Columbia Banking System, Inc. — 2016 Q1 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 three months ended March 31, 2016. Operations are concentrated in Washington, Oregon and Idaho, with lending focused on commercial business, commercial real estate and related banking services. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 2016 | Comparable period or date |
|---|---|---|
| Net income | $21.3 million | $24.4 million in Q1 2015 |
| Diluted EPS | $0.37 | $0.42 in Q1 2015 |
| Revenue | $100.8 million | Down 2% from Q1 2015 |
| Net interest income | $80.2 million | $80.4 million in Q1 2015 |
| Net interest margin, tax equivalent | 4.13% | 4.39% in Q1 2015 |
| Operating net interest margin, tax equivalent | 4.03% | 4.18% in Q1 2015 |
| Provision for loan and lease losses | $5.3 million | $1.2 million in Q1 2015 |
| Noninterest income | $20.6 million | $22.8 million in Q1 2015 |
| Noninterest expense | $65.1 million | $66.7 million in Q1 2015 |
| Net cash provided by operating activities | $29.3 million | $27.0 million in Q1 2015 |
| Cash and cash equivalents | $188.9 million | $175.3 million at December 31, 2015 |
| Total assets | $9.04 billion | $8.95 billion at December 31, 2015 |
| Total loans, net of unearned income | $5.88 billion | $5.82 billion at December 31, 2015 |
| Total deposits | $7.60 billion | $7.44 billion at December 31, 2015 |
| Shareholders’ equity | $1.26 billion | $1.24 billion at December 31, 2015 |
Material changes versus the prior comparable period
- Net income declined approximately 13% and diluted EPS declined from $0.42 to $0.37, primarily because of the higher loan-loss provision and lower noninterest income.
- Net interest income was broadly stable, but the tax-equivalent net interest margin fell to 4.13% from 4.39%. Incremental accretion income from acquired loans decreased to $4.7 million from $7.5 million.
- The provision for loan and lease losses increased by $4.0 million. The current-quarter provision included $4.6 million for loans excluding purchased credit-impaired loans and $653 thousand related to purchased credit-impaired loans.
- Noninterest income decreased 9% to $20.6 million. The FDIC loss-sharing asset produced a $1.1 million expense in Q1 2016 versus $150 thousand of income in Q1 2015.
- Noninterest expense decreased 2%, principally from lower compensation, data-processing and legal costs, partly offset by higher occupancy expense and a net cost related to other real estate owned.
- Loans grew $62.3 million during the quarter, supported by $254 million of loan production. Deposits increased $158.1 million, while Federal Home Loan Bank advances declined from $68.5 million to $6.5 million.
- Credit quality weakened at quarter-end: nonaccrual loans increased to $36.9 million from $21.5 million, and total nonperforming assets increased to $49.3 million from $35.2 million. Nonperforming assets were 0.55% of total assets versus 0.39% at year-end.
- The allowance for loan and lease losses increased to $69.3 million, or 1.18% of loans, from $68.2 million, or 1.17%, at December 31, 2015. Net charge-offs were $4.2 million compared with $544 thousand in Q1 2015.
- Other comprehensive income was $18.6 million, primarily reflecting higher unrealized gains on available-for-sale securities. Total comprehensive income was $39.9 million.
Liquidity, capital and other significant items
- Operating activities generated $29.3 million of cash, while investing activities used $63.5 million, primarily for loan growth, securities purchases and Federal Home Loan Bank stock. Financing activities provided $47.8 million, mainly from deposit growth and net Federal Home Loan Bank funding activity.
- Core deposits increased $145.9 million from year-end and represented 97.3% of total deposits. CDARS and brokered money-market deposits totaled $141.6 million, or approximately 2% of total deposits.
- The Company and Columbia Bank remained well capitalized. At March 31, 2016, the Company’s CET1, total risk-based capital and leverage ratios were 11.92%, 12.95% and 9.93%, respectively; the Bank’s corresponding ratios were 11.77%, 12.79% and 9.81%.
- The FDIC loss-sharing asset declined to $6.0 million from $6.6 million at year-end. Remaining non-single-family loss-sharing provisions for two acquisitions were scheduled to expire in the second quarter of 2016. The estimated FDIC clawback liability was $5.4 million.
- Commitments to extend credit were approximately $2.01 billion, and standby letters of credit were $46.9 million at March 31, 2016. Management stated that routine legal proceedings were not expected to have a material effect.
- Management declared a regular quarterly dividend of $0.19 per common share and a special dividend of $0.18 per share after quarter-end. Dividend payments remain subject to regulatory capital and other restrictions.
Outlook, management commentary and risks
Management expects continued emphasis on commercial lending and relationship banking. The filing provides no quantitative earnings or revenue guidance. Management cautions that results are sensitive to economic conditions, local housing and real estate markets, credit quality, interest rates, liquidity, competition, regulatory changes, acquisition integration, goodwill impairment, cybersecurity, operational disruptions and natural disasters.
The decline in acquired-loan balances and FDIC loss-sharing benefits is expected to reduce the significance of related accretion income and other earnings effects over time. The filing also notes that future changes in expected cash flows on purchased credit-impaired loans, collateral values and economic conditions could affect provisions, the allowance and earnings.
Recently issued accounting standards addressed employee share-based payment accounting, leases, financial instruments and revenue recognition. The Company was evaluating their effects and generally did not expect a material impact where stated, although implementation assessments were not complete.
Investor verification checklist
- Verify whether the rise in nonaccrual loans and nonperforming assets continued beyond March 31, 2016, particularly in commercial business and consumer portfolios.
- Review subsequent allowance levels, net charge-offs and provisions to assess whether Q1 credit deterioration was temporary or persistent.
- Assess the effect of declining acquired-loan accretion and the expiration of FDIC loss-sharing provisions on future net interest income and noninterest income.
- Monitor loan growth, deposit composition, brokered funding and reliance on Federal Home Loan Bank advances and repurchase agreements.
- Reconcile reported net interest margin with the non-GAAP operating net interest margin and evaluate sensitivity to interest-rate movements.
- Confirm capital ratios, dividend capacity and regulatory treatment of accumulated other comprehensive income.
- Review future filings for changes in FDIC clawback exposure, commitments, litigation, goodwill valuation and accounting-standard implementation.