Columbia Banking System, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. is a Washington-based bank holding company whose principal subsidiary, Columbia State Bank, provides commercial banking and related financial services primarily in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three months ended March 31, 2020, including the initial effects of the COVID-19 pandemic and the January 1, 2020 adoption of CECL accounting under ASC 326.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 or March 31, 2020 balance |
|---|---|---|
| Net interest income | $122.4 million | $121.0 million |
| Provision for credit losses | $41.5 million | $1.4 million |
| Noninterest income | $21.2 million | $21.7 million |
| Noninterest expense | $84.3 million | $84.7 million |
| Net income | $14.6 million | $45.9 million |
| Diluted EPS | $0.20 | $0.63 |
| Net interest margin, tax equivalent | 4.00% | 4.32% |
| Total assets | $14.04 billion | $14.08 billion at December 31, 2019 |
| Total loans, excluding loans held for sale | $8.93 billion | $8.74 billion at December 31, 2019 |
| Allowance for credit losses | $122.1 million, or 1.37% of loans | $84.0 million, or 0.96%, at December 31, 2019 |
| Total deposits | $10.81 billion | $10.68 billion at December 31, 2019 |
| FHLB advances and FRB borrowings | $712.5 million | $953.5 million at December 31, 2019 |
| Cash and cash equivalents | $215.8 million | $247.7 million at December 31, 2019 |
| Shareholders’ equity | $2.21 billion | $2.16 billion at December 31, 2019 |
Operating performance deteriorated primarily because the provision for credit losses increased by $40.1 million year over year. Net interest income rose modestly, but the tax-equivalent net interest margin declined to 4.00% from 4.32%, reflecting lower loan yields and higher average FHLB borrowing balances. The filing does not provide a clear GAAP operating margin percentage.
Material changes versus the prior comparable period
- Net income declined 68% year over year to $14.6 million, and diluted EPS declined to $0.20 from $0.63.
- CECL adoption increased the opening allowance for credit losses by $1.6 million, increased the allowance for unfunded commitments by $1.6 million, and reduced beginning retained earnings by $2.5 million after tax.
- The ACL increased to $122.1 million from $84.0 million at year-end 2019. Management attributed the increase primarily to the forecasted economic effects of COVID-19.
- Loans increased $189.9 million from year-end, driven by organic loan production and higher seasonal line utilization. Commercial real estate and commercial business loans represented approximately 80% of the portfolio.
- Nonperforming assets increased to $48.2 million from $33.6 million at year-end, primarily due to higher nonaccrual agriculture and commercial business loans. Nonperforming assets were 0.34% of total assets.
- Debt securities available for sale declined to $3.55 billion from $3.75 billion, while net unrealized gains increased to $146.6 million from $43.0 million, principally due to lower interest rates.
- Deposits increased $128.0 million, while FHLB and FRB borrowings declined $241.0 million. Wholesale deposits excluding public funds increased to $407.4 million, or 3.8% of total deposits, from $329.5 million, or 3.1%.
- The Company repurchased approximately 731,000 shares for $20.0 million and declared cash dividends of $0.50 per share, including a $0.22 special dividend and a $0.28 regular dividend.
Cash flow, liquidity, debt and capital
- Operating activities provided $65.4 million of cash, compared with $52.5 million in Q1 2019. Investing activities provided $103.2 million, while financing activities used $200.5 million, resulting in a $31.9 million decline in cash and cash equivalents.
- Primary funding sources are customer deposits, FHLB and FRB borrowings, repurchase agreements, subordinated debentures and a revolving credit facility. The Company had $5.0 million outstanding under a $30.0 million revolving facility at March 31, 2020; the facility matured May 28, 2020 and was subject to asset-quality and capital covenants.
- Commitments to extend credit totaled approximately $2.56 billion, and standby letters of credit totaled $25.7 million. The allowance for unfunded commitments and letters of credit was $6.0 million.
- The Company and the Bank remained “well-capitalized” under applicable regulatory standards. At March 31, 2020, the Company reported CET1 and total risk-based capital ratios of 12.01% and 13.42%, respectively, and a leverage ratio of 9.85%.
- The Company elected the regulatory transition relief that temporarily delays certain effects of CECL on regulatory capital.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide formal earnings or revenue guidance. It expects COVID-19 to continue affecting credit quality, loan demand, liquidity, capital, interest income and profitability, but the ultimate impact cannot be predicted.
- As of March 31, 2020, the Company had granted short-term payment deferrals on $165.1 million of loans. As of April 30, 2020, the amount had increased to $1.29 billion. The Company also participated in the SBA Paycheck Protection Program, which management expected to increase loan balances and interest income while loans remained outstanding.
- Management expects continued reliance on FHLB advances, FRB borrowings, the revolving credit facility and repurchase agreements to support lending and securities purchases.
- Key risks include prolonged pandemic-related economic weakness, increased borrower defaults and line utilization, declining collateral values, further credit-loss provisions, lower interest rates and net interest margins, LIBOR transition, liquidity pressures, regulatory changes, operational disruption and potential goodwill impairment.
- Management evaluated goodwill for COVID-19-related impairment indicators as of March 31, 2020 and concluded that goodwill was not more likely than not impaired.
- Subsequent to quarter-end, the Company sold 17,360 Visa Class B shares for a $3.0 million gain and recorded a $13.4 million write-up on its remaining 77,683 shares, producing a total $16.4 million gain.
- Subsequent to quarter-end, the Company declared a regular quarterly dividend of $0.28 per share payable May 28, 2020.
- Management stated that routine legal proceedings were not expected to have a material effect on financial condition, results of operations or cash flows.
Important facts for investors to verify
- Whether the sharp increase in loan deferrals, particularly the $1.29 billion reported at April 30, 2020, leads to higher delinquencies, nonaccrual loans, charge-offs or additional CECL provisions.
- The sustainability of the 4.00% net interest margin in a near-zero interest-rate environment and after further loan repricing.
- The adequacy of the $122.1 million ACL and the effect of regulatory CECL transition relief on reported capital ratios.
- Credit concentration and collateral risks in commercial real estate, commercial business and agriculture loans, which comprised most of the loan portfolio.
- Liquidity and funding conditions, including reliance on wholesale deposits, FHLB and FRB borrowings, and the maturity or renewal of the revolving credit facility.
- The effect of COVID-19 on future fee income, operating expenses, branch operations, capital, dividend capacity and share repurchases.
- The accounting and cash-tax consequences of the $16.4 million Visa Class B share gain and whether additional value can be realized from the remaining shares.