Business Context and Reporting Period
Columbia Banking System, Inc., a regional bank holding company headquartered in Tacoma, Washington, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. Its principal banking subsidiary is Columbia State Bank, serving customers primarily in Washington, Oregon, Idaho and California. The results include Bank of Commerce, acquired October 1, 2021. The proposed Umpqua Holdings merger remained pending regulatory approval.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $147.5 million | $125.5 million | $293.7 million | $249.5 million |
| Noninterest income | $25.0 million | $22.7 million | $49.2 million | $45.9 million |
| Net income | $58.8 million | $55.0 million | $116.3 million | $106.9 million |
| Diluted EPS | $0.75 | $0.77 | $1.49 | $1.50 |
| Net interest margin, tax equivalent | 3.16% | Not clearly provided for Q2 2021 | 3.14% | 3.23% |
| Noninterest expense | $95.4 million | $84.1 million | $200.4 million | $167.7 million |
Second-quarter net income increased 7% year over year and rose from $57.5 million in the first quarter of 2022. Net interest income increased primarily from higher average loan balances and the Bank of Commerce acquisition. The tax-equivalent operating net interest margin was 3.23% in Q2 2022, compared with 3.15% in Q1 2022. The six-month margin declined year over year because of lower average loan yields.
- Total assets were $20.56 billion at June 30, 2022, down $380.9 million from December 31, 2021.
- Loans, net of unearned income, were $11.32 billion, up $680.5 million from year-end; loans, net of the allowance, were $11.17 billion.
- Deposits were $17.96 billion, down approximately $53 million from year-end. Noninterest-bearing deposits represented 48.7% of total deposits.
- The allowance for credit losses was $149.9 million, or 1.32% of loans, versus $155.6 million, or 1.46%, at year-end.
- Cash and cash equivalents were $414.2 million, compared with $824.7 million at December 31, 2021.
- Debt securities available for sale were $5.12 billion, down from $5.91 billion at year-end, primarily because of interest-rate-driven fair-value declines and maturities.
- Total shareholders’ equity was $2.24 billion, down from $2.59 billion, primarily because accumulated other comprehensive loss increased to $384.6 million.
- Net cash provided by operating activities for the six months was $161.6 million. Investing activities used $453.2 million and financing activities used $118.8 million, producing a $410.5 million decrease in cash and cash equivalents.
- FHLB advances were $7.3 million, repurchase agreements were $70.3 million, subordinated debentures were $10.0 million and junior subordinated debentures were $10.3 million. A $15.0 million revolving credit facility was undrawn.
- The Company and Bank remained well-capitalized. The Company’s June 30 CET1, total risk-based capital and leverage ratios were 12.59%, 13.69% and 8.77%, respectively.
Material Changes Versus Comparable Periods
- Six-month net interest income rose $44.2 million, or approximately 18%, driven by larger loan and securities balances, partly related to Bank of Commerce.
- Six-month net income increased $9.4 million, but diluted EPS declined to $1.49 from $1.50 because the weighted-average diluted share count increased to 78.1 million from 71.1 million.
- Six-month noninterest income increased $3.3 million. Deposit and treasury management fees, card revenue, financial services and trust revenue, and other income increased, while mortgage banking revenue declined because of higher rates and lower mortgage production.
- Six-month noninterest expense increased $32.8 million, reflecting Bank of Commerce operating costs, higher compensation and benefits, and merger-related expenses.
- Merger-related expenses were $3.9 million in Q2 and $11.0 million for the six months, including expenses related to both Bank of Commerce integration and the pending Umpqua transaction.
- The second quarter included a $2.1 million provision for credit losses, compared with a $7.8 million recapture in Q1. The six-month period still reflected a $5.7 million recapture, compared with a $6.3 million recapture in the prior-year period.
- Accumulated other comprehensive loss increased by $419.8 million during the first six months, principally from unrealized losses on available-for-sale securities as market interest rates increased. Management did not identify these losses as credit-related.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal earnings or revenue guidance. Management expects economic factors used in credit-loss modeling to include slower real GDP growth, moderation in home-price growth, slower commercial real estate index growth and unemployment near pre-pandemic levels early in the forecast period before increasing later. Management stated that the allowance is sensitive to changes in these assumptions.
- The pending Umpqua merger is subject to regulatory approval and other closing conditions. Risks include delay or failure to close, regulatory conditions, integration costs, deposit or employee attrition, management distraction, litigation and failure to realize expected synergies.
- Higher interest rates create both opportunity and risk. Loan yields benefited from rate increases, but many floating-rate loans remained at floor rates during the period, while deposit repricing and funding costs may increase. The securities portfolio remains exposed to further fair-value declines.
- At June 30, $4.85 billion of available-for-sale securities had gross unrealized losses of $526.7 million. Management stated it did not intend, and did not expect to be required, to sell these securities before recovery of amortized cost.
- Loan commitments were $3.71 billion and standby letters of credit were $34.2 million. These off-balance-sheet exposures carry credit risk similar to funded loans.
- Loans and unfunded commitments are geographically concentrated in the Company’s operating markets. Key risks include credit deterioration, real estate collateral declines, recession, inflation, Federal Reserve actions, liquidity and interest-rate risk, cybersecurity, operational disruptions, regulatory changes and climate or natural-disaster events.
- The Company declared a regular $0.30-per-share dividend after quarter-end, payable August 17, 2022. Dividend payments remain subject to regulatory capital and other restrictions.
- Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the expected timing, regulatory status, consideration, integration costs and projected benefits of the Umpqua merger.
- Track securities unrealized losses, accumulated other comprehensive loss, capital ratios and potential effects of further rate increases or decreases.
- Assess whether loan growth remains supported by credit quality, including nonaccrual loans, criticized loans, charge-offs and allowance coverage.
- Reconcile earnings growth with the increase in the share count and the impact of Bank of Commerce acquisition accounting and merger expenses.
- Monitor deposit trends, wholesale and brokered funding, available borrowing capacity and the $410.5 million first-half decline in cash and cash equivalents.
- Evaluate sensitivity of net interest income to rates: the filing’s model projected that an instantaneous 200-basis-point increase would raise first-year net interest income by 7.17%, while an instantaneous 100-basis-point decrease would reduce it by 6.93%, subject to stated modeling assumptions.