Columbia Banking System, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. is a regional bank holding company operating primarily through Columbia State Bank and Columbia Trust Company. The unaudited filing covers the quarter and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. Lending is concentrated in Washington, Oregon and Idaho, with commercial real estate and commercial business loans representing the largest portfolio categories.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net income | $53.0 million | $44.7 million | $159.9 million | $95.9 million |
| Diluted EPS | $0.74 | $0.63 | $2.24 | $1.35 |
| Net interest income | $132.5 million | $124.7 million | $382.0 million | $369.0 million |
| Provision/(recapture) for credit losses | $0 | $7.4 million provision | $6.3 million recapture | $82.4 million provision |
| Noninterest income | $24.0 million | $22.5 million | $69.9 million | $80.9 million |
| Noninterest expense | $90.0 million | $85.1 million | $257.7 million | $250.2 million |
| Tax-equivalent net interest margin | 3.17% | 3.47% | 3.21% | 3.69% |
At September 30, 2021, total assets were $18.60 billion, loans were $9.52 billion, and deposits were $15.95 billion. Shareholders’ equity was $2.32 billion. Cash and cash equivalents totaled $897.5 million. The company had $7.4 million of FHLB advances, $40.0 million of repurchase agreements and $35.0 million of subordinated debentures. Its $15.0 million revolving credit facility was undrawn and available through May 2022, subject to covenants.
Net cash provided by operating activities for the first nine months was $189.1 million. Investing activities used $1.93 billion, primarily for debt securities and loans, while financing activities provided $1.99 billion, principally from a $2.08 billion increase in deposits. Cash and cash equivalents increased $243.7 million from year-end 2020.
The allowance for credit losses was $142.8 million, or 1.50% of loans, compared with $149.1 million, or 1.58%, at December 31, 2020. Nonperforming assets were $24.6 million, or 0.13% of total assets, versus $35.4 million, or 0.21%, at year-end. The company and bank remained well-capitalized; the company’s CET1, total risk-based capital and leverage ratios were 12.79%, 14.25% and 8.43%, respectively.
Material changes versus prior comparable periods
- Q3 net income increased 19% year over year, while nine-month net income increased 67%.
- Net interest income increased, but the tax-equivalent net interest margin declined because of lower average asset yields and a greater mix of taxable securities.
- The credit-loss provision declined sharply, reflecting an improved economic forecast and recovery from the COVID-19-related deterioration in 2020.
- Nine-month noninterest income declined 14%, primarily because 2020 included a $16.4 million gain related to Visa Class B shares. Q3 noninterest income increased 7%, helped by a $750 thousand gain on the sale of health savings accounts and higher card and financial-services revenue.
- Noninterest expense increased 6% in Q3 and 3% year to date. Legal and professional fees included $2.2 million of acquisition-related costs in Q3 and $2.7 million year to date; management expected elevated acquisition costs for several subsequent quarters.
- Total assets increased $2.02 billion and deposits increased $2.08 billion from December 31, 2020, supported by PPP-related funds, government stimulus and reduced customer spending.
- The company transferred $2.01 billion of securities from available-for-sale to held-to-maturity classification. No gain or loss was recognized at transfer.
- Loans increased $93.7 million from year-end, including $337.0 million of PPP loans outstanding at September 30, 2021. COVID-related loan deferrals declined to $32.8 million from $146.7 million at December 31, 2020.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management’s credit-loss forecast assumed national unemployment would return to pre-pandemic levels in 2023, continued commercial real estate index weakness through 2021 followed by modest improvement in 2022, moderating home-price growth and above-average real GDP growth. Management noted that changes in these assumptions could create future ACL volatility.
On October 1, 2021, the company completed its acquisition of Bank of Commerce for approximately $256.3 million. Its results were not included in the reported nine-month financial statements, and purchase accounting values had not been finalized as of the filing.
On October 12, 2021, Columbia and Umpqua Holdings Corporation announced a definitive merger agreement intended to create a West Coast regional bank with assets exceeding $50 billion and more than 300 locations. Completion remains subject to shareholder and regulatory approvals and other conditions. Identified risks include delayed or denied approvals, imposed regulatory conditions, integration costs, deposit or employee attrition, failure to realize synergies, shareholder litigation and a potential $145 million termination fee under certain circumstances.
Other principal risks include COVID-19 and economic conditions, commercial real estate and regional concentration, interest-rate and liquidity risk, LIBOR replacement, credit-loss estimation uncertainty, cybersecurity, regulatory changes, competition and potential goodwill impairment. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Bank of Commerce acquisition’s final purchase accounting materially changes goodwill, intangible assets, capital or future earnings.
- The status, timing, regulatory conditions and expected economics of the proposed Umpqua merger, including integration costs and the potential termination fee.
- Whether the declining net interest margin persists as securities yields, loan pricing and deposit costs evolve.
- Whether the improvement in credit quality and ACL assumptions remains appropriate as COVID-19 support programs expire and economic forecasts change.
- The effect of PPP loan forgiveness and accelerated fee recognition on future loan yields and net interest income.
- The market-value sensitivity of the securities portfolio and accumulated other comprehensive income to changes in interest rates.
- The company states that there were no program repurchases during the quarter; the 833 shares shown as repurchased were surrendered for employee tax withholding rather than open-market program purchases.