COLUMBIA BANKING SYSTEM, INC. quarterly report, Q2 FY2019

Columbia Banking System, Inc. — 2019 Q2 Form 10-Q Summary

Business context and reporting period

Columbia Banking System, Inc. is a Washington-based bank holding company whose principal subsidiaries are Columbia State Bank and Columbia Trust Company. The company provides commercial banking, lending, treasury management, wealth management, trust, card and related financial services, primarily in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared primarily with the corresponding 2018 periods, and balance-sheet figures compared with December 31, 2018.

Key financial metrics

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Net interest income	$125.1 million	$116.7 million	$246.1 million	$232.2 million
Provision for loan losses	$0.2 million	$4.0 million	$1.6 million	$9.8 million
Noninterest income	$25.6 million	$23.7 million	$47.3 million	$46.8 million
Noninterest expense	$86.7 million	$84.6 million	$171.4 million	$170.6 million
Net income	$51.7 million	$41.7 million	$97.6 million	$81.7 million
Diluted EPS	$0.71	$0.57	$1.33	$1.12
Tax-equivalent net interest margin	4.40%	4.30%	4.36%	4.29%

Q2 net income increased approximately 24% year over year; first-half net income increased approximately 19%.
Q2 income before taxes was $63.8 million and the effective tax rate was approximately 19%; first-half income before taxes was $120.5 million and the effective tax rate was approximately 19%.
Total assets were $13.09 billion at June 30, 2019, essentially unchanged from year-end 2018.
Loans, net of unearned income, were $8.65 billion, up $255.5 million, or approximately 3%, from December 31, 2018. Loans, net of the allowance, were $8.57 billion.
Available-for-sale debt securities were $2.86 billion, down $303.0 million from year-end as assets shifted toward loans. The portfolio had a $48.4 million net unrealized gain at June 30, 2019, compared with a $43.2 million net unrealized loss at year-end.
Total deposits were $10.21 billion, down $246.5 million from year-end. Core deposits represented approximately 95.7% of total deposits; wholesale deposits were $338.3 million, or 3.3% of total deposits.
Cash and cash equivalents were $258.7 million, compared with $277.6 million at December 31, 2018. Six-month operating cash flow was $98.5 million, investing cash flow was $129.1 million, and financing cash flow was $(246.5) million, producing an $18.9 million decrease in cash.
FHLB advances were $495.5 million, up from $399.5 million at year-end. Repurchase agreements were $50.2 million and subordinated debentures were $35.4 million.
Shareholders’ equity was $2.13 billion, or approximately 16% of total assets. The company and bank subsidiary remained well-capitalized; the company’s June 30 CET1, total risk-based capital and leverage ratios were 12.57%, 13.75% and 10.39%, respectively.

Material changes versus comparable periods

Net interest income benefited from higher loan and taxable-security balances and yields, together with $4.9 million of interest recoveries on nonaccrual loans related to two lending relationships. Higher deposit and FHLB funding costs partially offset these benefits.
The provision for loan losses declined substantially, reflecting improved credit quality and the absence of the large agricultural-loan charge-off recorded in 2018.
Noninterest income increased in Q2 primarily because of a $3.0 million BOLI benefit and a $667,000 gain on loan disposals. First-half income also included $2.1 million of net securities gains.
Card revenue fell 43% in Q2 and 40% year to date, primarily following the July 2018 application of the Dodd-Frank interchange fee cap.
Reported noninterest expense increased modestly. Excluding $2.8 million of Q2 2018 acquisition-related costs, Q2 expense increased approximately 6%; excluding $7.1 million of first-half 2018 acquisition-related costs, first-half expense increased approximately 5%. Compensation and legal/professional costs were higher, partly offset by lower occupancy, data-processing and OREO costs.
Nonperforming assets declined to $40.2 million from $60.9 million at year-end. Nonaccrual loans were $39.0 million, or 0.45% of period-end loans, versus 0.65% at year-end; OREO declined to $1.1 million.
The allowance for loan and lease losses was $80.5 million, or 0.93% of loans, compared with $83.4 million, or 0.99%, at year-end. Six-month net charge-offs were $4.4 million.
The company repurchased 624,158 shares for $21.9 million during the quarter and had 2,275,842 shares remaining under its authorization at June 30. It declared regular dividends of $0.28 per share for each of the first two quarters and declared another $0.28 quarterly dividend payable in August 2019.

Guidance, outlook, risks and unusual items

The filing does not provide specific earnings, revenue, margin or loan-growth guidance. Management expects continued emphasis on commercial relationship banking and commercial lending.
Management stated that results for the six months are not necessarily indicative of full-year results. Q2 and first-half earnings benefited from unusual $4.9 million nonaccrual-loan interest recoveries, a $3.0 million BOLI benefit, loan-disposal gains and lower credit-loss provisions.
The company adopted the new lease standard on January 1, 2019, increasing other assets by $49.2 million and other liabilities by $48.2 million, with a $782,000 increase to opening retained earnings.
The company is preparing to adopt CECL, effective for fiscal years beginning after December 15, 2019. It stated that the impact could be significant but could not yet be reasonably estimated.
Key risks include interest-rate and liquidity pressure, deposit pricing and funding costs, credit deterioration, concentrations in Washington, Oregon and Idaho, commercial and real-estate exposure, changing collateral values, LIBOR replacement, regulatory and accounting changes, cybersecurity and systems risks, competition, goodwill impairment, natural disasters and broader economic conditions.
The company had $2.59 billion of loan commitments, $35.1 million of standby letters of credit and $286,000 of commercial letters of credit at June 30, 2019. Management reported no material adverse effect expected from pending or threatened litigation.
A new $30.0 million revolving credit facility, maturing in May 2020, was available for liquidity and corporate purposes, including share repurchases; no amount was outstanding at June 30, 2019, and the company was in compliance with its covenants.

Most important facts for investors to verify

Whether net interest income and margin remain strong after excluding the $4.9 million of nonaccrual-loan interest recoveries.
The sustainability of low loan-loss provisions and whether credit quality continues to improve as the loan portfolio grows.
The effect of CECL adoption on the allowance, retained earnings, capital ratios and future provision expense.
Deposit trends, deposit pricing, FHLB funding reliance and liquidity capacity as loans continue to grow.
The ongoing impact of the interchange fee cap on card revenue and whether fee growth in treasury management, trust and other businesses offsets that decline.
The effect of interest-rate movements, LIBOR replacement and the company’s hedging program on net interest income and accumulated other comprehensive income.
The company’s ability to fund dividends and share repurchases while maintaining well-capitalized status.