Columbia Banking System, Inc. — 2016 Q3 Form 10-Q Summary
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. The filing covers the unaudited quarter and nine months ended September 30, 2016, with comparisons primarily to September 30, 2015 and December 31, 2015.
Key financial metrics
| Metric | Three months ended September 30, 2016 | Three months ended September 30, 2015 | Nine months ended September 30, 2016 | Nine months ended September 30, 2015 |
|---|---|---|---|---|
| Net interest income | $85.6 million | $81.7 million | $247.9 million | $243.1 million |
| Provision for loan losses | $1.9 million | $2.8 million | $10.8 million | $6.2 million |
| Noninterest income | $23.2 million | $22.5 million | $65.8 million | $66.7 million |
| Noninterest expense | $67.3 million | $64.1 million | $196.1 million | $199.3 million |
| Net income | $27.5 million | $25.8 million | $74.1 million | $72.1 million |
| Diluted EPS | $0.47 | $0.45 | $1.28 | $1.25 |
| Tax-equivalent net interest margin | 4.13% | 4.37% | 4.12% | 4.39% |
Net income increased approximately 7% year over year in the third quarter and approximately 3% for the first nine months. The reported effective tax rate was approximately 31% in both comparable periods. The filing does not provide a consolidated operating margin; net income represented approximately 31% of pretax income in both the quarter and year-to-date period.
- Total assets were $9.59 billion at September 30, 2016, up $635.1 million from year-end 2015.
- Total loans, net of unearned income and before the allowance, were $6.26 billion, up $444.7 million from year-end 2015. Growth was concentrated in commercial business and commercial real estate lending.
- Securities available for sale were $2.36 billion, up $202.4 million from year-end 2015.
- Total deposits were $8.06 billion, up $619.0 million from year-end 2015. Core deposits represented approximately 96.9% of total deposits.
- FHLB advances were $66.5 million and repurchase agreements were $69.2 million at quarter-end. The company also reported $192.1 million of cash and cash equivalents.
- Shareholders’ equity was $1.28 billion. The company and Columbia Bank remained well-capitalized; the company’s CET1, total risk-based capital and leverage ratios were 11.43%, 12.41% and 9.53%, respectively.
- Cash provided by operating activities for the first nine months was $118.5 million. Investing activities used $622.4 million, primarily for loan originations and securities purchases, while financing activities provided $520.7 million, primarily from deposit growth.
- The allowance for loan and lease losses was $70.3 million, or 1.12% of period-end loans, compared with 1.17% at December 31, 2015. Year-to-date net charge-offs were $8.7 million.
Material changes versus comparable periods
- Third-quarter net interest income rose $3.9 million, primarily from higher loan and securities volumes. However, the tax-equivalent net interest margin declined to 4.13% from 4.37%, reflecting lower acquired-loan accretion and lower yields on originated loans.
- Nine-month net interest income increased 2%, while incremental acquired-loan accretion income declined to $13.7 million from $21.2 million.
- Third-quarter noninterest income increased 3%, largely because the FDIC loss-sharing asset produced a smaller negative impact. Nine-month noninterest income declined 1%, primarily because of lower financial services revenue.
- Third-quarter noninterest expense increased 5%, driven principally by higher compensation, health insurance costs, incentive compensation and advertising. Nine-month expense decreased 2%, primarily because acquisition-related expenses declined, although underlying expenses excluding acquisition costs increased.
- The nine-month provision for loan losses increased to $10.8 million from $6.2 million, reflecting loan growth and net charge-offs. The third-quarter provision declined year over year to $1.9 million.
- Nonperforming assets declined to $30.4 million from $35.2 million at year-end 2015, primarily due to sales of other real estate owned. Nonperforming assets were 0.32% of total assets.
- Accumulated other comprehensive income improved to $16.5 million from a $6.3 million loss at year-end 2015, largely because of unrealized gains on available-for-sale securities.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantitative earnings or balance-sheet guidance. Management expects continued emphasis on commercial lending and relationship banking, with funding supplied primarily by customer deposits and supplemented as needed by FHLB advances, Federal Reserve borrowings and repurchase agreements.
- Four FDIC loss-sharing agreements had expired for non-single-family assets. The remaining FDIC-related portfolio and associated accretion income are declining. The estimated FDIC clawback liability was $5.5 million, while the FDIC loss-sharing asset was $3.6 million.
- The company recorded $857 thousand of third-quarter expense, including an $849 thousand cease-use liability, after deciding to stop using an Idaho branch location. A Washington facility sale-leaseback generated a deferred gain of $742 thousand.
- Loan commitments were approximately $2.10 billion and standby letters of credit were $48.4 million at September 30, 2016. These arrangements expose the company to credit risk and future funding requirements.
- Management identified credit losses, acquired loans, FDIC loss-sharing assets, business combinations and goodwill valuation as critical accounting areas. Goodwill was $382.8 million, and the July 2016 impairment assessment found no impairment.
- Key risks include Pacific Northwest real estate and economic conditions, credit quality, interest-rate changes, liquidity, competition, regulatory and compliance requirements, cybersecurity, operational disruptions, acquisition integration and potential goodwill impairment.
- The company reported no material change in previously disclosed risk factors, no material legal proceedings, and effective disclosure controls and procedures.
- The board authorized repurchases of up to 2.9 million common shares. Only 688 shares were repurchased during the quarter, solely to satisfy employee withholding taxes.
Important facts for investors to verify
- Whether loan growth remains strong without materially increasing commercial real estate, construction or consumer credit losses.
- Trends in net interest margin as acquired-loan accretion continues to decline and interest rates change.
- Provision expense, net charge-offs, criticized loans and the adequacy of the $70.3 million allowance.
- The sustainability of deposit growth and the company’s reliance on FHLB advances, repurchase agreements and other wholesale funding.
- Future cash flows, clawback exposure and earnings effects associated with the FDIC loss-sharing agreements.
- Operating costs after the reduction in acquisition-related expenses, particularly compensation, healthcare, occupancy and technology costs.
- Capital ratios and dividend or repurchase capacity under applicable regulatory requirements.
- Execution of the commercial-lending strategy, regional economic conditions and any changes in real estate collateral values.