Columbia Banking System, Inc. — 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Columbia Banking System, Inc., through Columbia State Bank and Columbia Trust Company, operates a commercial banking and financial services business focused primarily on Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods. The filing was signed November 5, 2019.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total interest income | $132.5 million | $127.6 million | $396.8 million | $367.3 million |
| Net interest income | $122.5 million | $122.8 million | $368.6 million | $355.0 million |
| Provision for loan losses | $0.3 million | $3.2 million | $1.9 million | $13.0 million |
| Noninterest income | $28.0 million | $21.0 million | $75.4 million | $67.9 million |
| Noninterest expense | $87.1 million | $82.8 million | $258.5 million | $253.5 million |
| Net income | $50.7 million | $46.4 million | $148.3 million | $128.1 million |
| Diluted EPS | $0.70 | $0.63 | $2.04 | $1.75 |
| Tax-equivalent net interest margin | 4.14% | 4.37% | 4.28% | 4.32% |
At September 30, 2019, total assets were $13.76 billion, loans net of unearned income were $8.76 billion, deposits were $10.86 billion, and shareholders’ equity was $2.16 billion. Cash and cash equivalents were $298.6 million. FHLB advances were $492.5 million, subordinated debentures were $35.3 million, and repurchase agreements were $24.5 million.
Nine-month operating cash flow was $154.8 million, compared with $171.2 million in 2018. Investing activities used $460.1 million, primarily for loan growth, securities purchases and FHLB stock purchases. Financing activities provided $326.3 million, principally from deposit growth and net FHLB funding. Cash and cash equivalents increased $21.0 million during the period.
The allowance for loan and lease losses was $82.7 million, or 0.94% of total loans, compared with 0.99% at December 31, 2018. Nonperforming assets were $37.6 million, or 0.27% of total assets, compared with $60.9 million, or 0.46%, at year-end 2018. The Company and Bank were classified as well-capitalized; the Company’s CET1 ratio was 12.37% and leverage ratio was 10.19% at quarter-end.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income increased 9% and nine-month net income increased 16%; diluted EPS rose from $0.63 to $0.70 for the quarter and from $1.75 to $2.04 year to date.
- Net interest income declined slightly in the third quarter because higher funding costs offset growth in interest-earning assets. Year-to-date net interest income increased 4%, aided by $4.9 million of loan interest recoveries and higher loan and securities balances.
- Net interest margin declined to 4.14% in the quarter from 4.37%, reflecting higher deposit and FHLB funding costs and lower acquired-loan accretion income. The year-to-date margin declined modestly to 4.28% from 4.32%.
- Loan balances increased $364.8 million from December 31, 2018, primarily from organic production and seasonal line utilization. Commercial business loans represented 42.3% of the portfolio and commercial and multifamily real estate loans represented 45.5%.
- Noninterest income increased primarily because of a $5.9 million gain on the sale-leaseback of a Washington facility. Year-to-date results also included approximately $3.0 million of BOLI benefits and $2.1 million of net securities gains.
- Card revenue declined 29% year to date, primarily because of the interchange fee cap effective July 1, 2018.
- Noninterest expense increased 5% in the quarter and 2% year to date as reported. Excluding 2018 acquisition-related expenses, year-to-date expense increased 5%, driven by compensation and professional fees.
- The Company repurchased approximately 676,000 shares during the quarter and 1.3 million shares during the first nine months for $45.4 million. Approximately 1.6 million shares remained authorized for repurchase at September 30, 2019.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management expects continued emphasis on commercial lending and relationship banking, while noting that future results depend on economic conditions, interest rates, credit quality, competition and regulatory developments.
- The Company expects adoption of the CECL credit-loss standard on January 1, 2020 to change the allowance for credit losses by a range from a 10% decrease to a 5% increase based on then-current expectations, with no material capital impact anticipated. The ultimate effect remains subject to portfolio characteristics, economic forecasts, model validation and management judgment.
- Principal risks include deterioration in the Northwest economy or real estate collateral values, higher credit losses, interest-rate changes affecting net interest income and funding costs, liquidity risk, LIBOR replacement, regulatory and compliance changes, cybersecurity and systems disruptions, competition, acquisition-related performance, goodwill impairment and natural disasters.
- The investment securities portfolio was $3.37 billion and had a $67.4 million net unrealized gain at quarter-end. Gross unrealized losses of $11.6 million were not considered other-than-temporary because management did not intend, and was not required, to sell the affected securities before recovery.
- The Company had $2.62 billion of commitments to extend credit and $26.9 million of standby letters of credit. Management stated that routine litigation is not expected to have a material effect on the Company.
- Adoption of the new lease standard increased other assets by $49.2 million and other liabilities by $48.2 million at January 1, 2019, and resulted in a $782,000 increase to opening retained earnings. Operating lease liabilities were $57.2 million at September 30, 2019.
- A $30 million short-term revolving credit facility, maturing in May 2020, was undrawn at quarter-end; the Company was in compliance with its covenants.
Facts Investors Should Verify
- Whether deposit repricing and increased FHLB funding costs continue to pressure net interest margin.
- The realized impact of CECL adoption on the allowance, retained earnings, capital and future provision expense.
- Whether loan growth remains strong without a deterioration in commercial and commercial real estate credit quality.
- How much of the quarter’s earnings growth is recurring versus the $5.9 million sale-leaseback gain, BOLI benefits and securities gains.
- The sustainability of share repurchases and dividends relative to capital ratios, liquidity and regulatory requirements.
- Changes in card revenue following the interchange fee cap and the trajectory of compensation and professional-fee expenses.