Columbia Banking System, Inc. — Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. is a regional bank holding company operating primarily through Columbia State Bank and Columbia Trust Company, with lending and deposit activities concentrated in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, and was filed August 7, 2018.
The results include Pacific Continental Corporation, acquired November 1, 2017. The acquisition expanded the company’s Eugene, Oregon presence and improved branch coverage in Seattle and Portland. The acquisition added approximately $383.1 million of goodwill and $46.9 million of core deposit intangible assets.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net interest income | $116.7 million | $86.2 million | $232.2 million | $172.8 million |
| Net income | $41.7 million | $27.1 million | $81.7 million | $56.3 million |
| Diluted EPS | $0.57 | $0.47 | $1.12 | $0.97 |
| Provision for loan losses | $4.0 million | $3.2 million | $9.8 million | $6.0 million |
| Noninterest income | $23.7 million | $24.1 million | $46.8 million | $49.0 million |
| Noninterest expense | $84.6 million | $68.9 million | $170.6 million | $137.9 million |
| Net interest margin, tax equivalent | 4.29% | 4.12% | 4.26% | 4.16% |
- Second-quarter net income increased approximately 54%; six-month net income increased approximately 45%.
- Second-quarter diluted EPS increased approximately 21%, despite a substantially higher share count following the Pacific Continental acquisition.
- Net interest income increased 35% in the quarter and 34% year to date, primarily from higher loan volumes and rising interest rates.
- The reported second-quarter effective tax rate was 19%, versus 29% in the prior-year quarter; the six-month rate was 17%, versus 28%. The decrease primarily reflected the Tax Cuts and Jobs Act and the lower federal corporate tax rate.
Balance sheet, liquidity and capital
| Balance-sheet item | June 30, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $12.63 billion | $12.72 billion |
| Loans, net of unearned income | $8.45 billion | $8.36 billion |
| Allowance for loan and lease losses | $80.2 million | $75.6 million |
| Debt securities available for sale | $2.65 billion | $2.74 billion |
| Total deposits | $10.38 billion | $10.53 billion |
| Federal Home Loan Bank advances | $99.5 million | $11.6 million |
| Total shareholders’ equity | $1.96 billion | $1.95 billion |
| Cash and cash equivalents | $263.5 million | $342.5 million |
- Loans increased $95.5 million from year-end, driven by loan production and seasonal line utilization, partly offset by repayments.
- Deposits declined $148.1 million from year-end; core deposits declined approximately 2%. Brokered and other wholesale deposits were $404.3 million, or 3.9% of total deposits.
- Six-month operating cash flow was $114.5 million, compared with $57.2 million in the prior-year period. Investing activities used $55.5 million and financing activities used $138.0 million, producing a $79.0 million decrease in cash and cash equivalents.
- The company and bank were classified as well-capitalized. At June 30, 2018, the company reported CET1, total risk-based capital and leverage ratios of 12.23%, 13.45% and 10.20%, respectively; Columbia Bank reported 12.49%, 13.34% and 10.41%.
- The company had $2.46 billion of loan commitments and $42.5 million of standby letters of credit at June 30, 2018.
Material changes versus the prior comparable period
- Net interest income benefited from the Pacific Continental acquisition and higher loan yields in the rising-rate environment. Tax-equivalent net interest margin increased 17 basis points in the quarter and 10 basis points year to date.
- Noninterest income declined because the merchant card services portfolio was sold in the third quarter of 2017 and because the prior-year period included a $1.9 million bank-owned life insurance benefit. Treasury management fees increased 17% in the quarter and 19% year to date.
- Noninterest expense increased 23% in the quarter and 24% year to date. Compensation, occupancy, amortization and other costs increased primarily because of the Pacific Continental acquisition. Acquisition-related expenses were $2.8 million in the quarter and $7.1 million year to date.
- The allowance increased to $80.2 million, or 0.95% of loans, from $75.6 million, or 0.91%, at year-end. Six-month net charge-offs were $5.3 million, including a large agricultural portfolio charge-off.
- Nonaccrual loans increased to $69.5 million from $66.2 million at year-end, while total nonperforming assets declined to $76.6 million from $79.5 million because of OREO sales. Nonperforming assets were 0.61% of total assets.
- Accumulated other comprehensive loss increased to $55.9 million, primarily because of higher unrealized losses on available-for-sale securities. Gross unrealized losses on those securities were $73.5 million; management did not consider them other-than-temporarily impaired.
Guidance, outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management expects continued focus on commercial lending and relationship banking, but cautions that interim results are not necessarily indicative of full-year results.
- Beginning July 1, 2018, the company became subject to the Dodd-Frank interchange fee cap after exceeding $10 billion in consolidated assets. Management anticipated an annual pretax impact of approximately $10 million.
- Management identified credit losses, business combinations and goodwill valuation as critical accounting areas. The company stated that it could not yet reasonably estimate the impact of adopting the current expected credit loss standard, although the impact could be significant.
- Key risks include deterioration in economic or housing conditions, credit quality and collateral values; changes in interest rates and funding costs; acquisition integration and realization of expected efficiencies; goodwill impairment; liquidity and capital management; regulatory changes; cybersecurity and systems disruptions; competition; legal and compliance matters; and natural disasters.
- The company redeemed $8.2 million of junior subordinated debentures in January 2018. It had $35.6 million of subordinated debentures outstanding at June 30, 2018.
- Routine litigation is disclosed, but management believes it is not expected to have a material effect. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
- The board authorized repurchases of up to 2.9 million shares. During the quarter, 1,220 shares were acquired solely to satisfy withholding taxes on equity awards; no plan shares were repurchased.
Most important facts for investors to verify
- Whether loan growth and higher interest rates offset rising deposit and wholesale funding costs in subsequent quarters.
- The sustainability of the Pacific Continental acquisition’s revenue contribution, cost synergies and elevated operating expenses.
- The impact of the interchange fee cap, estimated by management at approximately $10 million pretax annually.
- Trends in agricultural charge-offs, nonaccrual loans, criticized loans, provision expense and the adequacy of the allowance.
- The effect of interest-rate movements on the securities portfolio, accumulated other comprehensive loss, deposit pricing and net interest margin.
- The eventual capital and earnings impact of the current expected credit loss standard, for which the filing states that no clear estimate was available.
- Future deposit trends, reliance on Federal Home Loan Bank advances and the company’s available liquidity and borrowing capacity.