Columbia Banking System, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
Columbia Banking System, Inc., through Columbia State Bank and Columbia Trust Company, provides commercial banking, consumer banking, wealth management and related financial services primarily in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods and December 31, 2019 balance-sheet data.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Total interest income | $127.4 million | $132.5 million | $384.5 million | $396.8 million |
| Net interest income | $124.7 million | $122.5 million | $369.0 million | $368.6 million |
| Provision for credit losses | $7.4 million | $0.3 million | $82.4 million | $1.9 million |
| Noninterest income | $22.5 million | $28.0 million | $80.9 million | $75.4 million |
| Noninterest expense | $85.1 million | $87.1 million | $250.2 million | $258.5 million |
| Net income | $44.7 million | $50.7 million | $95.9 million | $148.3 million |
| Diluted EPS | $0.63 | $0.70 | $1.35 | $2.04 |
| Tax-equivalent net interest margin | 3.47% | 4.14% | 3.69% | 4.28% |
- Total assets were $16.23 billion at September 30, 2020, up $2.15 billion from year-end 2019.
- Total loans were $9.69 billion, up $945.5 million from year-end 2019; the balance included $953.2 million of Paycheck Protection Program loans.
- Deposits were $13.60 billion, up $2.92 billion from year-end 2019, largely reflecting PPP-related customer deposits.
- Cash and cash equivalents were $930.2 million, compared with $247.7 million at December 31, 2019.
- Debt securities available for sale were $4.28 billion, compared with $3.75 billion at year-end 2019.
- FHLB advances declined to $7.4 million from $953.5 million at year-end 2019; subordinated debentures were $35.1 million and repurchase agreements were $27.0 million.
- Shareholders’ equity was $2.30 billion, compared with $2.16 billion at year-end 2019.
- Net cash provided by operating activities was $143.8 million for the first nine months, while investing activities used $1.30 billion and financing activities provided $1.84 billion. Cash and cash equivalents increased by $682.6 million.
- The allowance for credit losses was $157.0 million, or 1.62% of total loans, compared with $84.0 million, or 0.96%, at December 31, 2019.
- Nonperforming assets were $47.9 million, or 0.29% of total assets, compared with $33.6 million, or 0.24%, at year-end 2019.
- The Company and Columbia Bank remained well-capitalized and met applicable capital requirements. The Company’s CET1 ratio was 12.61%, total risk-based capital ratio was 14.18% and leverage ratio was 8.89% at September 30, 2020.
Material Changes Versus Prior Comparable Period
- Q3 net income declined 12% to $44.7 million, and year-to-date net income declined 35% to $95.9 million. The principal driver was substantially higher credit-loss provisioning associated with COVID-19, economic weakness and increased unemployment.
- Q3 net interest income increased $2.3 million despite a 67-basis-point decline in the tax-equivalent net interest margin. Lower deposit and FHLB borrowing costs offset lower yields on loans and securities and the increased volume of low-yield interest-earning deposits.
- Year-to-date provision expense increased by $80.5 million to $82.4 million. The ACL increased $73.0 million from year-end 2019, including the impact of the CECL adoption and subsequent economic deterioration.
- Q3 noninterest income declined $5.6 million, primarily because Q3 2019 included a $5.9 million sale-leaseback gain and because deposit and treasury management fees decreased. Higher mortgage banking revenue partially offset the decline.
- Year-to-date noninterest income increased $5.6 million, primarily due to a $16.4 million gain from the sale and upward revaluation of Visa Class B restricted shares.
- Loans grew 10.8% from year-end 2019, driven substantially by PPP lending. Loan deferrals declined sharply during Q3; at September 30, 2020, 103 short-term deferments covered $114.4 million of loans, compared with $1.60 billion of deferred balances at June 30, 2020.
- Noninterest expense decreased 2% in Q3 and 3% year to date, mainly because of lower legal and professional fees and, year to date, lower compensation expense related partly to deferral of PPP origination costs.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or financial guidance. Management continued to monitor COVID-19 and expected ongoing uncertainty regarding economic conditions, credit quality, collateral values, liquidity, loan demand and interest rates.
- PPP forgiveness processing was underway. As of October 26, 2020, the Company had received more than 1,400 forgiveness applications and approved or submitted nearly 850 applications to the SBA totaling more than $220 million.
- The ACL excludes PPP loans because they are fully guaranteed by the SBA; credit risk remains concentrated in the Pacific Northwest commercial, commercial real estate and agricultural portfolios.
- Management identified risks from COVID-19, economic deterioration, interest-rate movements, LIBOR discontinuation, competition, regulatory changes, cybersecurity, operational disruption, goodwill impairment and liquidity or credit-risk management.
- Interest-rate sensitivity analysis indicated that a gradual 100-basis-point rate decrease could reduce net interest income by approximately $7 million in year one and $21 million in year two. A gradual 200-basis-point increase was estimated to increase net interest income by approximately $4 million and $32 million, respectively, assuming a constant balance sheet.
- The Company adopted CECL effective January 1, 2020, resulting in a $2.5 million after-tax reduction to opening retained earnings. It elected temporary regulatory capital relief for CECL effects.
- Subsequent to quarter end, the Board authorized repurchases of up to 3.5 million shares for a maximum aggregate price of $100 million. The prior authorization had expired in May 2020.
- In October 2020, the Company terminated its $500 million interest-rate collar and recorded a $34.9 million gain in accumulated other comprehensive income. The gain is expected to amortize into interest income through February 2024, subject to the continued occurrence of the hedged cash flows.
- Management stated that routine litigation is not expected to have a material effect on financial condition, results of operations or cash flows. The filing reported no material change in previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether COVID-19-related credit deterioration produces additional provisions, charge-offs, nonaccrual loans or higher nonperforming assets after the temporary loan-deferral period.
- The sustainability and forgiveness timing of the $953.2 million PPP loan balance, related deferred fees and associated deposit growth.
- Future net interest margin performance given historically low interest rates, elevated cash balances and repricing limitations on deposits.
- The adequacy of the $157.0 million ACL and the effect of CECL regulatory-capital relief when it phases out.
- The effect of the terminated interest-rate collar and its $34.9 million deferred gain on future interest income.
- Capital ratios, dividend capacity and the execution of the newly authorized $100 million share-repurchase program.
- Exposure to commercial real estate, commercial business and agricultural borrowers concentrated in Washington, Oregon and Idaho.