COLUMBIA BANKING SYSTEM, INC. quarterly report, Q3 FY2022

Columbia Banking System, Inc. — Q3 2022 Form 10-Q Summary

Business context and reporting period

Columbia Banking System, Inc. is the parent of Columbia State Bank and Columbia Trust Company, operating primarily in Washington, Oregon, Idaho and California. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022. The October 1, 2021 acquisition of Bank of Commerce contributed to the 2022 results. The proposed combination with Umpqua remained pending required regulatory approvals at quarter-end; Federal Reserve approval was received on October 25, 2022, while FDIC approval and other closing conditions remained outstanding as of the filing.

Financial performance and key metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net interest income	$162.5 million	$132.5 million	$456.1 million	$382.0 million
Provision/(recapture) for credit losses	$5.3 million	$0.0 million	$(0.5) million	$(6.3) million
Noninterest income	$26.6 million	$24.0 million	$75.8 million	$69.9 million
Noninterest expense	$101.4 million	$90.0 million	$301.9 million	$257.7 million
Net income	$64.9 million	$53.0 million	$181.3 million	$159.9 million
Diluted EPS	$0.83	$0.74	$2.32	$2.24

Third-quarter net income was $64.9 million, or $0.83 diluted EPS, compared with $58.8 million, or $0.75 diluted EPS, in the second quarter of 2022.
Tax-equivalent net interest margin increased to 3.47% in Q3 from 3.16% in Q2. The nine-month margin was 3.25%, compared with 3.21% in the prior-year period. Operating tax-equivalent net interest margin was 3.50% in Q3 and 3.29% for the nine-month period.
Average Q3 loans, net of unearned income, were $11.51 billion and earned a 4.56% average rate. The company reported that higher loan rates and balances drove the quarter’s net interest income increase.
Total assets were $20.41 billion at September 30, 2022, versus $20.95 billion at December 31, 2021. Loans increased to $11.69 billion from $10.64 billion, while loans, net of ACL, increased to $11.54 billion from $10.49 billion.
Total deposits were $17.94 billion, slightly below $18.01 billion at year-end. Cash and cash equivalents declined to $317.7 million from $824.7 million.
Available-for-sale debt securities declined to $4.70 billion from $5.91 billion. Their net unrealized loss was approximately $746.7 million at September 30, 2022, primarily reflecting higher interest rates; management concluded that no credit-loss allowance was required.
The ACL was $154.9 million, or 1.32% of loans excluding loans held for sale, compared with $155.6 million, or 1.46%, at year-end 2021. Nonaccrual loans were $13.5 million, down from $23.0 million at December 31, 2021.
Shareholders’ equity was $2.12 billion, down from $2.59 billion at year-end, primarily because accumulated other comprehensive loss increased to $558.8 million from income of $35.2 million. The company declared $0.30 per share quarterly dividends during 2022 and declared another $0.30 dividend after quarter-end.
Nine-month operating cash flow was $223.7 million. Investing activities used $559.5 million, financing activities used $171.3 million, and cash and cash equivalents decreased by $507.0 million.
The company and bank remained “well-capitalized.” At September 30, 2022, the company’s CET1 ratio was 12.50%, total risk-based capital ratio was 13.59%, and leverage ratio was 9.00%.

Material changes versus comparable periods

Q3 net interest income increased 23% from Q3 2021, and nine-month net interest income increased 19%, reflecting loan growth, the Bank of Commerce acquisition and a higher-rate environment.
Q3 net income increased approximately 22% year over year; nine-month net income increased approximately 13%. Diluted EPS increased from $0.74 to $0.83 for Q3 and from $2.24 to $2.32 for nine months.
Noninterest income increased 9% for the nine-month period, helped by higher deposit and treasury-management fees and a $3.7 million gain from a sale-leaseback of owned real estate. Loan revenue declined 42% year over year for nine months because higher rates reduced mortgage production.
Noninterest expense increased 17% for nine months, driven by Bank of Commerce-related expenses, higher compensation, technology costs and merger-related expenses. Merger-related expenses totaled $3.2 million in Q3 and $14.2 million for nine months, including $9.3 million related to the proposed Umpqua transaction.
The company recorded a $5.3 million Q3 provision for credit losses, compared with no provision in Q3 2021 and a $2.1 million provision in Q2 2022. The nine-month 2022 recapture was $0.5 million, versus a $6.3 million recapture in the prior-year period.
Accumulated other comprehensive loss was the principal driver of the decline in equity, with nine-month after-tax unrealized securities losses of $583.1 million.

Guidance, outlook, commentary and risks

No formal earnings or financial guidance is provided in the filing. Management states that results for the nine months are not necessarily indicative of full-year results.
Management described the company as asset-sensitive and positioned to benefit from rising rates. Its simulation indicated that an instantaneous 200-basis-point rate increase could increase net interest income by 6.81% in year one and 12.86% in year two; an instantaneous 100-basis-point decrease could reduce it by 6.25% and 9.32%, respectively. These are model estimates, not guidance.
Management expects deposit pricing and balances to be important to realizing the benefit of asset sensitivity. The low existing cost of funds limits the ability to reduce deposit costs in a falling-rate environment.
The ACL forecast assumed unemployment near pre-pandemic levels early in the forecast period, followed by some increase; slower commercial real estate growth; moderating home prices; and declining real GDP growth. Management notes that changes in economic assumptions could create ACL volatility.
Key risks include recession and inflation, interest-rate and liquidity risk, deterioration in credit quality or collateral values, deposit attrition, mortgage-volume weakness, securities valuation losses, concentration in the company’s geographic markets, regulatory and compliance changes, cybersecurity and operational risks, and the effects of geopolitical events and COVID-19.
The proposed Umpqua merger remains subject to regulatory approvals and other closing conditions. Risks include delay or failure to close, integration costs, deposit or employee attrition, failure to achieve expected synergies, management distraction and potential litigation.
The company had $3.84 billion of loan commitments and $32.4 million of standby letters of credit at September 30, 2022. Management believes routine litigation is not expected to have a material effect on financial condition, results or cash flows.
The company maintained a $15.0 million unused short-term credit facility expiring May 25, 2023 and was in compliance with its covenants.

Important facts for investors to verify

Whether the Umpqua transaction received all remaining regulatory approvals and closed on expected terms, including final consideration, integration costs and realized synergies.
Whether unrealized securities losses remain primarily interest-rate related and whether any securities sales, credit deterioration or liquidity needs require recognition of losses in earnings.
Loan growth, deposit trends, funding costs and the sustainability of the 3.47% Q3 tax-equivalent net interest margin as rates and deposit pricing change.
Changes in nonaccrual loans, criticized assets, charge-offs, the ACL ratio and economic assumptions used in the credit-loss model.
The effect of merger-related expenses and other nonrecurring items, including the $3.7 million sale-leaseback gain, on underlying earnings.
Capital ratios and liquidity after accounting for accumulated other comprehensive losses, continued loan growth, dividends and any merger-related effects.