Columbia Banking System, Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Columbia Banking System, Inc. is the parent of Columbia State Bank, a full-service commercial bank focused primarily on commercial real estate, commercial business, agricultural, construction, residential real estate and consumer lending. Its operations are concentrated in Washington, Oregon, Idaho and California.
The filing covers the three months ended March 31, 2022. The interim financial statements are unaudited. The October 1, 2021 acquisition of Bank of Commerce materially affects comparability with the prior-year period.
Key Financial Metrics
| Metric | Q1 2022 / March 31, 2022 | Comparable period or prior date |
|---|---|---|
| Total assets | $20.96 billion | $20.95 billion at December 31, 2021 |
| Total deposits | $18.30 billion | $18.01 billion at December 31, 2021 |
| Loans, net | $10.61 billion | $10.49 billion at December 31, 2021 |
| Net interest income | $146.2 million | $124.0 million in Q1 2021 |
| Net interest margin, tax equivalent | 3.12% | 3.31% in Q1 2021; 3.05% in Q4 2021 |
| Noninterest income | $24.2 million | $23.2 million in Q1 2021 |
| Noninterest expense | $105.1 million | $83.6 million in Q1 2021 |
| Net income | $57.5 million | $51.9 million in Q1 2021 |
| Diluted EPS | $0.74 | $0.73 in Q1 2021 |
| Allowance for credit losses | $146.9 million, or 1.37% of loans | $155.6 million, or 1.46%, at December 31, 2021 |
| Cash and cash equivalents | $972.5 million | $824.7 million at December 31, 2021 |
Profitability, Cash Flow, Debt and Liquidity
- Net income increased 11% year over year to $57.5 million. Income before taxes was $73.1 million, and the effective tax rate was 21%.
- Net interest income increased $22.2 million year over year, primarily from higher average loan and securities balances, including the Bank of Commerce acquisition. The tax-equivalent net interest margin declined because of lower average loan yields.
- The company recorded a $7.8 million recapture of credit losses, compared with an $0.8 million recapture in Q1 2021 and an $11.1 million provision in Q4 2021.
- Operating cash flow was $62.4 million, compared with $59.1 million in Q1 2021. Investing activities used $135.2 million, while financing activities provided $220.6 million, primarily from a $289.3 million increase in deposits.
- Interest-bearing debt was limited relative to deposits: FHLB advances were $7.3 million, repurchase agreements were $44.2 million, subordinated debentures were $10.0 million and junior subordinated debentures were $10.3 million. The $15.0 million revolving credit facility had no outstanding balance.
- Shareholders’ equity declined to $2.36 billion from $2.59 billion at year-end, primarily because accumulated other comprehensive loss increased by $262.9 million from unrealized securities losses.
- The company and the bank were classified as well-capitalized and met applicable capital requirements. The company’s CET1 ratio was 12.88%, total risk-based capital ratio was 14.00% and leverage ratio was 8.64%.
Material Changes Versus Comparable Periods
- Compared with Q1 2021, average interest-earning assets increased to $19.27 billion from $15.42 billion, substantially reflecting the Bank of Commerce acquisition and other balance-sheet growth.
- Noninterest expense increased 26% year over year. Compensation rose 22%, and acquisition-related expenses totaled $7.1 million, including $2.6 million related to Bank of Commerce and $4.5 million related to the proposed Umpqua transaction.
- Noninterest income increased 4% year over year. Card revenue and financial services and trust revenue improved, while loan revenue declined 57% because of lower mortgage production and reduced loan-sale premiums in the higher-rate environment.
- Total loans increased $117.7 million from year-end, while deposits increased $289.1 million. Wholesale deposits, including brokered, reciprocal money market and other wholesale deposits excluding public funds, rose to $1.11 billion, or 6.1% of deposits, from 4.6% at year-end.
- Available-for-sale securities declined to $5.53 billion from $5.91 billion at year-end, primarily because of fair-value declines, maturities and repayments. The portfolio had $337.5 million of gross unrealized losses, which management attributed primarily to interest-rate movements rather than credit deterioration.
- Loans past due increased to $9.6 million from $7.4 million at year-end, but nonaccrual loans declined to $17.4 million from $23.0 million. Management stated that problem loans had returned near pre-pandemic levels.
Guidance, Outlook, Risks and Unusual Items
- No specific earnings, revenue or margin guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year performance.
- Management’s credit-loss forecast assumes unemployment remains near pre-pandemic levels, slower commercial real estate index growth, moderating home-price growth and slower real GDP growth. Changes in these assumptions could create ACL volatility.
- The proposed merger with Umpqua remained pending. Risks include failure to obtain regulatory approvals, delays, integration difficulties, deposit or employee attrition, higher-than-expected expenses, litigation and failure to realize expected cost savings or revenue synergies.
- Interest-rate risk is significant. Model estimates indicated that an instantaneous 200-basis-point rate increase could increase first-year net interest income by approximately $48.2 million, while a 100-basis-point decrease could reduce it by approximately $25.6 million. These are model-based estimates, not guidance.
- Accumulated other comprehensive loss increased sharply because of interest-rate-driven unrealized securities losses. Management concluded that the securities did not have an indicated credit loss and did not record an allowance for those securities.
- The company had $3.64 billion of loan commitments and $35.6 million of standby letters of credit at March 31, 2022. Management stated that routine litigation was not expected to have a material effect on financial condition, results or cash flows.
- The company declared a $0.30-per-share quarterly dividend after quarter-end, payable May 18, 2022.
Important Facts for Investors to Verify
- Progress, regulatory approvals, closing conditions, integration costs and expected synergies associated with the Umpqua merger.
- Whether deposit growth and the increased use of wholesale deposits remain sustainable and cost-effective.
- The effect of rising interest rates, deposit repricing and securities duration on net interest margin and accumulated other comprehensive income.
- Credit quality trends in the commercial real estate, commercial business and agricultural portfolios, including changes in nonaccrual loans, criticized loans and the ACL.
- The extent to which Bank of Commerce acquisition benefits offset higher operating and acquisition-related expenses.
- Potential capital effects if unrealized securities losses persist or if goodwill and other acquisition-related assets require impairment testing.