Columbia Banking System, Inc. — Q3 2018 Form 10-Q Summary
Business Context and Reporting Period
Columbia Banking System, Inc. is a bank holding company whose principal subsidiary, Columbia State Bank, 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 and nine months ended September 30, 2018, with comparisons to the same periods in 2017 and to December 31, 2017.
The results include the operations of Pacific Continental Corporation, acquired on November 1, 2017. The acquisition added approximately $383.1 million of goodwill and a $46.9 million core deposit intangible.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net interest income | $122.8 million | $88.9 million | $355.0 million | $261.8 million |
| Provision for loan losses | $3.2 million | $(0.6) million recapture | $13.0 million | $5.3 million |
| Noninterest income | $21.0 million | $37.1 million | $67.9 million | $86.1 million |
| Noninterest expense | $82.8 million | $67.5 million | $253.5 million | $205.4 million |
| Net income | $46.4 million | $40.8 million | $128.1 million | $97.1 million |
| Diluted EPS | $0.63 | $0.70 | $1.75 | $1.67 |
| Net interest margin, tax equivalent | 4.41% | 4.20% | 4.31% | 4.17% |
Q3 net income increased 14% year over year, while nine-month net income increased 32%. Diluted EPS declined in the quarter because the weighted-average share count increased substantially following the Pacific Continental acquisition, despite higher net income.
At September 30, 2018, total assets were $13.0 billion, loans net of unearned income were $8.5 billion, deposits were $10.6 billion, shareholders’ equity was $2.0 billion and cash and cash equivalents were $242.2 million. The allowance for loan and lease losses was $83.8 million, or 0.98% of loans.
Nonperforming assets were $67.7 million, or 0.52% of total assets, compared with $79.5 million, or 0.63%, at year-end 2017. Nonaccrual loans were $60.3 million.
Nine-month cash flow from operating activities was $171.2 million. Investing activities used $418.7 million, principally for loan growth, securities purchases and Federal Home Loan Bank stock. Financing activities provided $147.1 million. Cash and cash equivalents declined by $100.4 million from year-end 2017.
FHLB advances increased to $166.5 million from $11.6 million at year-end 2017. The Company and Columbia Bank were classified as well-capitalized. At September 30, 2018, the Company reported a CET1 ratio of 12.44%, total risk-based capital ratio of 13.68% and leverage ratio of 10.24%.
Material Changes Versus Prior Comparable Period
- Net interest income rose 38% in the quarter and 36% year to date, driven by higher loan volumes associated with the Pacific Continental acquisition and higher earning-asset yields in a rising-rate environment.
- Net interest margin increased to 4.41% in Q3 and 4.31% year to date, compared with 4.20% and 4.17%, respectively, in the prior-year periods.
- Noninterest income declined 43% in Q3 and 21% year to date. The prior-year periods included a $14.0 million gain on the sale of the merchant card services portfolio. Card revenue also declined following the application of the Dodd-Frank interchange fee cap beginning July 1, 2018.
- Noninterest expense increased 23% year to date, primarily due to higher compensation, amortization of acquisition-related intangible assets and acquisition-related expenses. Acquisition-related expenses were $8.2 million in the first nine months of 2018 versus $3.6 million in the prior-year period.
- The nine-month provision for loan losses increased to $13.0 million, including a large charge-off in the agricultural portfolio. Net charge-offs were $4.8 million for the period.
- Loans increased $155.7 million from year-end 2017, while available-for-sale debt securities increased $183.4 million to $2.92 billion. The securities portfolio had $90.5 million of gross unrealized losses, primarily attributed to interest-rate changes; management did not consider the securities other-than-temporarily impaired.
- Accumulated other comprehensive loss increased to $70.0 million, primarily because of unrealized losses on available-for-sale securities.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued emphasis on commercial lending and relationship banking and anticipates continued use of FHLB advances, Federal Reserve borrowings and repurchase agreements to support lending and securities purchases.
Management identified interest-rate changes, credit quality, collateral values, liquidity, competition, acquisition integration, goodwill impairment, regulatory changes, cybersecurity, operational disruptions, legal and compliance risks, natural disasters and broader economic conditions as material risks. The Company stated that interest-rate risk had not materially changed since December 31, 2017.
The Company adopted ASU 2016-01 and Topic 606 in 2018. Adoption of ASU 2016-01 resulted in a $157 thousand reduction to opening retained earnings. Topic 606 had no material effect on revenue timing or amount. The Company expects to adopt the new lease standard on January 1, 2019 and estimated that right-of-use assets and lease liabilities would be approximately $40 million to $50 million; it did not expect a material income-statement impact.
The Company stated that the future impact of the current expected credit loss standard, ASU 2016-13, could be significant but could not yet be reasonably estimated. The Company had begun implementation activities with third-party assistance.
Subsequent to quarter-end, the Company declared a regular $0.26 per-share quarterly dividend and a $0.14 per-share special dividend. Dividend payments remain subject to regulatory capital and other restrictions. Management stated that routine litigation is not expected to have a material effect on financial condition, results of operations or cash flows.
Important Facts for Investors to Verify
- Assess the sustainability of earnings growth after excluding acquisition-related benefits, purchase-accounting accretion and the prior-year $14.0 million merchant-card sale gain.
- Monitor deposit pricing, FHLB borrowing levels and funding costs as interest rates rise.
- Review agricultural portfolio charge-offs, the $83.8 million allowance, nonaccrual loans and loan concentrations in commercial and real estate lending.
- Evaluate the effect of Pacific Continental integration expenses, goodwill of $765.8 million and core deposit intangible amortization on future profitability.
- Track unrealized securities losses and their potential effect on accumulated other comprehensive income and capital.
- Verify the eventual implementation impact of CECL and the lease standard, including any changes to reserves, retained earnings, assets, liabilities and regulatory capital.
- Confirm continued regulatory compliance and the capacity to fund the declared regular and special dividends.