Business Context and Reporting Period
Columbia Banking System, Inc. is a Washington-based bank holding company whose principal subsidiaries include Columbia State Bank and Columbia Trust Company. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared primarily with the three months ended March 31, 2016 and, for balance-sheet items, December 31, 2016.
Key Financial Metrics
| Metric | Q1 2017 | Comparable period or date |
|---|---|---|
| Net income | $29.2 million | $21.3 million in Q1 2016 |
| Diluted EPS | $0.50 | $0.37 in Q1 2016 |
| Net interest income | $86.7 million | $80.2 million in Q1 2016 |
| Net interest margin, tax equivalent | 4.20% | 4.13% in Q1 2016 |
| Operating net interest margin, tax equivalent | 4.09% | 4.03% in Q1 2016 |
| Provision for loan and lease losses | $2.8 million | $5.3 million in Q1 2016 |
| Noninterest income | $24.9 million | $20.6 million in Q1 2016 |
| Noninterest expense | $69.0 million | $65.1 million in Q1 2016 |
| Total assets | $9.53 billion | $9.51 billion at December 31, 2016 |
| Total loans, net of unearned income | $6.23 billion | $6.21 billion at December 31, 2016 |
| Total deposits | $8.09 billion | $8.06 billion at December 31, 2016 |
| Cash and cash equivalents | $182.8 million | $224.2 million at December 31, 2016 |
| Shareholders’ equity | $1.28 billion | $1.25 billion at December 31, 2016 |
Net income increased 37% year over year. Income before taxes was $39.8 million, and the income tax provision was $10.6 million, producing an effective tax rate of approximately 27%, compared with 30% in Q1 2016. The filing does not present a consolidated net profit margin based on revenue.
Cash provided by operating activities was $36.0 million, compared with $29.3 million in Q1 2016. Investing activities used $68.2 million, primarily reflecting purchases of available-for-sale securities. Financing activities used $9.2 million, resulting in a $41.4 million decrease in cash and cash equivalents during the quarter.
The allowance for loan and lease losses was $71.0 million, or 1.14% of total loans, compared with 1.13% at year-end 2016. Nonperforming assets were $30.1 million, or 0.32% of total assets, compared with $33.8 million, or 0.35%, at year-end. Net charge-offs were $1.8 million.
At March 31, 2017, the Company and Columbia Bank qualified as well-capitalized. The Company reported a CET1 ratio of 12.03%, total risk-based capital ratio of 13.04%, and leverage ratio of 9.79%. Columbia Bank reported corresponding ratios of 11.86%, 12.87%, and 9.64%.
Material Changes Versus Prior Comparable Period
- Net interest income rose $6.5 million, driven by higher loan and taxable-securities volumes and lower premium amortization on taxable securities. Average interest-earning assets increased $514.3 million.
- Noninterest income increased $4.2 million, primarily from higher loan revenue, a $1.5 million bank-owned life insurance benefit, and a $573 thousand benefit from reducing a prior mortgage repurchase liability to zero. Q1 2016 included $373 thousand of investment-securities gains; Q1 2017 included none.
- The loan-loss provision declined $2.5 million. The Q1 2017 provision included $3.1 million for loans excluding purchased credit-impaired loans, partly offset by a $325 thousand provision recapture for purchased credit-impaired loans.
- Noninterest expense increased $3.9 million, principally from higher compensation and employee benefits, legal and professional fees, and an $850 thousand increase in the allowance for unfunded commitments and letters of credit. Acquisition-related expense was $1.4 million in Q1 2017 versus $2.4 million in Q1 2016.
- Total loans increased $14.7 million from year-end, with growth concentrated in commercial business and commercial real estate. Securities available for sale increased $52.8 million to $2.33 billion.
- Nonaccrual loans declined to $25.5 million from $27.8 million at year-end, while other real estate owned declined to $4.5 million from $6.0 million.
- Series B preferred stock was converted into 102,362 common shares on January 12, 2017. Common shares outstanding at March 31, 2017 were 58.329 million.
Outlook, Commentary, Risks, and Unusual Items
Management stated that it expects continued emphasis on commercial relationship banking and commercial lending. The filing does not provide quantitative earnings, revenue, margin, or balance-sheet guidance.
The Company had signed a definitive agreement to acquire Pacific Continental Corporation. Completion remained subject to regulatory, shareholder, and other closing conditions, and the filing recognized $1.4 million of related acquisition expenses in Q1 2017.
Management identified interest-rate changes, economic and real-estate conditions in its Washington, Oregon, and Idaho markets, credit quality, collateral values, liquidity, competition, regulatory changes, acquisition execution and integration, goodwill impairment, cybersecurity, operational disruptions, and natural disasters as material risks. The Company also noted that substantially all loans and unfunded commitments are geographically concentrated in those three states.
The Company carried $17.8 million of net unrealized losses on available-for-sale securities at March 31, 2017, including $28.8 million of gross unrealized losses. Management did not consider these securities other-than-temporarily impaired because it intended and expected to be able to hold them through recovery or maturity.
The Company estimated a $5.4 million FDIC loss-sharing clawback liability. Loan commitments were $2.23 billion and standby letters of credit were $47.6 million. Management stated that routine litigation was not expected to have a material effect on the financial statements.
The Company adopted ASU 2016-09, resulting in a $1.2 million income-tax benefit, or $0.02 per diluted share, and a $117 thousand reduction to opening retained earnings. It also early adopted ASU 2017-08 with no material impact. Management stated that the future impact of the forthcoming CECL standard cannot yet be reasonably estimated and may be significant.
Management reported no material change in interest-rate risk from December 31, 2016. Disclosure controls and procedures were considered effective, and no material change in internal control over financial reporting was identified.
Important Facts for Investors to Verify
- Confirm the status, final consideration, regulatory approvals, closing date, and integration costs for the proposed Pacific Continental acquisition.
- Assess whether the increase in earnings is sustainable after separating recurring operating performance from the bank-owned life insurance benefit, mortgage repurchase-liability remeasurement, acquisition expenses, and share-based-payment tax benefit.
- Monitor commercial real estate concentrations, classified loans, nonaccrual loans, net charge-offs, and the adequacy of the allowance as loan growth continues.
- Evaluate exposure to interest-rate movements through the securities portfolio, including its duration and unrealized losses.
- Review liquidity and funding trends, including the decline in cash, reliance on deposits and FHLB advances, repurchase agreements, and $2.23 billion of unfunded loan commitments.
- Verify the potential effect and implementation status of CECL, including possible changes to the allowance, retained earnings, capital, and earnings volatility.
- Confirm FDIC loss-sharing recovery periods and the potential $5.4 million clawback liability.