COLUMBIA BANKING SYSTEM, INC. quarterly report, Q1 FY2015

Columbia Banking System, Inc. — Q1 2015 Form 10-Q Summary

Business context and reporting period

Columbia Banking System, Inc., through Columbia State Bank and subsidiaries, operates a full-service commercial banking business primarily serving Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three months ended March 31, 2015, with comparative results for the three months ended March 31, 2014 and balance-sheet comparisons to December 31, 2014.

Results include Intermountain Community Bancorp for the entire quarter following its November 1, 2014 acquisition; the prior-year period does not include that acquisition, limiting comparability.

Financial performance and key metrics

Metric	Q1 2015	Q1 2014	Change
Total revenue	$103.1 million	$87.9 million	17%
Net interest income	$80.4 million	$73.9 million	9%
Noninterest income	$22.8 million	$14.0 million	63%
Provision for loan losses	$1.2 million	$1.9 million	Lower provision
Noninterest expense	$66.7 million	$57.4 million	16%
Income before taxes	$35.2 million	$28.6 million	23%
Net income	$24.4 million	$19.8 million	23%
Diluted EPS	$0.42	$0.37	Up $0.05
Common dividend per share	$0.30	$0.12	Higher dividend

Reported tax-equivalent net interest margin was 4.39%, compared with 4.85% in the prior-year quarter. Management’s non-GAAP operating net interest margin was relatively stable at 4.18% versus 4.19%, excluding specified acquisition-related accretion and other adjustments. The effective tax rate was 31% in both periods.

Average interest-earning assets increased to $7.53 billion from $6.24 billion, primarily reflecting the Intermountain acquisition and organic loan growth. Incremental accretion income from acquired loans declined to $7.5 million from $12.3 million.

Balance sheet, liquidity and capital

Total assets were $8.55 billion at March 31, 2015, down from $8.58 billion at year-end 2014.
Total loans, net of unearned income and before the allowance, were $5.45 billion, essentially unchanged from $5.45 billion at year-end. Commercial and multifamily real estate represented 43.5% of the portfolio and commercial business loans represented 39.3%.
Total deposits increased to $7.07 billion from $6.92 billion. Core deposits increased $151.8 million and represented 95.7% of total deposits.
Cash and cash equivalents increased to $248.6 million from $188.2 million.
Federal Home Loan Bank advances declined to $36.6 million from $216.6 million. Repurchase agreements totaled $96.9 million.
Shareholders’ equity increased to $1.24 billion, or approximately 15% of period-end assets.
The company and bank were classified as well-capitalized. Company ratios included a 12.50% CET1 ratio, 12.53% Tier 1 risk-based ratio, 13.63% total risk-based ratio and 10.29% leverage ratio.
Commitments to extend credit totaled $1.73 billion, compared with $1.62 billion at year-end.

Cash flow, credit quality and unusual items

Operating activities provided $27.0 million of cash, compared with $35.5 million in Q1 2014.
Investing activities provided $97.3 million, principally from securities sales, maturities and repayments. Financing activities used $63.9 million, primarily reflecting net FHLB advance repayments and common dividends.
Cash and cash equivalents increased $60.4 million during the quarter to $248.6 million.
The allowance for loan and lease losses was $70.2 million, or 1.29% of total loans, versus $69.6 million, or 1.28%, at year-end and $70.6 million, or 1.54%, a year earlier.
Nonaccrual loans increased modestly to $31.8 million from $31.4 million. Total nonperforming assets increased to $55.2 million from $53.6 million, and represented 0.65% of total assets.
Other real estate owned increased to $23.3 million from $22.2 million. The company recorded a $1.2 million net benefit from OREO operations, compared with a $0.1 million net cost in the prior-year quarter.
Acquisition-related expenses were $3.0 million in Q1 2015, including $2.9 million related to Intermountain, compared with $1.0 million in Q1 2014.
Noninterest income benefited from a $0.15 million gain related to the FDIC loss-sharing asset, compared with a $4.8 million expense in the prior-year quarter. The FDIC loss-sharing asset was $14.6 million at March 31, 2015, with an estimated clawback liability of $4.2 million.
Available-for-sale securities totaled $2.01 billion and had a $25.2 million net unrealized gain. Management did not consider the $6.6 million of gross unrealized losses to be other-than-temporary impairment.

Material changes versus the prior comparable period

Net income and diluted EPS increased, primarily from the Intermountain acquisition, higher net interest income, stronger fee income and improved FDIC loss-sharing results.
Revenue increased 17%, while noninterest expense increased 16%. Compensation and employee benefits rose 25% and data processing and communications expense rose 42%, largely due to the expanded operating platform and acquisition activity.
Reported net interest margin declined because of lower acquisition-related accretion income; the operating net interest margin was essentially unchanged.
Credit metrics remained generally stable, although nonperforming assets and OREO increased from year-end. Net charge-offs were $0.5 million versus $3.8 million in Q1 2014, supported by higher recoveries.
Compared with year-end, deposits and cash increased substantially while FHLB advances declined. Securities decreased by approximately $91.1 million.

Guidance, outlook, management commentary and risks

The filing does not provide quantitative full-year earnings or revenue guidance. Management stated that it expects to continue emphasizing commercial relationship banking and anticipates continued use of FHLB advances, Federal Reserve borrowings and repurchase agreements as supplemental funding sources.

Management expects additional operating cost savings, revenue growth and other synergies from the Intermountain acquisition, but these benefits were not fully reflected in the pro forma information. The filing cautions that quarterly results are not necessarily indicative of full-year results.

Key risks include adverse economic or Pacific Northwest real estate conditions, deterioration in credit quality or collateral values, interest-rate changes affecting net interest income and funding, integration and realization of acquisition synergies, competition, regulatory and accounting changes, goodwill impairment, liquidity and capital management, cybersecurity and systems interruptions, and legal, compliance and operational risks.

The company reported effective disclosure controls and no material change in internal control over financial reporting. A previously disclosed Oregon legal matter was effectively resolved when the Oregon Supreme Court denied review on February 5, 2015. Subsequent to quarter-end, shareholders approved an increase in authorized common shares from approximately 63.0 million to 115.0 million.

Investor verification checklist

Reconcile reported growth with the acquisition-related contribution from Intermountain and distinguish organic growth from acquired balances.
Monitor the pace of decline in acquisition-related accretion income and the effect on reported versus operating net interest margin.
Review nonperforming assets, OREO, PCI loan cash-flow remeasurements and the adequacy of the $70.2 million allowance.
Assess whether higher operating expenses, including compensation, data processing and integration costs, are offset by expected acquisition synergies.
Evaluate the sustainability of the $0.30 quarterly common dividend, including the regular and special dividend components and regulatory restrictions.
Track FDIC loss-sharing asset amortization, remaining coverage periods and the $4.2 million estimated clawback liability.
Confirm liquidity and funding trends, including deposit composition, FHLB borrowings, repurchase agreements and $1.73 billion of unfunded credit commitments.
Review the company’s regulatory capital ratios and the potential effect of the authorized-share increase on future capital actions.