Columbia Banking System, Inc. — 2020 Q2 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, with lending and deposit activities concentrated in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three and six months ended June 30, 2020. Results were materially affected by the COVID-19 pandemic, the CARES Act Paycheck Protection Program (PPP), lower interest rates and adoption of the current expected credit loss (CECL) methodology on January 1, 2020.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net income | $36.6 million | $51.7 million | $51.2 million | $97.6 million |
| Diluted EPS | $0.52 | $0.71 | $0.72 | $1.33 |
| Net interest income | $121.9 million | $125.1 million | $244.3 million | $246.1 million |
| Provision for credit losses | $33.5 million | $0.2 million | $75.0 million | $1.6 million |
| Noninterest income | $37.3 million | $25.6 million | $58.5 million | $47.3 million |
| Noninterest expense | $80.8 million | $86.7 million | $165.1 million | $171.4 million |
| Tax-equivalent net interest margin | 3.64% | 4.40% | 3.82% | 4.36% |
At June 30, 2020, total assets were $15.92 billion, up from $14.08 billion at December 31, 2019. Total loans were $9.77 billion, up $1.03 billion from year-end, including $941.4 million of PPP loans outstanding. Deposits were $13.13 billion, up $2.45 billion, largely because customers deposited PPP proceeds. Cash and cash equivalents were $1.10 billion, compared with $247.7 million at year-end.
The allowance for credit losses was $151.5 million, or 1.55% of total loans, compared with $84.0 million, or 0.96%, at December 31, 2019. The allowance for unfunded commitments and letters of credit was $8.8 million. Shareholders’ equity was $2.28 billion. FHLB advances and FRB borrowings declined to $157.4 million from $953.5 million at year-end; subordinated debentures were $35.2 million and repurchase agreements were $51.5 million.
Six-month operating cash flow was $83.1 million. Investing activities used $793.6 million, primarily due to net loan originations, while financing activities provided $1.56 billion, principally from the increase in deposits. Ending cash and cash equivalents increased by $850.0 million.
Material changes versus prior comparable periods
- Q2 net income declined 29% and diluted EPS declined from $0.71 to $0.52. Six-month net income declined 48% and diluted EPS declined from $1.33 to $0.72.
- Net interest income declined modestly, while the tax-equivalent net interest margin contracted by 76 basis points in Q2 and 54 basis points year to date, primarily because of lower loan and securities yields and elevated low-yield cash balances.
- The credit-loss provision increased sharply because of COVID-19-related economic deterioration, higher unemployment and the CECL lifetime-loss framework.
- Noninterest income increased 45% in Q2 and 23% year to date, primarily because of a $16.4 million gain related to Visa Class B restricted shares. The company sold 17,360 shares for a $3.0 million gain and revalued the remaining 77,683 shares, recording a $13.4 million gain.
- Noninterest expense decreased 7% in Q2 and 4% year to date, partly because PPP loan origination labor costs were capitalized and because legal and professional expenses declined.
- Nonaccrual loans increased to $53.7 million from $33.1 million at year-end, and total nonperforming assets increased to $54.5 million from $33.6 million. Nonperforming assets were 0.34% of total assets versus 0.24% at year-end.
- The company adopted CECL on January 1, 2020, increasing the allowance for credit losses and allowance for unfunded commitments by approximately $1.6 million each and reducing opening retained earnings by $2.5 million after tax.
Guidance, outlook, management commentary and risks
The filing does not provide formal earnings or financial guidance. Management stated that PPP participation should increase loan balances and interest income while the loans remain outstanding, but PPP-related balances and deposits may change as loans are forgiven or repaid.
At June 30, approximately 3,050 short-term COVID-19 payment deferrals covered $1.58 billion of loans, or 16% of total loan balances. These loans were not classified as troubled debt restructurings or past due while performing under modified terms. Credit quality will be reevaluated after deferral periods end.
Management identified COVID-19, economic conditions, unemployment, collateral values, credit quality, interest rates, liquidity, LIBOR replacement, regulatory changes, competition, operational and cybersecurity risks, and potential goodwill impairment as material risks. The company concluded that goodwill was not more likely than not impaired as of June 30, 2020.
The company and bank met applicable capital adequacy requirements and were classified as well-capitalized. The company elected regulatory relief that delays certain CECL effects on regulatory capital. The company’s CET1 ratio was 12.42%, total risk-based capital ratio was 14.00% and leverage ratio was 9.17% at June 30, 2020. A $15.0 million revolving credit facility was undrawn, and the company was in compliance with its covenants.
Management’s interest-rate sensitivity analysis estimated that a gradual 100-basis-point decline in rates would reduce net interest income by $2.8 million in year one and $13.4 million in year two, while a gradual 200-basis-point increase would increase net interest income by $7.0 million and $38.7 million, respectively, assuming a constant balance sheet.
The board’s share repurchase authorization expired in May 2020. The company repurchased 731,000 shares for $20.0 million during the first six months, but made no program repurchases during the second quarter. A regular quarterly dividend of $0.28 per share was declared on July 23, 2020.
Most important facts for investors to verify
- Whether PPP loan forgiveness, repayments and related deposit runoff materially affect future loan growth, interest income and liquidity.
- Whether COVID-19 deferrals convert into delinquencies, nonaccrual loans, charge-offs or additional CECL provisions after deferral periods expire.
- The adequacy of the $151.5 million ACL, particularly for commercial real estate, commercial business and agricultural exposures.
- The sustainability of earnings excluding the one-time $16.4 million Visa-related gain and the impact of continued low interest rates on the 3.64% quarterly net interest margin.
- The effect of regulatory CECL capital relief, dividend payments and the expired repurchase authorization on capital management.
- Potential changes in goodwill valuation, collateral values, liquidity, LIBOR transition and broader economic conditions in the company’s Pacific Northwest markets.