Columbia Banking System, Inc. — Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company provides commercial and retail banking, mortgage, trust, private banking and equipment leasing services through Umpqua Bank, Columbia Trust Company 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, 2023 results include the combined company after the merger, while prior-period results generally reflect standalone UHC and are not directly comparable.
Key financial metrics
| Metric | Q2 2023 | Six months ended June 30, 2023 | Comparable period |
|---|---|---|---|
| Net income | $133.4 million | $119.3 million | $78.6 million Q2 2022; $169.7 million six months 2022 |
| Diluted EPS | $0.64 | $0.65 | $0.61 Q2 2022; $1.31 six months 2022 |
| Net interest income | $484.0 million | $858.7 million | $248.2 million Q2 2022; $476.9 million six months 2022 |
| Net interest margin, tax-equivalent | 3.93% | 3.99% | 4.08% Q1 2023; 3.28% six months 2022 |
| Provision for credit losses | $16.0 million | $121.6 million | $18.7 million Q2 2022; $23.5 million six months 2022 |
| Non-interest income | $39.7 million | $94.4 million | $55.2 million Q2 2022; $135.2 million six months 2022 |
| Non-interest expense | $328.6 million | $671.4 million | $179.6 million Q2 2022; $362.0 million six months 2022 |
| Return on average assets | 1.00% | 0.52% | (0.14)% Q1 2023; 1.12% six months 2022 |
Net income improved from a $14.0 million loss in Q1 2023, primarily because Q2 represented the first full quarter of combined-company operations, merger-related expenses declined, and the provision for credit losses was lower. The six-month earnings decline versus 2022 reflects higher funding costs, merger expenses, credit-loss provision and share dilution.
- Total assets were $53.6 billion at June 30, 2023, compared with $31.8 billion at December 31, 2022.
- Loans and leases were $37.0 billion, up from $26.2 billion, primarily from $10.9 billion of loans acquired in the merger.
- Total deposits were $40.8 billion, up from $27.1 billion, including $15.2 billion of deposits assumed through the merger. Existing customer balances declined due largely to inflation and tighter market liquidity.
- Cash and cash equivalents were $3.4 billion, up $2.1 billion from year-end.
- Borrowings were $6.3 billion, versus $906.2 million at year-end; substantially all were FHLB advances maturing in 2023.
- The allowance for credit losses was $424.4 million, or 1.15% of loans and leases. Non-performing assets were $80.3 million, or 0.15% of total assets.
- Common shareholders’ equity was $4.8 billion. The consolidated total risk-based capital ratio was 11.31%, CET1 ratio was 9.22%, and tangible common equity ratio was 6.04%.
Material changes versus prior periods
- The merger added approximately $19.2 billion of assets, $17.9 billion of liabilities and $1.0 billion of goodwill. Approximately 78.9 million shares were issued in the transaction, increasing the share count and reducing per-share comparability.
- Net interest income increased substantially because of the larger combined balance sheet, higher loan yields, rising market rates and purchase-accounting accretion. Q2 purchase-accounting accretion and amortization was $74.4 million; $1.3 billion of acquired loan and securities discounts remained at June 30.
- Q2 net interest margin declined from Q1 because funding costs increased, the loan mix was lower relative to earning assets, and higher rates slowed prepayments and delayed discount accretion.
- Six-month non-interest income fell 30% to $94.4 million. Residential mortgage banking revenue declined to $5.5 million from $91.3 million, reflecting lower mortgage volumes, MSR valuation changes and MSR hedging losses.
- Six-month non-interest expense increased 85% to $671.4 million. Merger-related expenses were $145.5 million, compared with $5.0 million in the prior-year period, and Q2 intangible amortization was $35.6 million.
- Net charge-offs increased to $28.1 million in Q2 and $44.7 million for the six months, primarily from leases and equipment finance loans. The annualized six-month net charge-off ratio was 0.27%, versus 0.10% in 2022.
- Available-for-sale securities increased to $9.0 billion. The portfolio had $555.4 million of gross unrealized losses, which management attributed primarily to interest-rate and market-spread changes rather than issuer credit deterioration.
Guidance, outlook, risks and unusual items
- Management remains on track for $135 million of annualized merger-related cost savings by the end of Q3 2023, with $105 million achieved through June 30. The company completed its core systems conversion and consolidated 47 branches during Q2.
- Total available liquidity was approximately $18.1 billion, including cash, excess bond collateral and off-balance-sheet borrowing capacity. Management stated that liquidity was sufficient, but noted deposit pricing pressure, possible deposit outflows and reliance on more expensive wholesale funding as risks.
- The company signed an indication of interest in July 2023 to sell MSRs associated with approximately $4.5 billion of serviced loans. The transaction was expected to close in late Q3 or early Q4, subject to final agreements and customary conditions. The MSRs were marked to the expected sale price at June 30.
- Management expects merger benefits but cautions that integration challenges, cost execution, employee and customer retention, and competitive conditions could prevent anticipated benefits from being realized.
- Credit risk is concentrated in real estate-related lending, which represented approximately 75% of the loan and lease portfolio. Higher interest rates, weaker economic conditions, declining commercial real estate values, refinancing constraints and higher unemployment could increase losses.
- The company used Moody’s Analytics’ May 2023 baseline economic forecast in its CECL estimate. Management stated that the allowance was adequate, but acknowledged that changes in economic conditions and model assumptions could require additional provisions.
- A proposed FDIC special assessment related to bank failures could increase future expense; the amount and timing were not yet determinable at June 30.
- The company is defending class-action and related litigation concerning alleged aiding and abetting claims tied to the failure of Professional Financial Investors entities. Plaintiffs estimated class damages of $386.2 million to $429.8 million before prior recoveries. The company had $4.6 million accrued for legal matters and stated that the ultimate outcome could still be material for a particular period.
- Interest-rate sensitivity shifted after the merger. The company’s modeling indicated that higher rates could reduce economic value of equity and that net interest income would decline under both rising and falling-rate scenarios over the modeled horizons.
Important facts for investors to verify
- Whether the merger’s expected $135 million annualized cost savings are achieved and whether integration costs decline as projected.
- Deposit retention, deposit pricing, uninsured deposits of $13.5 billion and the company’s ability to refinance or reduce $6.3 billion of borrowings maturing within one year.
- Future net interest margin trends as deposit costs rise, purchase-accounting accretion changes and interest rates remain elevated.
- Credit performance in commercial real estate, commercial lending and equipment finance, including trends in charge-offs, criticized assets and the $424.4 million allowance.
- The final terms, timing and earnings impact of the proposed $4.5 billion MSR sale.
- Potential effects of unrealized securities losses, goodwill impairment testing and the preliminary nature of merger-date fair-value estimates.
- The final FDIC special assessment and developments in the pending litigation.
- Regulatory capital ratios and dividend capacity, particularly after the decline in capital ratios following the merger.