $2.68 | $2.36 | Up 14% |
| Net interest margin, tax-equivalent | 4.24% | 4.33% | Down 9 bps |
| Return on average assets | 1.46% | 1.36% | Up 10 bps |
| Return on average common equity | 9.19% | 8.78% | Up 41 bps |
- Total assets rose 8% to $14.08 billion. Loans increased 4.2% to $8.74 billion, while securities increased approximately 18% to $3.75 billion.
- Deposits increased 2.2% to $10.68 billion. FHLB advances increased $553.9 million to $953.5 million, supporting growth in loans and securities.
- Cash and cash equivalents ended at $247.7 million, down from $277.6 million. Available supplemental borrowing capacity was $1.96 billion from the FHLB and $209.1 million from the Federal Reserve.
- Net cash provided by operating activities was $204.7 million. Investing activities used $865.5 million, principally for securities purchases, loan growth and FHLB stock; financing activities provided $630.8 million.
- Nonperforming assets declined to $33.6 million, or 0.24% of assets, from $60.9 million, or 0.46%, in 2018. Nonaccrual loans declined to $33.1 million, and net charge-offs fell to $2.9 million.
- The allowance for loan and lease losses was $84.0 million, equal to 0.96% of loans, compared with 0.99% in 2018. Potential problem loans increased to $72.5 million from $26.6 million.
- The Company and Bank remained well-capitalized. Company ratios included 12.45% CET1, 13.60% total risk-based capital and 10.17% leverage; Bank ratios were 12.46%, 13.29% and 10.22%, respectively.
- Shareholders’ equity increased to $2.16 billion. The Company paid $1.40 per common share in dividends, including $0.28 per share of special dividends, and repurchased 1.5 million shares for $50.8 million.
Material Changes Versus the Prior Comparable Period
- Profitability improved primarily because of higher net interest income, lower loan-loss provision expense and increased noninterest income.
- Interest income increased 7% to $530.0 million, but interest expense doubled to $36.5 million as deposit and FHLB funding costs increased. The resulting margin contracted from 4.33% to 4.24%.
- Noninterest income benefited from $6.6 million of gains on the sale of three real-estate parcels, $3.1 million of bank-owned life insurance benefits and higher securities gains. Card revenue declined because of the applicable interchange-fee cap.
- Noninterest expense increased modestly despite the absence of $8.7 million of Pacific Continental acquisition-related costs recorded in 2018. Excluding those costs, expenses increased primarily because of compensation, employee benefits and legal and professional fees related to digital initiatives.
- The investment portfolio grew materially, while gross unrealized securities losses declined to $20.4 million from $56.0 million. Management did not consider the losses other-than-temporary.
- The Company adopted the new lease standard in 2019, recording approximately $49.2 million of right-of-use assets and $48.2 million of lease liabilities, plus a $782,000 increase to beginning retained earnings.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No quantitative earnings or revenue guidance is provided in the filing. Management emphasizes organic loan and deposit growth, operational efficiency, digital banking investment, asset quality and disciplined strategic expansion.
- Management entered an interest-rate collar with a $500 million notional amount to reduce the impact of declining rates. The filing estimates that a gradual 100-basis-point rate decline would reduce net interest income by $2.9 million in year one and $22.4 million in year two; a gradual 200-basis-point increase would increase net interest income by $517,000 and $21.4 million, respectively.
- The Company adopted CECL on January 1, 2020. Adoption increased the allowance for credit losses by $1.6 million, increased the allowance for unfunded commitments by $1.6 million and reduced beginning retained earnings by $2.5 million after tax.
- Management is preparing for the discontinuation of LIBOR, including substitute language for new and renewed LIBOR-based loans. The Company does not anticipate a material financial-statement impact but notes potential implementation costs and increased litigation risk.
- Principal risks include economic deterioration in the Northwest, commercial real-estate and commercial-business loan concentrations, changes in interest rates, funding costs, credit losses, cybersecurity and operational failures, regulatory and compliance costs, competition, acquisition integration, goodwill impairment, liquidity access and natural disasters.
- Goodwill totaled $765.8 million, or approximately 5.4% of total assets. The 2019 impairment test indicated that no goodwill impairment was required.
- The filing states that routine litigation is not expected to have a material adverse effect. No unresolved SEC staff comments or material control deficiencies were reported; management and the independent auditor concluded internal control over financial reporting was effective.
- Subsequent to year-end, the Company declared a $0.28 regular quarterly dividend and a $0.22 special dividend payable February 19, 2020.
Most Important Facts for Investors to Verify
- Whether the increase in potential problem loans to $72.5 million develops into higher nonaccrual loans, charge-offs or CECL provisions.
- The sustainability of the 2019 earnings improvement after excluding real-estate sale gains, BOLI benefits and other unusual items.
- The effect of deposit repricing, elevated FHLB advances and future interest-rate movements on net interest margin.
- Loan and securities concentration, particularly the 60% of gross loans secured by real estate and the large mortgage-backed securities portfolio.
- Actual post-adoption CECL allowance levels and the effect on capital, lending capacity and future earnings.
- Liquidity coverage, availability and collateral requirements for FHLB and Federal Reserve borrowing capacity.
- Progress and costs associated with digital initiatives, LIBOR replacement and cybersecurity controls.
- Whether dividends and share repurchases remain consistent with regulatory capital requirements and cash flows from the Bank to the holding company.