Business Context and Reporting Period
Columbia Banking System, Inc., through Columbia State Bank and Columbia Trust Company, provides commercial banking, lending, treasury management, wealth management and related financial services, primarily in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018 and balance-sheet comparisons to December 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Comparable period or date | Change |
|---|---|---|---|
| Net income | $45.9 million | $40.0 million in Q1 2018 | 15% increase |
| Diluted EPS | $0.63 | $0.55 in Q1 2018 | Increase |
| Net interest income | $121.0 million | $115.5 million in Q1 2018 | $5.5 million increase |
| Tax-equivalent net interest margin | 4.32% | 4.28% in Q1 2018 | 4 basis-point increase |
| Operating net interest margin | 4.33% | 4.24% in Q1 2018 | 9 basis-point increase |
| Provision for loan losses | $1.4 million | $5.9 million in Q1 2018 | $4.5 million decrease |
| Noninterest income | $21.7 million | $23.1 million in Q1 2018 | 6% decrease |
| Noninterest expense | $84.7 million | $86.0 million in Q1 2018 | 1% decrease |
| Effective tax rate | 19% | 15% in Q1 2018 | Increase |
| Total assets | $13.06 billion | $13.10 billion at December 31, 2018 | $30.7 million decrease |
| Loans, net of unearned income | $8.52 billion | $8.39 billion at December 31, 2018 | $129.3 million increase |
| Deposits | $10.37 billion | $10.46 billion at December 31, 2018 | $89.1 million decrease |
| Cash and cash equivalents | $212.1 million | $277.6 million at December 31, 2018 | $65.5 million decrease |
| Shareholders’ equity | $2.09 billion | $2.03 billion at December 31, 2018 | $55.0 million increase |
Profitability and Revenue Drivers
- Higher loan and taxable-securities balances and yields increased interest income by approximately $10.0 million. Interest expense increased $4.2 million, primarily because of higher deposit and FHLB funding costs.
- Noninterest income declined primarily because card revenue fell 37% to $3.7 million after the Company became subject to the Dodd-Frank interchange fee cap. Loan revenue also declined 25% to $2.4 million. These decreases were partly offset by $1.8 million of net investment-securities gains.
- Reported noninterest expense decreased $1.3 million. However, Q1 2018 included $4.3 million of acquisition-related expenses; excluding those costs, Q1 2019 expense increased approximately $3.0 million, or 4%, mainly from compensation and legal and professional fees.
- Net income benefited from the lower loan-loss provision, while the effective tax rate increased to 19% from 15%, partly because Q1 2018 included greater discrete tax benefits from share-based compensation.
Credit Quality and Capital
- The allowance for loan and lease losses was $83.3 million, or 0.98% of total loans, compared with $83.4 million, or 0.99%, at year-end 2018.
- Net charge-offs were $1.5 million, compared with $1.7 million in Q1 2018. Nonaccrual loans declined to $52.6 million from $54.8 million at year-end, and total nonperforming assets declined to $58.7 million from $60.9 million.
- Commercial business and commercial and multifamily real estate loans represented the largest portfolio categories. Substantially all loans and unfunded commitments are concentrated in Washington, Oregon and Idaho.
- The Company and Columbia Bank reported that they met all applicable capital requirements and were classified as well-capitalized. At March 31, 2019, the Company’s CET1 ratio was 12.78%, total risk-based capital ratio was 14.01% and leverage ratio was 10.37%.
Cash Flow, Debt and Liquidity
- Operating activities provided $52.5 million of cash, compared with $43.5 million in Q1 2018. Investing activities provided $50.4 million, while financing activities used $168.4 million, resulting in a $65.5 million decrease in cash and cash equivalents.
- FHLB advances were $390.5 million, compared with $399.5 million at year-end. Securities sold under repurchase agreements were $23.0 million, compared with $61.1 million.
- Total deposits declined $89.1 million from year-end. Core deposits declined $74.9 million but remained approximately 95% of total deposits. Brokered, reciprocal and other wholesale deposits, excluding public deposits, were $368.4 million, or 3.6% of total deposits.
- Loan commitments were approximately $2.66 billion and standby letters of credit were $27.6 million at March 31, 2019. These off-balance-sheet commitments expose the Company to additional credit and liquidity risk.
Material Changes Versus the Prior Comparable Period
- Net income increased $5.9 million, or approximately 15%, and diluted EPS increased from $0.55 to $0.63.
- Net interest income increased 5%, and the tax-equivalent net interest margin improved from 4.28% to 4.32%.
- The loan-loss provision decreased substantially because Q1 2018 reflected weaknesses in portions of the agricultural portfolio and related net charge-off activity.
- Noninterest income decreased 6%, principally because of lower card and loan revenue. Securities gains increased by $1.8 million.
- Loans increased 1.5% from year-end, while available-for-sale debt securities declined $140.2 million to $3.03 billion as earning assets shifted toward loans.
- Accumulated other comprehensive income improved from a $35.3 million loss at year-end to $3.0 million of income, primarily because of higher unrealized values on available-for-sale securities and gains on cash-flow hedging instruments.
- The Company adopted the new lease accounting standard on January 1, 2019, recognizing approximately $49.2 million of right-of-use assets and $48.2 million of lease liabilities, together with a $782,000 increase to opening retained earnings.
Guidance, Outlook, Commentary and Risks
The filing does not provide quantitative earnings or revenue guidance. Management indicated that it expects continued emphasis on commercial lending and relationship banking, and expects to continue using FHLB advances, Federal Reserve borrowings and repurchase agreements to supplement deposits and fund loans and securities.
- Management reported no material change in interest-rate risk from December 31, 2018. Interest-rate movements remain important because they can affect net interest income, deposit costs, funding sources and securities valuations.
- The Company had $1.72 billion of securities with gross unrealized losses of $30.6 million. Management did not consider the securities other-than-temporarily impaired because it did not intend, and was not required, to sell them before recovery or maturity.
- The Company is preparing for adoption of the current expected credit loss model. Management stated that the effect cannot yet be reasonably estimated and could be significant because the model may require recognition of lifetime expected credit losses.
- Other stated risks include economic and regional real-estate conditions, credit quality, concentration in the Pacific Northwest, competition, regulatory and accounting changes, LIBOR transition, goodwill impairment, cybersecurity, operational disruption, liquidity and legal or compliance risk.
- Routine litigation is ongoing in the ordinary course of business; management believes any resulting liability will not materially affect the financial statements.
- Subsequent to quarter-end, the Company declared a regular dividend of $0.28 per share and a special dividend of $0.14 per share. Dividend payments remain subject to regulatory capital and other restrictions.
Important Facts for Investors to Verify
- Whether loan growth can continue without deterioration in commercial, commercial-real-estate or regional credit quality.
- The effect of the interchange-fee cap and other reductions in fee income on future revenue mix.
- The size and timing of the CECL adoption adjustment, including potential effects on allowance levels, retained earnings and regulatory capital.
- Trends in deposit balances, deposit pricing, wholesale funding and FHLB advances as loan balances grow.
- The sustainability of the improved net interest margin in changing interest-rate and funding-cost environments.
- The extent to which unrealized securities gains or losses and securities sales affect comprehensive income and reported earnings.
- Future capital requirements, dividend capacity and the timing or use of the authorized 2.9 million-share, $100 million stock-repurchase program.