Business Context and Reporting Period
Columbia Banking System, Inc., through Columbia State Bank and Columbia Trust Company, operates a full-service commercial banking business focused primarily on commercial business, commercial real estate, real estate construction, consumer lending, deposits, treasury management, card services, trust and financial services in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three and six months ended June 30, 2016; the balance sheet is compared with December 31, 2015.
Financial Performance and Condition
| Metric | Q2 2016 | Six Months 2016 | Comparable Prior Period |
|---|---|---|---|
| Net income | $25.4 million | $46.7 million | $21.9 million and $46.3 million |
| Diluted EPS | $0.44 | $0.80 | $0.38 and $0.80 |
| Net interest income | $82.1 million | $162.3 million | $81.0 million and $161.4 million |
| Noninterest income | $21.9 million | $42.6 million | $21.5 million and $44.2 million |
| Provision for loan losses | $3.6 million | $8.9 million | $2.2 million and $3.4 million |
| Noninterest expense | $63.8 million | $128.9 million | $68.5 million and $135.2 million |
| Net interest margin, tax-equivalent | 4.10% | 4.12% | 4.41% and 4.40% |
| Operating net interest margin, tax-equivalent | 4.00% | 4.01% | 4.17% and 4.18% |
Total assets were $9.35 billion at June 30, 2016, up $402.0 million from year-end 2015. Loans, net of unearned income and before the allowance, were $6.11 billion, up $292.1 million, driven by commercial business and commercial and multifamily real estate production. Securities available for sale totaled $2.28 billion, up $121.9 million.
Total deposits were $7.67 billion, up $234.4 million from year-end. FHLB advances increased to $204.5 million from $68.5 million, while repurchase agreements were $89.2 million. Cash and cash equivalents were $178.4 million. Six-month operating cash flow was $73.7 million, compared with $64.6 million in the prior-year period; investing activities used $386.6 million, principally for loan growth, securities purchases and FHLB stock, while financing activities provided $316.1 million.
Shareholders’ equity was $1.27 billion, or 14% of assets. At June 30, 2016, the Company and Columbia Bank were well capitalized, with CET1 ratios of 11.6591% and 11.5121%, total risk-based capital ratios of 12.6568% and 12.4962%, and leverage ratios of 9.6859% and 9.5856%, respectively.
Credit metrics remained relatively strong. Nonaccrual loans were $22.9 million and total nonperforming assets were $33.5 million, representing 0.38% of period-end loans and 0.36% of total assets, respectively. The allowance for loan and lease losses was $69.3 million, or 1.13% of loans. Net charge-offs were $7.8 million for the first six months, compared with $3.7 million in the prior-year period.
Material Changes Versus Prior Comparable Period
- Second-quarter net income increased 16%, supported by higher net interest income and noninterest income and lower expenses. Six-month net income increased less than 1%.
- Net interest income rose modestly, but the tax-equivalent net interest margin declined because of lower accretion income from acquired loans. Incremental accretion income fell to $4.4 million in the quarter and $9.1 million year to date, from $7.3 million and $14.8 million, respectively.
- Noninterest expense declined 7% in the quarter and 5% year to date, primarily because acquisition-related costs were substantially lower. Acquisition-related expense was $2.4 million year to date versus $8.6 million in the prior-year period.
- Loan-loss provision increased materially, to $8.9 million year to date from $3.4 million, reflecting loan growth, net charge-offs and lower expected cash flows on purchased credit-impaired loans.
- Six-month noninterest income declined 4%, primarily because of a less favorable change in the FDIC loss-sharing asset and lower financial services and trust revenue. Quarterly noninterest income increased 2%, aided by card and loan revenue.
- Accumulated other comprehensive income improved to $20.8 million from a $6.3 million loss at year-end, principally due to higher unrealized gains on available-for-sale securities.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or financial guidance. Management expects continued emphasis on commercial lending and relationship banking and expects to continue using deposits, FHLB advances, Federal Reserve borrowings and repurchase agreements to fund loans and securities.
Non-single-family FDIC loss-sharing provisions for the remaining acquired portfolios expired in the second quarter of 2016. The Company retained a $5.4 million estimated FDIC clawback liability, and future activity is expected to be limited primarily to recoveries under the remaining agreements. The FDIC loss-sharing asset was $4.3 million at quarter end, down from $6.6 million at year-end.
The Board approved a new authorization to repurchase up to 2.9 million common shares, subject to market conditions and maintenance of well-capitalized status. A regular quarterly dividend of $0.20 per common share and a special dividend of $0.19 were declared after quarter end.
Principal risks include credit deterioration, concentrated exposure to Pacific Northwest commercial and real estate markets, interest-rate and funding risk, changes in real estate collateral values, reduced accretion from acquired loans, FDIC loss-sharing and clawback estimates, goodwill impairment, regulatory and accounting changes, competition, cybersecurity and operational disruptions. Management reported no material change in previously disclosed risk factors, no material litigation exposure, effective disclosure controls and no material change in internal controls.
Most Important Facts for Investors to Verify
- Whether loan growth can continue without further increases in provisions, charge-offs or nonperforming assets.
- The sustainability of net interest income as acquired-loan accretion declines and interest-rate conditions change.
- The composition and duration of the $2.28 billion securities portfolio, including unrealized gains and interest-rate sensitivity.
- Funding needs and liquidity implications of the increase in FHLB advances and other borrowings.
- The ultimate FDIC clawback obligation and remaining recoveries after the expiration of loss-sharing provisions.
- The effect of the new 2.9 million-share repurchase authorization and dividend payments on regulatory capital.
- The impact of pending accounting standards, particularly expected credit loss, lease, financial instruments and revenue-recognition requirements; the filing states that implementation impacts were still under assessment.