Columbia Banking System, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. is a Washington-based bank holding company whose principal subsidiary, Columbia State Bank, provides commercial banking, lending, deposit, treasury management, wealth management and trust services, primarily in Washington, Oregon and Idaho. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods and to December 31, 2020 for balance-sheet items.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $125.5 million | $121.9 million | $249.5 million | $244.3 million |
| Provision/(recapture) for credit losses | $(5.5) million | $33.5 million | $(6.3) million | $75.0 million |
| Noninterest income | $22.7 million | $37.3 million | $45.9 million | $58.5 million |
| Noninterest expense | $84.1 million | $80.8 million | $167.7 million | $165.1 million |
| Net income | $55.0 million | $36.6 million | $106.9 million | $51.2 million |
| Diluted EPS | $0.77 | $0.52 | $1.50 | $0.72 |
| Tax-equivalent net interest margin | 3.16% | 3.64% | 3.23% | 3.82% |
- Total assets were $18.01 billion at June 30, 2021, up $1.43 billion from year-end 2020. Total deposits were $15.35 billion, up $1.48 billion.
- Total loans were $9.69 billion, up $265.5 million from year-end 2020; loans, net of the allowance for credit losses, were $9.55 billion.
- The allowance for credit losses was $143.0 million, or 1.48% of total loans, versus $149.1 million, or 1.58%, at December 31, 2020.
- Nonperforming assets were $24.4 million, or 0.14% of total assets, compared with $35.4 million, or 0.21%, at year-end 2020.
- Cash and cash equivalents were $831.5 million, compared with $653.8 million at December 31, 2020. Net cash provided by operating activities for the six months was $127.4 million; investing activities used $1.38 billion, and financing activities provided $1.43 billion.
- Debt securities totaled $6.23 billion, including $4.19 billion available for sale and $2.02 billion held to maturity. The company transferred $2.01 billion of securities from available-for-sale to held-to-maturity classification during the second quarter.
- Interest-bearing debt remained limited: FHLB advances were $7.4 million, repurchase agreements were $71.0 million, and subordinated debentures were $35.0 million at June 30, 2021. A $15.0 million revolving credit facility was undrawn.
- The Company and Bank were classified as well-capitalized. Company CET1, total risk-based capital and leverage ratios were 12.97%, 14.47% and 8.67%, respectively; Bank ratios were 12.85%, 14.04% and 8.63%.
Material changes versus comparable periods
- Q2 net income increased 50% year over year, while first-half net income increased 109%. The primary earnings benefit was the shift from significant credit-loss provisions in 2020 to credit-loss recaptures in 2021.
- Net interest income increased modestly despite a lower tax-equivalent net interest margin, as higher securities balances and lower deposit and FHLB borrowing costs offset lower loan yields.
- Noninterest income declined 39% in Q2 and 21% year to date. The 2020 periods included a $16.4 million gain related to the sale and fair-value write-up of Visa Class B restricted shares; Q2 2021 investment securities gains were only $0.3 million.
- Noninterest expense increased 4% in Q2 and 2% year to date, driven primarily by compensation and employee benefits. Q2 included $0.5 million of acquisition-related legal and professional expense.
- Average earning assets grew substantially, but the net interest margin declined because of lower loan and securities yields and a greater proportion of taxable securities.
- PPP loans outstanding were $691.9 million at June 30, 2021. During the first half, new PPP production and related deposits supported balance-sheet growth, while PPP paydowns and SBA forgiveness partially offset loan growth.
Outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management’s credit-loss forecast assumes national unemployment returns to pre-pandemic levels in 2023, commercial real estate conditions weaken through 2021 and improve slightly in 2022, home-price growth moderates, and real GDP growth remains above average. These are model assumptions, not guaranteed outcomes.
- Management stated that the economic outlook improved modestly but remains affected by COVID-19. Changes in unemployment, real estate values, GDP, borrower performance and other model inputs could produce future allowance volatility.
- The proposed acquisition of Bank of Commerce Holdings was announced under a June 23, 2021 merger agreement but remained pending at the filing date. Completion, regulatory and shareholder approvals, integration, and expected operating efficiencies are not assured.
- Interest-rate risk is significant. A modeled gradual 200-basis-point increase was estimated to increase net interest income by 0.38% in year one and 7.18% in year two; a 100-basis-point decrease was estimated to reduce it by 1.48% and 6.03%, respectively. Actual results may differ materially.
- The company reported $3.04 billion of loan commitments and $24.7 million of standby letters of credit at June 30, 2021, exposing it to additional credit and liquidity demands.
- Key continuing risks include COVID-19 and macroeconomic conditions, commercial real estate concentration, competition, regulatory and capital requirements, LIBOR replacement, cybersecurity, operational disruptions, legal and compliance matters, goodwill impairment, and natural disasters.
- The company had $77,683 of Visa Class B restricted shares with a $13.4 million carrying value. Conversion remains subject to Visa-related litigation and transfer restrictions.
- The company declared a regular $0.28-per-share dividend on July 29, 2021. No shares were repurchased under the public repurchase program during the quarter; 1,682 shares were cancelled to satisfy employee-related withholding taxes.
Important facts for investors to verify
- Whether PPP forgiveness and paydowns cause loan balances, deferred fee amortization, interest income and deposits to decline in subsequent periods.
- Whether the credit-loss recapture is sustainable and how allowance requirements respond to changing economic forecasts, commercial real estate conditions and borrower performance.
- The effect of continued low rates, deposit repricing limits, securities duration and prepayments on net interest margin and earnings.
- The timing, regulatory approvals, accounting treatment, purchase price and integration risks associated with the proposed Bank of Commerce acquisition.
- The fair value and liquidity implications of the securities portfolio, including the $2.01 billion held-to-maturity transfer and unrealized securities gains and losses.
- Capital ratios after acquisition-related actions, dividend payments, future balance-sheet growth and the company’s use of temporary CECL regulatory capital relief.
- Potential exposure from $3.04 billion of unfunded loan commitments, regional concentration in the Pacific Northwest, and the company’s stated operational, cybersecurity, legal and regulatory risks.