Columbia Banking System, Inc. — 2017 Second-Quarter Form 10-Q Summary
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, wealth management, card services and merchant processing. The filing covers the quarter and six months ended June 30, 2017. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net interest income | $86.2 million | $82.1 million | $172.8 million | $162.3 million |
| Net interest margin, tax equivalent | 4.12% | 4.10% | 4.16% | 4.12% |
| Noninterest income | $24.1 million | $21.9 million | $49.0 million | $42.6 million |
| Provision for loan losses | $3.2 million | $3.6 million | $6.0 million | $8.9 million |
| Noninterest expense | $68.9 million | $63.8 million | $137.9 million | $128.9 million |
| Net income | $27.1 million | $25.4 million | $56.3 million | $46.7 million |
| Diluted EPS | $0.47 | $0.44 | $0.97 | $0.80 |
- Total assets were $9.69 billion at June 30, 2017, up $175.5 million from December 31, 2016.
- Loans, net of unearned income and before the allowance, were $6.42 billion, up $209.7 million from year-end. Commercial business loans represented 42.1% and commercial and multifamily real estate loans represented 43.5% of the portfolio.
- Total deposits were $8.07 billion, broadly unchanged from $8.06 billion at year-end. Core deposits decreased $27.8 million, while brokered money market and CDARS deposits increased to $268.8 million.
- Shareholders’ equity was $1.30 billion, or approximately 13% of total assets. The Company and Columbia Bank remained classified as well-capitalized. The Company’s CET1, total risk-based capital and leverage ratios were 11.95%, 12.96% and 9.85%, respectively.
- Cash and cash equivalents were $212.0 million at June 30, 2017, compared with $224.2 million at December 31, 2016.
- Net cash provided by operating activities was $65.8 million for the first six months. Investing activities used $202.4 million, primarily for net loan growth, securities purchases and FHLB stock purchases. Financing activities provided $124.5 million, including net FHLB borrowing.
- FHLB advances increased to $159.5 million from $6.5 million at year-end, primarily to support loan growth. Repurchase agreements were $65.9 million.
- The allowance for loan and lease losses was $73.0 million, or 1.14% of total loans, compared with 1.13% at both December 31, 2016 and June 30, 2016.
Material changes versus the prior comparable period
- Second-quarter net income increased 7% and diluted EPS increased from $0.44 to $0.47. Six-month net income increased 21% and diluted EPS increased from $0.80 to $0.97.
- Net interest income increased $4.0 million in the quarter and $10.5 million year to date, driven mainly by higher loan and securities volumes. The six-month net interest margin increased to 4.16% from 4.12%.
- Operating net interest margin, a non-GAAP measure, increased to 4.09% from 4.00% in the quarter and to 4.09% from 4.01% year to date.
- Noninterest income increased 10% in the quarter and 15% year to date. Drivers included higher loan revenue, bank-owned life insurance benefits and lower expense associated with the FDIC loss-sharing asset.
- Noninterest expense increased 8% in the quarter and 7% year to date. The increase included a $2.4 million pre-tax charge for early termination of FDIC loss-sharing agreements, higher compensation, legal and professional fees, data-processing costs and acquisition-related expenses.
- Nonaccrual loans increased to $36.8 million from $27.8 million at year-end, and total nonperforming assets increased to $40.9 million from $33.8 million. Nonperforming assets were 0.42% of total assets versus 0.35% at year-end.
- Net charge-offs declined to $3.0 million in the first six months from $7.8 million in the prior-year period, despite continued loan growth.
- Series B preferred stock was converted into common stock in January 2017. The quarterly common dividend was $0.22 per share, compared with $0.37 per share in the second quarter of 2016.
Guidance, outlook, management commentary, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management stated that results for the first six months are not necessarily indicative of full-year results.
- Management expects continued emphasis on commercial lending and relationship banking, with loan growth funded primarily through customer deposits and supplemented by FHLB advances, Federal Reserve borrowings and repurchase agreements.
- In the second quarter, the Company terminated all FDIC loss-sharing agreements early. It paid the FDIC $4.7 million, removed a $3.1 million loss-sharing asset and a $5.4 million clawback liability, and recorded a $2.4 million pre-tax charge. Columbia will retain future recoveries and bear future losses and expenses on the previously covered assets.
- In July 2017, the Company agreed to outsource merchant-services delivery. The transaction is expected to produce a one-time $14.0 million gain in the third quarter of 2017, followed by net monthly revenue. A termination fee may apply if the agreement ends during its initial ten-year term.
- The Company had signed definitive agreements for the proposed acquisition of Pacific Continental Corporation, but completion remained subject to regulatory approvals and other closing conditions. Second-quarter acquisition-related expenses were $1.0 million and first-half expenses were $2.4 million.
- The Company is exposed to credit, interest-rate, liquidity, real-estate, operational, legal, regulatory, cybersecurity and competitive risks. Substantially all loans and unfunded commitments are concentrated in Washington, Oregon and Idaho.
- Management identified potential future effects from the current expected credit loss standard, ASU 2016-13, and stated that the eventual impact cannot yet be reasonably estimated and may be significant.
- The Company reported effective disclosure controls and no material change in internal control over financial reporting. Routine litigation was not expected to have a material effect.
Most important facts for investors to verify
- Whether loan growth continues without further deterioration in nonaccrual loans, classified loans, nonperforming assets or credit losses.
- The sustainability of net interest margin as funding costs rise, FHLB borrowing remains elevated and acquired-loan accretion declines.
- The effect of the Pacific Continental acquisition, including approval, closing, integration costs, purchase accounting and capital requirements.
- The timing and accounting treatment of the anticipated $14.0 million merchant-services gain and the ongoing economics of the outsourced arrangement.
- The effect of CECL adoption on the allowance, retained earnings, capital ratios and future provision expense.
- Capital and liquidity capacity after loan growth, dividends, share repurchases and additional wholesale funding.