Columbia Banking System, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
Columbia Banking System, Inc. is a Washington-based bank holding company for Columbia State Bank and Columbia Trust Company. The company provides commercial, consumer, wealth-management and trust services primarily through 153 branches in Washington, Oregon, Idaho and California. The filing covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019.
- Completed the acquisition of Bank of Commerce on October 1, 2021, adding approximately $2.04 billion of assets, $1.08 billion of fair-value loans and $1.74 billion of deposits.
- Announced a proposed combination with Umpqua Holdings Corporation; shareholders approved the transaction on January 26, 2022, and management expected closing in mid-2022, subject to regulatory and other conditions.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net interest income | $527.5 million | $500.1 million | +5% |
| Provision for credit losses | $4.8 million | $77.7 million | -94% |
| Noninterest income | $94.1 million | $104.5 million | -10% |
| Noninterest expense | $360.3 million | $334.5 million | +8% |
| Net income | $202.8 million | $154.2 million | +31% |
| Diluted EPS | $2.78 | $2.17 | +28% |
| Net interest margin, tax equivalent | 3.17% | 3.65% | -48 bps |
- Income before taxes was $256.5 million, compared with $192.4 million in 2020. The effective tax rate was 21% in 2021 versus 20% in 2020.
- Operating cash flow was $235.1 million. Investing activities used $2.36 billion, primarily for debt-security purchases, while financing activities provided $2.29 billion, primarily from deposit growth.
- Total assets increased 26% to $20.95 billion; total deposits increased 30% to $18.01 billion; and shareholders’ equity increased to $2.59 billion.
- Loans increased to $10.64 billion from $9.43 billion. The allowance for credit losses increased to $155.6 million, or 1.46% of loans, from $149.1 million, or 1.58%.
- Nonperforming assets declined to $23.4 million, or 0.11% of year-end assets, from $35.4 million, or 0.21%.
- Cash and cash equivalents were $824.7 million. Debt securities totaled $8.06 billion, including $5.91 billion available for sale and $2.15 billion held to maturity.
- FHLB advances were $7.4 million, securities sold under repurchase agreements were $86.0 million, subordinated debentures were $10.0 million and junior subordinated debentures were $10.3 million. The company had no outstanding balance on its $15.0 million revolving credit facility.
- Unused borrowing capacity was approximately $2.18 billion at the FHLB and $226.0 million at the Federal Reserve.
- Company and bank total risk-based capital ratios were 14.21% and 14.18%, respectively; both were classified as well-capitalized.
Material changes versus the prior comparable period
- Profit growth was driven primarily by higher net interest income, substantially lower credit-loss provisioning and the absence of the unusually high 2020 provision expense.
- Net interest income benefited from larger loan and securities balances and lower funding costs, but the net interest margin contracted because asset yields declined in the low-rate environment.
- Noninterest income fell because 2020 included $16.4 million of gains related to Visa Class B shares; card revenue and financial-services revenue increased in 2021.
- Noninterest expense increased by $25.8 million. Acquisition-related costs totaled $14.5 million, including $10.4 million for Bank of Commerce and $4.1 million for the pending Umpqua transaction.
- Loans, deposits, securities and total assets increased substantially, reflecting both organic growth and the Bank of Commerce acquisition.
- Accumulated other comprehensive income declined to $35.2 million from $182.2 million, primarily because of lower unrealized gains on available-for-sale securities.
- The company issued approximately $256.1 million of common stock in connection with the Bank of Commerce acquisition. The prior $100 million share-repurchase program expired on December 31, 2021; no shares were repurchased under that program during 2021.
Outlook, management commentary, risks and unusual items
- No formal quantitative earnings or revenue guidance is provided in the filing.
- Management expected additional Bank of Commerce integration expenses during 2022 and anticipated the Umpqua transaction to close in mid-2022, subject to regulatory approvals and other closing conditions.
- The proposed Umpqua merger involves integration, execution, regulatory, litigation, employee-retention, customer-retention and cost-synergy risks. If terminated under certain circumstances, Columbia may owe Umpqua a $145 million termination fee.
- COVID-19 continued to create risks involving borrower defaults, credit quality, operating disruptions, cybersecurity, supply-chain effects and economic uncertainty. At December 31, 2021, only 14 loans totaling approximately $14.1 million remained subject to payment deferrals.
- Credit exposure is concentrated in the company’s regional markets and in commercial real estate and commercial business lending. Approximately 63% of gross loans were secured by real estate.
- The allowance for credit losses is highly judgmental and sensitive to economic assumptions. Management estimated that a 100-basis-point increase in unemployment would increase the ACL by approximately $3.5 million, while a 100-basis-point decrease would reduce it by approximately $4.0 million.
- The available-for-sale securities portfolio had $57.9 million of gross unrealized losses. Management stated it did not intend, and was not required, to sell the securities before recovery of amortized cost.
- LIBOR transition remains a risk. The company discontinued LIBOR use in new contracts and is transitioning legacy contracts toward SOFR before the expected June 2023 cessation of commonly used U.S. dollar LIBOR settings.
- Other significant risks include interest-rate sensitivity, cybersecurity and third-party systems, regulatory and compliance changes, deposit and liquidity risk, goodwill impairment, competition, climate and natural disasters, and the potential inability to pay dividends from the bank subsidiary.
- The company recorded no goodwill impairment and received unqualified audit opinions on its financial statements and internal control over financial reporting. The audit and management assessments excluded Bank of Commerce internal controls from the 2021 assessment.
Most important facts for an investor to verify
- Whether the Umpqua merger received all required regulatory approvals and closed on the expected timetable, including any imposed conditions or divestitures.
- The actual integration costs, cost savings, revenue synergies, deposit retention and employee retention associated with Bank of Commerce and Umpqua.
- Whether credit quality remains favorable as COVID-related deferrals expire and as commercial real estate, business borrowers and regional economies respond to higher interest rates.
- The sustainability of the 3.17% net interest margin and the effect of Federal Reserve rate increases, deposit repricing and securities duration.
- Changes in the $155.6 million ACL, nonperforming assets, net charge-offs and criticized or classified loans.
- The market value and liquidity impact of the securities portfolio, including the $57.9 million of available-for-sale unrealized losses.
- The effect of LIBOR transition on the $10.0 million subordinated debenture, $10.3 million of junior subordinated debentures, loans, derivatives and customer contracts.
- Future dividend capacity and capital ratios after merger consideration, acquisition accounting, integration costs and any potential share issuance.