Columbia Banking System, Inc. — 2017 Q3 Form 10-Q Summary
Business context and reporting period
Columbia Banking System is a regional banking company operating primarily through Columbia State Bank and Columbia Trust Company, with lending and unfunded commitments concentrated in Washington, Oregon, and Idaho. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared primarily with the corresponding 2016 periods and December 31, 2016 balance-sheet data.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total interest income | $90.3 million | $86.8 million | $265.9 million | $251.2 million |
| Net interest income | $88.9 million | $85.6 million | $261.8 million | $247.9 million |
| Noninterest income | $37.1 million | $23.2 million | $86.1 million | $65.8 million |
| Noninterest expense | $67.5 million | $67.3 million | $205.4 million | $196.1 million |
| Net income | $40.8 million | $27.5 million | $97.1 million | $74.1 million |
| Diluted EPS | $0.70 | $0.47 | $1.67 | $1.28 |
| Net interest margin, tax-equivalent | 4.20% | 4.13% | 4.17% | 4.12% |
- Q3 net income increased approximately 48% year over year; nine-month net income increased approximately 31%.
- Q3 and nine-month total revenue, calculated as interest income plus noninterest income, was approximately $127.4 million and $352.0 million, respectively. The filing does not present this subtotal as a reported revenue line.
- The Q3 provision for loan and lease losses was a $648 thousand net recapture, compared with a $1.9 million provision in Q3 2016. The nine-month provision was $5.3 million, down from $10.8 million.
- Total assets were $9.81 billion at September 30, 2017, up from $9.51 billion at year-end 2016. Loans, net of unearned income and before the allowance, were $6.51 billion, up $298.6 million, or approximately 4.8%, from year-end.
- Deposits were $8.34 billion, up $282.3 million from year-end. Cash and cash equivalents were $322.7 million, compared with $224.2 million at year-end.
- The allowance for loan and lease losses was $71.6 million, or 1.10% of loans, versus 1.13% at December 31, 2016. Nonaccrual loans were $40.3 million and total nonperforming assets were $44.0 million, up from $27.8 million and $33.8 million, respectively, at year-end.
- Shareholders’ equity was $1.33 billion, or 14% of total assets. The Company reported a 12.20% CET1 ratio, 13.18% total risk-based capital ratio, and 10.09% leverage ratio at September 30, 2017. The Company and Bank were classified as well-capitalized.
Cash flow, debt, and liquidity
- For the nine months, operating activities provided $111.2 million of cash, investing activities used $216.4 million, and financing activities provided $203.7 million, resulting in a $98.5 million increase in cash and cash equivalents.
- Investing cash uses primarily reflected $304.8 million of net loan originations and $130.9 million of securities purchases, partly offset by $200.5 million of securities maturities and principal repayments.
- Federal Home Loan Bank advances were $6.5 million at September 30, 2017, and repurchase agreements were $40.9 million, down from $80.8 million at year-end. The Company also had $2.23 billion of loan commitments, $50.1 million of standby letters of credit, and $2.9 million of commercial letters of credit.
- Core deposits represented approximately 95.9% of total deposits. CDARS and brokered money-market deposits totaled $258.1 million, or approximately 3% of deposits.
Material changes and unusual items
- In July 2017, the Company sold its merchant card services portfolio and moved to an outsourced model. It recognized a $14.0 million pretax gain. Subsequent merchant-services revenue sharing was reported in card revenue, including $438 thousand in Q3. Merchant processing expense ceased to be incurred directly beginning July 1, 2017.
- The Company terminated its FDIC loss-sharing agreements early during Q2 2017, paid the FDIC $4.7 million, removed the remaining loss-sharing asset and clawback liability, and recorded a $2.4 million pretax charge. Future recoveries and losses on the previously covered assets are now the Company’s responsibility.
- The Series B preferred stock was converted into common stock on January 12, 2017. The Company paid common dividends of $0.22 per share quarterly and declared another $0.22 dividend after quarter-end.
- On September 27, 2017, the Board authorized a new repurchase program for up to 2.9 million common shares. Q3 repurchases consisted only of 779 shares surrendered for employee tax withholding; no shares were purchased under the publicly announced plan during the quarter.
- On November 1, 2017, after the reporting period, the Company completed its approximately $644.8 million acquisition of Pacific Continental Corporation. The reported nine-month results do not include Pacific Continental’s operations, and purchase-accounting values had not been finalized at filing.
Outlook, risks, contingencies, and accounting matters
- Management emphasized continued commercial lending and relationship banking, but provided no specific earnings, revenue, margin, or loan-growth guidance in the filing.
- Management expects to continue using deposits, FHLB advances, Federal Reserve borrowings, and repurchase agreements to support lending and securities purchases. Interest-rate risk was not materially different from December 31, 2016.
- Key risks include deterioration in economic or Northwest real-estate conditions, higher interest rates and funding costs, credit-quality deterioration, acquisition integration risk, competition, regulatory changes, cybersecurity and systems failures, liquidity and capital management, goodwill impairment, and natural disasters.
- Adoption of the future current expected credit loss standard, ASU 2016-13, could materially increase the allowance because it will recognize estimated lifetime expected credit losses. The Company could not yet reasonably estimate the impact.
- Management stated that routine litigation is not expected to have a material effect and that there had been no material change in previously disclosed risk factors. Disclosure controls were effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $14.0 million merchant-card gain and the post-sale revenue-sharing model distort comparisons of recurring noninterest income.
- The trend in nonaccrual loans and nonperforming assets, which increased despite lower charge-offs and a Q3 allowance recapture.
- The sustainability of loan growth, net interest margin improvement, and deposit growth as interest rates and funding costs change.
- The final purchase accounting, capital impact, synergies, and integration costs associated with the Pacific Continental acquisition.
- The potential capital and earnings impact of CECL adoption and the Company’s progress in implementing the required data, forecasting, controls, and methodology.
- The capacity of the 2.9 million-share repurchase authorization and future dividends to coexist with acquisition funding and well-capitalized regulatory ratios.