Columbia Banking System, Inc. — 2015 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2015. Columbia operates primarily through Columbia State Bank and West Coast Trust Company, serving customers in Washington, Oregon and Idaho. Results include Intermountain Community Bancorp for the full 2015 period, whereas comparable 2014 results do not include the acquisition.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $104.2 million, up 13% | $309.8 million, up from $269.8 million |
| Net interest income | $81.7 million, up 7% | $243.1 million, up 8% |
| Net income | $25.8 million, versus $21.6 million | $72.1 million, versus $62.7 million |
| Diluted EPS | $0.45, versus $0.41 | $1.25, versus $1.18 |
| Net interest margin, tax equivalent | 4.37%, versus 4.85% | 4.39%, versus 4.86% |
| Operating net interest margin, tax equivalent | 4.18%, versus 4.22% | 4.18%, versus 4.23% |
| Provision for loan losses | $2.8 million, versus $1.0 million | $6.2 million, versus $5.0 million |
| Noninterest income | $22.5 million, up 41% | $66.7 million, up 50% |
| Noninterest expense | $64.1 million, up 7% | $199.3 million, up 14% |
Using reported revenue and net income, net margin was approximately 24.7% for the quarter and 23.3% year to date; these are analytical calculations and are not presented as company-defined margins.
- Total assets were $8.76 billion at September 30, 2015, compared with $8.58 billion at December 31, 2014.
- Total loans, net of unearned income and before the allowance, were $5.75 billion, up $301.1 million from year-end. Commercial business loans were $2.35 billion and commercial and multifamily real estate loans were $2.45 billion.
- Total deposits were $7.31 billion, up from $6.92 billion at year-end. Noninterest-bearing deposits increased to $3.39 billion.
- Shareholders’ equity was $1.25 billion, or approximately 14% of total assets.
- Cash and cash equivalents were $172.2 million at September 30, compared with $188.2 million at year-end.
- Net cash provided by operating activities was $100.9 million for the first nine months. Investing activities used $200.5 million, while financing activities provided $83.7 million, resulting in a $16.0 million decrease in cash.
- Federal Home Loan Bank advances declined to $6.5 million from $216.6 million at year-end. Repurchase agreements were $73.2 million, and the filing reports no other borrowings at September 30.
- The allowance for loan and lease losses was $69.0 million, or 1.20% of total loans, versus 1.28% at year-end 2014 and 1.41% at September 30, 2014.
- Nonaccrual loans were $19.1 million and total nonperforming assets were $38.6 million, representing 0.33% of period-end loans and 0.44% of assets, respectively.
- Capital ratios remained above well-capitalized thresholds: company CET1, total risk-based capital and leverage ratios were 12.18%, 13.22% and 10.21%, respectively; Columbia Bank ratios were 11.99%, 13.02% and 10.06%.
Material changes versus comparable periods
- Net income increased 19% in the third quarter and 15% for the first nine months, primarily from higher net interest income and noninterest income, partly offset by higher operating expenses.
- Growth in loans, securities and deposits largely reflects the November 2014 Intermountain acquisition and continued organic loan growth. The acquisition added approximately $964.4 million of assets and $736.8 million of deposits at closing.
- Noninterest income benefited from lower amortization and other expense associated with the FDIC loss-sharing asset, as well as increased service charges, merchant fees and other customer-related revenue.
- Net interest margin declined because acquired-loan accretion income decreased. Incremental accretion income was $6.4 million in the quarter and $21.2 million year to date, compared with $9.4 million and $33.0 million in the respective 2014 periods.
- Noninterest expense increased primarily because of the larger post-acquisition operating base. Nine-month acquisition-related expenses were $9.0 million, compared with $4.9 million in the prior-year period.
- Credit quality improved in aggregate: nonperforming assets declined $15.0 million from year-end, although third-quarter net charge-offs increased to $3.0 million from $2.4 million and the provision increased to $2.8 million.
- The securities available-for-sale portfolio declined to $2.03 billion from $2.10 billion, while its net unrealized gain increased to $22.7 million from $11.2 million.
Guidance, outlook, commentary, risks and unusual items
- No specific quantitative earnings or revenue guidance is provided in the filing. Management expects continued emphasis on commercial lending and relationship banking.
- Management states that future results remain sensitive to economic conditions, credit quality, collateral values, loan originations, interest rates, funding costs, competition and the integration and performance of acquired businesses.
- FDIC loss-sharing benefits are diminishing as major agreements expire. The FDIC loss-sharing asset was $8.1 million at September 30, compared with $23.5 million a year earlier; the estimated FDIC clawback liability was $4.3 million.
- At September 30, the company had $1.89 billion of commitments to extend credit, compared with $1.62 billion at year-end. Substantially all loans and unfunded commitments are geographically concentrated in Washington, Oregon and Idaho.
- Investment securities included $464.1 million with gross unrealized losses of $6.4 million. Management did not consider these declines other-than-temporary and stated it did not intend, or expect to be required, to sell the securities before recovery.
- Goodwill totaled $382.8 million. The company reported no goodwill impairment from its July 31, 2015 assessment. The filing identifies allowance estimates, business combinations, purchased credit-impaired loans, FDIC loss-sharing assets and goodwill recoverability as critical accounting areas.
- The company adopted ASU 2015-16 during the quarter, recording a $225 thousand increase in goodwill and corresponding decrease in other assets with no earnings impact.
- Subsequent to quarter-end, the company declared a regular quarterly dividend of $0.18 per common share and a special dividend of $0.18 per common share, subject to regulatory and other restrictions.
- On October 30, 2015, Columbia State Bank entered into split-dollar life insurance agreements benefiting the beneficiaries of CEO Melanie J. Dressel. The arrangements are described as comparable to benefits provided to other senior officers.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, no material change in previously disclosed risk factors, and no material impact expected from routine litigation.
Important facts for investors to verify
- Separate the recurring contribution of organic loan and deposit growth from the nonrecurring or declining effects of Intermountain acquisition accounting, acquired-loan accretion and FDIC loss-sharing arrangements.
- Assess whether the lower net interest margin and declining acquired-loan accretion could pressure future earnings as acquisition-related benefits run off.
- Monitor commercial real estate and commercial business concentrations, criticized loans, charge-offs, provision expense and the adequacy of the $69.0 million allowance.
- Review the liquidity profile, including deposit composition, brokered and CDARS deposits, unused borrowing capacity, collateral requirements and the $1.89 billion of unfunded commitments.
- Evaluate exposure to interest-rate changes, securities duration and unrealized losses, particularly given the approximately three-year-nine-month investment portfolio duration.
- Verify the sustainability of dividends against regulatory capital requirements, retained earnings and the bank’s ability to upstream dividends to the holding company.