Hadley Robbins, president and chief executive officer of Columbia Banking System and Columbia Bank (NASDAQ: COLB) (Columbia), said today upon the release of Columbia’s fourth quarter 2018 earnings, “We had a record year in terms of net income and loan production. Our bankers did an exceptional job in a very competitive environment. We maintained a strong core deposit mix and low funding costs and actively managed our credit exposures, resulting in low levels of nonperforming assets.”
Balance Sheet
Total assets at December 31, 2018 were $13.10 billion, an increase of $138.5 million from September 30, 2018. Loans were $8.39 billion, down $122.8 million from September 30, 2018 as loan originations of $388.4 million were offset by pay-downs and prepayments. Debt securities available for sale were $3.17 billion at December 31, 2018, an increase of $246.3 million, or 8 percent from $2.92 billion at September 30, 2018. Total deposits at December 31, 2018 were $10.46 billion, a decrease of $145.8 million from September 30, 2018 due to seasonal decline. Core deposits comprised 95 percent of total deposits and were $9.97 billion at December 31, 2018, a decrease of $110.8 million from September 30, 2018.
Deposit mix remained consistent from September 30, 2018 with 50 percent noninterest bearing and 50 percent interest bearing. The average cost of total deposits for the quarter was 0.15 percent, an increase of 3 basis points from the third quarter of 2018.
Clint Stein, Columbia’s executive vice president and chief operating officer, stated, “We experienced our usual balance sheet seasonality during the fourth quarter. The deposit portfolio is holding up well with no meaningful rate related attrition. The decrease in the loan portfolio was mostly related to reduced line utilization.” Stein continued, “While elevated prepayments were still a factor during the quarter, they continued to moderate from levels experienced during the first half of 2018.”
Income Statement
Net Interest Income
Net interest income for the fourth quarter of 2018 was $123.9 million, an increase of $1.1 million from the linked quarter and an increase of $17.7 million from the prior year period. The increase from the linked quarter was due to a combination of higher rates on earning assets and higher volumes of taxable securities. The increase from the prior year period was primarily due to income from earning assets acquired in the Pacific Continental acquisition, which closed on November 1, 2017, as well as higher rates on earning assets.
Noninterest Income
Noninterest income was $20.4 million for the fourth quarter of 2018, a decrease of $617 thousand from the third quarter of 2018. The linked quarter decrease was principally due to lower loan revenue.
Compared to the fourth quarter of 2017, noninterest income decreased by $3.2 million. The decrease from the prior year period was due to lower card revenue during the current quarter as we became subject to the interchange fee cap imposed under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Durbin Amendment as of July 1, 2018. Also contributing to the decrease in noninterest income compared to the prior year period was our change to net presentation of interchange revenue pursuant to the adoption of new revenue recognition accounting guidance on January 1, 2018. Specifically, $1.2 million of payment card network expenses that would have historically been presented in other noninterest expense are now presented in card revenue.
Noninterest Expense
Total noninterest expense for the fourth quarter of 2018 was $87.0 million, an increase of $4.2 million from the third quarter of 2018. After removing the effect of acquisition-related expenses for the current quarter and the linked quarter, noninterest expense increased $4.8 million due to higher compensation and employee benefits and legal and professional fees. The increase in compensation and employee benefits expense was driven in part by higher health insurance expense and higher payroll costs associated with an additional day within the current quarter. The increase in legal and professional expense was due to implementation and consulting costs related to our digital strategy and other projects. Compared to the fourth quarter of 2017, noninterest expense increased by $1.4 million. After removing the acquisition-related expenses of $13.6 million from the fourth quarter of 2017, noninterest expense increased $14.5 million. This increase was primarily driven by higher compensation and employee benefits and legal expense resulting from the Pacific Continental acquisition.
Provision for Income Taxes
Our effective tax rate for the current quarter was 19.3 percent, compared to 19.7 percent and 61.5 percent for the linked and prior year periods, respectively. The decrease from the prior year period was principally attributable to the re-measurement charge of $12.2 million to reduce our deferred tax assets as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which lowered the corporate tax rate to 21 percent from 35 percent. The prior year period’s effective tax rate reflected the then-enacted 35 percent corporate tax rate reduced by favorable tax attributes of certain earning assets and discrete tax benefits from share-based compensation.
Our effective tax rate remains below the statutory tax rate due to tax-exempt income from municipal securities, bank owned life insurance and certain loan receivables.
Net Interest Margin
Columbia’s net interest margin (tax equivalent) for the fourth quarter of 2018 was 4.40 percent, a decrease of 1 basis point from the linked quarter and an increase of 20 basis points from the prior year period. Columbia’s operating net interest margin (tax equivalent)(1) was 4.38 percent for both the fourth quarter of 2018 and the linked quarter and increased 13 basis points from the prior year period. Although the net interest margin for the current quarter as compared to the linked quarter was flat, the increase from the prior year period was due to income from earning assets acquired in the Pacific Continental acquisition as well as higher rates on interest-earning assets, which more than offset the modest increase in rates on interest-bearing liabilities.
Greg Sigrist, Columbia’s executive vice president and chief financial officer, commented, “Our net interest margin continued to hold up well given the strength of our deposit franchise. We also added to our leverage strategy in the quarter. Although this muted the benefit of loans repricing in the quarter, the leverage strategy is an important tool to help position the Bank for a falling rate environment.”
Asset Quality
At December 31, 2018, nonperforming assets to total assets were 0.46 percent compared to 0.52 percent at September 30, 2018. Total nonperforming assets decreased $6.9 million from the linked quarter due to a $5.5 million decrease in nonaccrual loans and a $1.4 million decrease in other real estate owned.
Andy McDonald, Columbia’s executive vice president and chief credit officer, commented, “We are pleased with the progress that we have made in reducing the level of our nonperforming assets. Our nonperforming assets to total assets ratio was 0.46 percent which is below our general target of 0.50 percent.
The allowance for loan losses to period end loans was 0.99 percent at December 31, 2018 compared to 0.98 percent at September 30, 2018. For the fourth quarter of 2018, Columbia recorded a net provision for loan and lease losses of $1.8 million compared to a net provision of $3.2 million for the linked quarter and a net provision of $3.3 million for the comparable quarter last year. The net provision for loan and lease losses recorded during the current quarter consisted of $1.9 million of provision expense for loans, excluding PCI loans and a recapture of $81 thousand for PCI loans.
Organizational Update
For the eighth consecutive year, Columbia was listed on the Forbes annual list of America’s Best Banks, which measures asset quality, capital adequacy, net interest margin and profitability among the nation’s largest publicly traded banks and thrifts. We were also recognized as an employer of choice in Oregon, joining the Oregonian’s list of Top Workplaces 2018 and were named one of Washington’s Best Workplaces for the 12th consecutive year by the Puget Sound Business Journal.
In addition to the recognition we received for dedication to providing a great place to work, we received recognition for our work in the community. We were pleased to receive the 2018 National Association of Secretaries of State Medallion by the Washington Secretary of State for outstanding work to improve lives in Washington communities. We were also delighted to receive the 2018 Corporate Citizenship Award for midsize companies in Washington State by the Puget Sound Business Journal and to be selected as one of Oregon’s Most Admired companies by the Portland Business Journal. For the first time, Columbia was named the Top SBA Lender in Oregon by the Small Business Administration.
Robbins commented, “We were honored to be recognized for our commitment to our employees, our clients and our communities in the Northwest throughout the year. We were particularly pleased to receive recognition for our partnership and community support from the Springfield, Oregon and Beaverton Oregon Chambers of Commerce, two markets in the footprint of former Pacific Continental Bank.”
Cash Dividend Announcement
Columbia will pay a regular cash dividend of $0.28 per common share and a special cash dividend of $0.14 per common share on February 20, 2019 to shareholders of record as of the close of business on February 6, 2019.
Conference Call Information
Columbia’s management will discuss the fourth quarter and full-year 2018 financial results on a conference call scheduled for Thursday, January 24, 2019 at 1:00 p.m. Pacific Time (4:00 p.m. ET).
Interested parties may join the live-streamed event by using the site: https://engage.vevent.com/rt/columbiabankingsysteminc~012419
The conference call can also be accessed on Thursday, January 24, at 1pm Pacific Time (4pm ET) by calling 888-286-8956; Conference ID: 3096265.
A replay of the call can be accessed beginning Friday, January 25, using the site https://engage.vevent.com/rt/columbiabankingsysteminc~012419
