Columbia Banking System, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. is a Washington-based bank holding company operating primarily through Columbia State Bank and Columbia Trust Company. The unaudited filing covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017 and the December 31, 2017 balance sheet. Results include Pacific Continental Corporation and its bank subsidiary for the period beginning January 1, 2018 following the November 1, 2017 acquisition.
Key financial metrics
| Metric | Q1 2018 | Comparable period or date |
|---|---|---|
| Net income | $40.0 million | $29.2 million in Q1 2017 |
| Diluted earnings per share | $0.55 | $0.50 in Q1 2017 |
| Net interest income | $115.5 million | $86.7 million in Q1 2017 |
| Net interest margin, tax equivalent | 4.22% | 4.20% in Q1 2017 |
| Operating net interest margin, tax equivalent | 4.18% | 4.09% in Q1 2017 |
| Noninterest income | $23.1 million | $24.9 million in Q1 2017 |
| Noninterest expense | $86.0 million | $69.0 million in Q1 2017 |
| Provision for loan and lease losses | $5.9 million | $2.8 million in Q1 2017 |
| Net cash provided by operating activities | $43.5 million | $36.0 million in Q1 2017 |
| Total assets | $12.53 billion | $12.72 billion at December 31, 2017 |
| Loans, net of unearned income | $8.34 billion | $8.36 billion at December 31, 2017 |
| Total deposits | $10.40 billion | $10.53 billion at December 31, 2017 |
| Shareholders’ equity | $1.95 billion | $1.95 billion at December 31, 2017 |
Interest income increased to $119.1 million from $87.8 million, primarily because of higher loan volumes following the Pacific Continental acquisition and higher loan yields. Average loans increased to $8.35 billion from $6.20 billion, while the average loan yield rose to 4.99% from 4.87%.
Noninterest income declined 7% year over year. Deposit and treasury management fees increased 20%, but merchant processing revenue was no longer reported on the same basis after the 2017 portfolio sale, and the prior-year period included a $1.5 million bank-owned life insurance benefit. Noninterest expense increased 25%, including $4.3 million of acquisition-related costs and higher compensation, occupancy, data processing and intangible amortization expenses.
The effective income tax rate was approximately 15%, compared with 27% in Q1 2017, principally reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act, tax-exempt income and discrete share-based compensation benefits.
Material changes versus prior comparable period and year-end
- Net income increased approximately 37% year over year, while diluted EPS increased from $0.50 to $0.55 despite a larger share count.
- Net interest income increased approximately 33%, primarily from acquisition-related earning-asset growth. The tax-equivalent net interest margin increased two basis points.
- Net interest expense increased to $3.7 million from $1.1 million as deposit costs, FHLB borrowing costs and subordinated debt expense rose.
- The allowance for loan and lease losses increased to $79.8 million, or 0.96% of loans, from $75.6 million, or 0.91%, at year-end 2017. Net charge-offs were $1.7 million.
- Nonperforming assets increased to $90.0 million from $79.5 million. Nonaccrual loans rose to $78.5 million, driven primarily by agricultural commercial loans; nonperforming assets were 0.72% of total assets.
- Total assets decreased $186.3 million from year-end, loans decreased $19.0 million, securities available for sale decreased $113.7 million, and deposits decreased $136.6 million.
- Accumulated other comprehensive loss increased to $48.1 million from $22.2 million, primarily because of larger after-tax unrealized losses on available-for-sale securities as interest rates changed.
- Cash and cash equivalents decreased $48.9 million to $293.7 million. Investing activities provided $95.1 million, while financing activities used $187.5 million, principally reflecting deposit declines and net FHLB advance repayments.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued emphasis on commercial lending and relationship banking. Management stated that loan production and line utilization were seasonally low during the quarter.
The Pacific Continental acquisition generated $383.1 million of goodwill and a $46.9 million core deposit intangible. Acquisition-related expenses were $4.3 million in Q1 2018. Because consolidated assets exceeded $10 billion, the company expects to become subject to the Dodd-Frank interchange fee cap beginning July 1, 2018, with an estimated pre-tax annual impact of approximately $10 million.
Management identified agricultural-loan weakness and related net charge-offs as the principal drivers of the $7.0 million provision for loans excluding purchased credit-impaired loans. The $1.1 million provision recapture for purchased credit-impaired loans reflected improved expected cash flows.
At March 31, 2018, the company and Columbia Bank qualified as well-capitalized. Company ratios included a 11.99% CET1 ratio, 13.21% total risk-based capital ratio and 9.92% leverage ratio. The company had $2.62 billion of commitments to extend credit and $41.9 million of standby letters of credit.
Principal risks include credit deterioration, agricultural and real-estate exposure concentrated in Washington, Oregon and Idaho, interest-rate and funding pressures, integration and realization of Pacific Continental synergies, potential goodwill impairment, cybersecurity and operational disruptions, regulatory changes, competition, economic and housing-market weakness, and changes in accounting standards. The company expects ASU 2016-13, the current expected credit loss standard, could have a significant impact, but it could not reasonably estimate the amount at filing. Routine litigation is not expected to have a material effect.
The company adopted ASU 2016-01 and Topic 606 on January 1, 2018. ASU 2016-01 resulted in a $203 thousand reduction to opening retained earnings; Topic 606 had no material effect on the timing or amount of revenue recognized in Q1 2018.
Most important facts for investors to verify
- Whether the increase in nonaccrual agricultural loans and nonperforming assets persists or leads to higher provisions and charge-offs.
- The actual post-integration cost savings, revenue synergies and recurring expense base from Pacific Continental.
- The effect beginning July 1, 2018 of the approximately $10 million estimated annual pre-tax interchange-fee impact.
- Deposit trends, funding costs, FHLB borrowings and liquidity as interest rates and deposit competition change.
- The magnitude and timing of any allowance increase under the CECL standard and its effects on retained earnings and regulatory capital.
- Future unrealized securities losses, interest-rate sensitivity and the potential for goodwill or intangible-asset impairment.
- Capital ratios, dividend capacity and the status of the authorization to repurchase up to 2.9 million common shares.