Columbia Banking System, Inc. — 2023 Q3 Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company provides commercial and retail banking, mortgage, trust, financial services, and equipment leasing through Umpqua Bank, Columbia Trust, and Financial Pacific Leasing.
On February 28, 2023, Columbia completed its all-stock merger with Umpqua Holdings Corporation. The transaction was accounted for as a reverse acquisition, with UHC treated as the accounting acquirer. Accordingly, periods before the merger primarily reflect standalone UHC results, and 2023 results include the acquired Columbia operations only after the merger date. Comparisons with prior periods are therefore not fully comparable.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Change or other period |
|---|---|---|---|
| Net income | $135.8 million | $84.0 million | Up 62% |
| Diluted EPS | $0.65 | $0.65 | Year-to-date EPS: $1.33 versus $1.96 |
| Net interest income | $480.9 million | $287.6 million | Year-to-date: $1.34 billion versus $764.5 million |
| Net interest margin, tax-equivalent | 3.91% | Not clearly provided in the filing excerpt | 3.96% year-to-date versus 3.48% in 2022 |
| Provision for credit losses | $36.7 million | $27.6 million | Year-to-date: $158.3 million versus $51.1 million |
| Non-interest income | $44.0 million | $29.4 million | Year-to-date: $138.4 million versus $164.6 million |
| Non-interest expense | $304.1 million | $178.0 million | Year-to-date: $975.5 million versus $540.0 million |
| Total assets | $52.0 billion | Not provided for Q3 2022 | $31.8 billion at December 31, 2022 |
| Total loans and leases | $37.2 billion | Not provided for Q3 2022 | Up $11.0 billion from year-end 2022 |
| Total deposits | $41.6 billion | Not provided for Q3 2022 | Up $14.6 billion from year-end 2022 |
| Allowance for credit losses | $438.0 million | Not provided for Q3 2022 | Up from $315.4 million at year-end 2022 |
| Cash and cash equivalents | $2.4 billion | Not provided for Q3 2022 | Up from $1.3 billion at year-end 2022 |
Q3 net income increased from the prior quarter’s $133.4 million, primarily because of lower merger-related and occupancy expenses and higher non-interest income. These benefits were partly offset by higher credit-loss provision and lower net interest income.
Operating margins were affected by higher funding costs. The Q3 cost of interest-bearing liabilities was 2.72%, compared with 2.45% in the prior quarter. The company reported return on average assets of 1.02%, return on average common equity of 11.07%, and return on average tangible common equity of 16.93%.
Cash flow, debt, liquidity, and capital
- Net cash provided by operating activities was $577.5 million for the first nine months of 2023, compared with $904.7 million in the prior-year period.
- Net cash provided by investing activities was $701.8 million, compared with $2.84 billion used in investing activities in the prior-year period.
- Net cash used in financing activities was $170.2 million, compared with $723.0 million provided in the prior-year period.
- Borrowings were $4.0 billion at September 30, 2023, versus $906.2 million at December 31, 2022. Most borrowings were fixed-rate FHLB advances maturing in 2023 and 2024.
- Total available liquidity was $19.1 billion, including cash, excess bond collateral, and off-balance-sheet borrowing capacity. This represented 37% of total assets, 46% of total deposits, and 142% of estimated uninsured deposits.
- The consolidated total risk-based capital ratio was 11.63% and the CET1 ratio was 9.49%, compared with 13.71% and 11.02%, respectively, at December 31, 2022. All regulatory ratios exceeded well-capitalized requirements.
- The company paid a quarterly dividend of $0.36 per share. It had no active board authorization for share repurchases; 7,072 shares were withheld during the quarter for employee tax obligations.
Material changes versus comparable periods
- The merger increased assets, loans, deposits, common shares, goodwill, intangible assets, and operating expenses. Columbia issued approximately 129.4 million shares in the merger and recorded approximately $1.0 billion of goodwill and $710.2 million of acquired intangible assets.
- Year-to-date net income was broadly similar to 2022, but diluted EPS declined to $1.33 from $1.96 because of the substantially larger share count, higher funding costs, merger expenses, and higher credit-loss provision.
- Year-to-date non-interest income declined 16%, principally because residential mortgage banking revenue fell to $12.6 million from $108.7 million. Closed for-sale mortgage volume declined 78%.
- Year-to-date non-interest expense increased 81%, including $164.5 million of merger-related expenses and $78.1 million of intangible amortization.
- Management reported $140 million of annualized merger-related cost savings by the end of Q3, exceeding its original $135 million target. Branch consolidations and core systems conversion were completed during 2023.
- Non-performing assets increased to $105.7 million, or 0.20% of assets, from $58.8 million at year-end. Non-performing loans and leases increased to $104.5 million, or 0.28% of loans.
- The allowance for credit losses increased to $438.0 million. The nine-month provision included an $88.4 million initial provision for acquired non-PCD loans and a $26.5 million allowance recorded for acquired PCD loans.
- The available-for-sale securities portfolio increased to $8.5 billion and had $876.5 million of gross unrealized losses, primarily attributable to higher interest rates and wider market spreads rather than issuer credit deterioration.
Guidance, outlook, commentary, risks, and unusual items
No formal earnings or financial guidance is provided in the filing. Management expects liquidity to remain satisfactory during 2023 but cautions that deposit balances may decline because of pricing pressure, customer behavior, inflation, and market liquidity conditions. Higher deposit pricing or additional borrowings could increase funding costs.
Management used Moody’s Analytics’ August 2023 baseline economic forecast for CECL, including projected average federal funds rates of 5.0% in 2023, 5.1% in 2024, 4.2% in 2025, and 3.1% in 2026. Management states that the ACL was adequate at September 30, 2023, but acknowledges that weaker economic conditions, commercial real estate stress, declining collateral values, or changes in forecasts could require additional provisions.
- Real estate-related loans represented approximately 75% of the loan and lease portfolio; office loans represented approximately 17% of commercial real estate loans and 8% of total loans.
- Interest-rate risk remains material. The company’s simulation indicated that a parallel 300-basis-point rate increase would reduce estimated first-year net interest income by 0.6% and economic value of equity by 20.6%, subject to model assumptions.
- The company completed its LIBOR transition, primarily to Term SOFR, by September 30, 2023.
- The FDIC proposed a special assessment related to bank failures. The ultimate amount and timing were unresolved at the filing date.
- Umpqua Bank faces litigation related to the Professional Financial Investors alleged Ponzi scheme. Plaintiffs estimated class damages of $386.2 million to $429.8 million before prior bankruptcy recoveries; the company believes it has meritorious defenses.
- A vendor MOVEit security incident affected names and Social Security or tax identification numbers of 429,252 consumer and small-business customers. Multiple lawsuits and potential additional claims were disclosed. The company had $4.6 million accrued for legal matters at September 30, 2023.
- Merger accounting estimates, goodwill, acquired loan valuations, the ACL, mortgage servicing rights, interest rates, deposit retention, cybersecurity, regulatory requirements, and litigation outcomes are significant sources of uncertainty.
Important facts for investors to verify
- Whether merger-related cost savings continue to offset elevated personnel, technology, amortization, FDIC, and integration expenses.
- The sustainability of net interest margin as deposit costs and wholesale funding costs rise and purchase-accounting accretion declines.
- Trends in commercial real estate, office exposure, non-performing assets, net charge-offs, criticized loans, and the adequacy of the $438.0 million ACL.
- The level and stability of core, brokered, and uninsured deposits and the company’s reliance on FHLB and other wholesale funding.
- The effect of unrealized securities losses on tangible capital, liquidity, and regulatory capital under changing interest rates.
- Potential FDIC special-assessment costs and the ultimate resolution or insurance coverage of the disclosed legal and cybersecurity matters.
- Goodwill impairment risk and the finalization of preliminary merger-date fair values during the remaining measurement period.