Columbia Banking System, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018, with comparative results for 2017 and 2016. Columbia is a bank holding company whose principal subsidiary, Columbia State Bank, provides commercial, real estate, consumer, deposit, treasury-management, wealth-management and trust services in Washington, Oregon and Idaho. The Bank operated 150 branches and employed 2,137 full-time-equivalent employees at year-end.
2018 was the first full fiscal year reflecting the November 2017 acquisition of Pacific Continental Corporation, which added approximately $2.94 billion of assets and $2.12 billion of deposits.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net interest income | $478.8 million | $368.0 million | +30% |
| Noninterest income | $88.3 million | $109.6 million | -20% |
| Noninterest expense | $340.5 million | $291.0 million | +17% |
| Provision for loan losses | $14.8 million | $8.6 million | +71% |
| Net income | $172.9 million | $112.8 million | +53% |
| Diluted EPS | $2.36 | $1.86 | +27% |
| Net interest margin, tax-equivalent | 4.33% | 4.18% | +15 basis points |
| Return on average assets | 1.36% | 1.11% | +25 basis points |
| Return on average common equity | 8.78% | 8.00% | +78 basis points |
Average assets increased to $12.73 billion from $10.13 billion. Interest income increased 33%, primarily from higher average loan and securities balances following the Pacific Continental acquisition. Interest expense rose 170% to $18.2 million as deposit and borrowing costs increased.
Net cash provided by operating activities was $237.2 million, compared with $128.5 million in 2017. Investing activities used $506.1 million, principally because of $965.6 million of debt-security purchases. Financing activities provided $203.9 million, including net FHLB borrowing activity. Cash and cash equivalents declined $64.9 million to $277.6 million at year-end.
Balance sheet, debt and liquidity
- Total assets were $13.10 billion, up 3% from $12.72 billion.
- Loans were $8.39 billion, essentially flat year over year; average loans increased substantially because of the acquisition.
- Debt securities available for sale were $3.17 billion, up from $2.74 billion.
- Total deposits were $10.46 billion, down 1%; core deposits were $9.97 billion and represented 95% of total deposits.
- FHLB advances increased to $399.5 million from $11.6 million. Subordinated debentures were $35.5 million and repurchase agreements were $61.1 million.
- The Company had unused credit lines of $1.62 billion with the FHLB and $107.1 million with the Federal Reserve at year-end.
- Shareholders’ equity increased to $2.03 billion from $1.95 billion. Tangible common equity to tangible assets was 9.95%, compared with 9.47% in 2017.
- The Company and Bank were well-capitalized. The Company’s total risk-based capital ratio was 13.9920% and its Tier 1 leverage ratio was 10.2444%; the Bank’s corresponding ratios were 13.8494% and 10.4185%.
Material changes versus the prior comparable period
- Profitability improved materially, driven by acquisition-related balance-sheet growth, higher loan yields and a 15-basis-point increase in tax-equivalent net interest margin.
- Noninterest income declined because 2017 included a $14.0 million one-time gain on the sale of the merchant card services portfolio. Card revenue also declined following the 2018 debit-interchange fee cap and the adoption of net revenue presentation.
- Noninterest expense increased $49.5 million, primarily from a full year of Pacific Continental compensation, benefits, amortization and other operating costs. Acquisition-related expenses declined to $8.7 million from $17.2 million.
- The effective tax rate declined to 18% from 37%, principally because of the Tax Cuts and Jobs Act. The 2017 rate included a $12.2 million deferred-tax-asset remeasurement charge.
- Nonperforming assets improved to $60.9 million, or 0.46% of assets, from $79.5 million, or 0.63%. Nonaccrual loans declined to $54.8 million from $66.2 million.
- The allowance for loan and lease losses increased to $83.4 million, or 0.99% of loans, from $75.6 million, or 0.91%. Net charge-offs increased to $7.0 million from $3.0 million, including a large agricultural-loan charge-off.
- The investment portfolio grew 15%, but gross unrealized losses increased to $56.0 million from $34.1 million. Management concluded the securities were not other-than-temporarily impaired.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management emphasizes continued Northwest market-share growth, relationship banking, core-deposit expansion, expense control, digital banking investment and disciplined consideration of acquisitions.
- Interest-rate sensitivity modeling indicated that a gradual 100-basis-point decline could reduce net interest income by $7.1 million in year one and $31.3 million in year two; a gradual 200-basis-point increase was estimated to increase net interest income by $6.2 million and $31.0 million, respectively.
- In January 2019, the Company entered into a $500 million notional interest-rate collar based on one-month LIBOR to reduce exposure to declining rates.
- Key risks include concentration in commercial business and commercial real estate lending, with 60% of gross loans secured by real estate; credit losses and collateral-value declines; interest-rate and LIBOR transition risk; liquidity and funding costs; regulatory and compliance changes; cybersecurity and systems disruption; acquisition integration; goodwill impairment; competition; and natural disasters affecting the Northwest.
- Goodwill was $765.8 million, or approximately 5.9% of total assets. The 2018 impairment test found no goodwill impairment.
- Off-balance-sheet loan commitments totaled $2.62 billion and standby letters of credit totaled $28.3 million.
- The Company had $63.0 million of future operating and equipment lease payments. It expected adoption of the new lease standard on January 1, 2019 to increase other assets by $49.2 million and other liabilities by $48.2 million, with a $1.0 million increase to beginning retained earnings.
- CECL adoption was required for fiscal years beginning after December 15, 2019. The Company stated that the impact could be significant but could not reasonably estimate it at the filing date.
- The Board authorized repurchases of up to 2.9 million shares, subject to a maximum aggregate purchase price of $100 million. A regular quarterly dividend of $0.28 per share and a special dividend of $0.14 per share were declared in January 2019.
Most important facts for investors to verify
- Whether net interest income remains resilient as deposit and wholesale funding costs rise and acquisition-related accretion income declines.
- Credit performance in the commercial business and commercial real estate portfolios, including charge-offs, criticized loans, nonaccrual loans and allowance coverage.
- The sustainability of the 2018 tax rate and the effect of tax-exempt income and other tax benefits.
- The effect of FHLB borrowing growth and deposit trends on liquidity, funding costs and interest-rate risk.
- Realized losses or impairment in the securities portfolio if interest rates, credit spreads or liquidity conditions worsen.
- The eventual financial and capital impact of CECL, lease accounting and other regulatory or accounting changes.
- Execution of the repurchase program, dividend capacity and continued well-capitalized status.