Columbia Banking System, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Columbia Banking System, Inc. is the parent of Columbia State Bank and Columbia Trust Company, serving customers primarily in Washington, Oregon and Idaho. The filing covers the unaudited three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020 and December 31, 2020 balance-sheet amounts.
Key financial metrics
| Metric | Q1 2021 / March 31, 2021 | Comparable / Prior period |
|---|---|---|
| Net income | $51.9 million | $14.6 million in Q1 2020 |
| Diluted EPS | $0.73 | $0.20 in Q1 2020 |
| Net interest income | $124.0 million | $122.4 million in Q1 2020 |
| Net interest margin, tax equivalent | 3.31% | 4.00% in Q1 2020 |
| Noninterest income | $23.2 million | $21.2 million in Q1 2020 |
| Noninterest expense | $83.6 million | $84.3 million in Q1 2020 |
| Provision for credit losses | $0.8 million net recapture | $41.5 million provision in Q1 2020 |
| Total assets | $17.34 billion | $16.58 billion at December 31, 2020 |
| Total loans | $9.68 billion | $9.43 billion at December 31, 2020 |
| Total deposits | $14.77 billion | $13.87 billion at December 31, 2020 |
| Cash and cash equivalents | $884.5 million | $653.8 million at December 31, 2020 |
| Allowance for credit losses | $148.3 million, or 1.53% of loans | $149.1 million, or 1.58%, at December 31, 2020 |
| Shareholders’ equity | $2.28 billion | $2.35 billion at December 31, 2020 |
Net cash provided by operating activities was $59.1 million. Investing activities used $667.7 million, principally reflecting $608.9 million of debt-security purchases and net loan investment. Financing activities provided $839.4 million, primarily from a $897.6 million increase in deposits. Cash and cash equivalents increased $230.7 million during the quarter.
Borrowings remained modest: FHLB advances were $7.4 million, repurchase agreements were $38.6 million and subordinated debentures were $35.0 million. The Company had no balance outstanding under its $15.0 million revolving credit facility and was in compliance with its covenants.
Material changes versus comparable periods
- Net income increased $37.2 million year over year, primarily because the $41.5 million credit-loss provision in Q1 2020 became an $0.8 million recapture in Q1 2021.
- Net interest income increased $1.6 million, although the tax-equivalent net interest margin declined 69 basis points to 3.31%. Lower loan and securities yields and higher low-yielding deposits at banks outweighed funding-cost reductions.
- Noninterest income increased $2.0 million, led by a $2.8 million increase in loan revenue, primarily from higher mortgage-banking volume and premium per loan sold. Deposit and treasury-management fees declined $1.4 million, including lower overdraft fees.
- Noninterest expense declined $0.7 million. Lower compensation expense and amortization were partly offset by higher data-processing, legal and professional, business-and-occupation tax, and regulatory-premium costs.
- Loans increased $248.7 million from year-end, including $494.8 million of new PPP loans, partly offset by $250.7 million of PPP paydowns and SBA forgiveness. PPP loans outstanding were $894.1 million at March 31, 2021.
- Deposits increased $897.6 million, primarily because customers deposited PPP proceeds. Noninterest-bearing deposits represented 50.4% of total deposits.
- Accumulated other comprehensive income declined $104.5 million, primarily from a $102.6 million after-tax decline in unrealized gains on available-for-sale securities. Shareholders’ equity consequently fell $72.5 million despite net income.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or financial guidance. Management stated that the economic outlook improved modestly as the economy recovered from COVID-19, supporting the credit-loss recapture. However, management still expected unemployment to remain above pre-pandemic levels through the forecast period, continued commercial-real-estate index pressure through 2021, moderating home-price growth and above-average real GDP growth for the remainder of the year.
COVID-19 remained a significant uncertainty. At March 31, 2021, 20 short-term loan deferments covered $71.4 million of loans, down from $146.7 million across 70 deferments at December 31, 2020. Credit-loss estimates remain sensitive to macroeconomic assumptions, and the ACL excludes PPP loans because they are fully SBA-guaranteed.
Nonperforming assets declined to $34.1 million from $35.4 million at year-end; nonaccrual loans were $33.6 million, or 0.35% of period-end loans. The loan portfolio is concentrated in the Pacific Northwest and heavily weighted toward commercial real estate and commercial business loans.
Interest-rate risk is material. Management’s simulation indicated that a gradual 100-basis-point decline in rates could reduce net interest income by approximately $5 million in year one and $21 million in year two, while a gradual 200-basis-point increase could increase net interest income by approximately $5 million and $40 million, respectively, assuming a constant balance sheet.
The Company and Bank were classified as well-capitalized and met capital requirements. At March 31, 2021, the Company reported a CET1 ratio of 13.09%, total risk-based capital ratio of 14.66% and leverage ratio of 8.84%; the Bank reported 13.33%, 14.58% and 9.09%, respectively.
Other items to monitor include the $35.0 million subordinated debentures callable June 30, 2021, $2.96 billion of commitments to extend credit, the planned amortization of the terminated interest-rate collar gain through February 2024, potential LIBOR replacement effects, cybersecurity and operational risks, and possible goodwill impairment. Management reported no material change in previously disclosed risk factors and no material effect expected from routine litigation.
The Company declared a quarterly dividend of $0.28 per share after quarter-end, payable May 26, 2021. No shares were repurchased under the public repurchase program during the quarter; shares acquired were limited to employee tax-withholding cancellations.
Important facts investors should verify
- Whether PPP loan forgiveness, paydowns and the expiration of borrower deferrals affect future loan growth, fee income and credit quality.
- Whether the Q1 credit-loss recapture is sustainable or reverses as COVID-19 support programs end and economic forecasts change.
- The effect of low interest rates, deposit mix changes and securities duration on net interest margin and earnings.
- Credit performance in the commercial real estate, commercial business and agriculture portfolios, including changes in criticized loans and collateral values.
- The impact of unrealized securities losses on accumulated other comprehensive income, tangible capital and regulatory capital.
- Liquidity capacity, deposit retention and the June 30, 2021 call date for the subordinated debentures.
- Potential effects of LIBOR transition, COVID-19 developments, regulatory changes, cybersecurity events and goodwill impairment testing.