Business Context and Reporting Period
Columbia Banking System, Inc. is a financial holding company whose principal subsidiary is Umpqua Bank. The company provides commercial, retail, private banking, mortgage, trust and equipment-leasing services across the western United States. This unaudited Form 10-Q covers the three months ended March 31, 2024.
Year-over-year comparisons require caution because the February 28, 2023 merger with Umpqua Holdings Corporation was accounted for as a reverse merger; the first quarter of 2023 included only one month of combined-company operations.
Financial Performance and Position
| Metric | Q1 2024 | Comparison |
|---|---|---|
| Net interest income | $423.4 million | Up from $374.7 million in Q1 2023; down from $454.7 million in Q4 2023 on a tax-equivalent basis |
| Net interest margin | 3.52% | Down from 4.08% in Q1 2023 and 3.78% in Q4 2023 |
| Provision for credit losses | $17.1 million | Down from $105.5 million in Q1 2023 and $54.9 million in Q4 2023 |
| Non-interest income | $50.4 million | Down from $54.7 million in Q1 2023 and $65.5 million in Q4 2023 |
| Non-interest expense | $287.5 million | Down from $342.8 million in Q1 2023 and $337.2 million in Q4 2023 |
| Net income | $124.1 million | Compared with a $14.0 million net loss in Q1 2023 and $93.5 million of net income in Q4 2023 |
| Diluted EPS | $0.59 | Compared with $(0.09) in Q1 2023 and $0.45 in Q4 2023 |
| Return on average assets | 0.96% | Up from 0.72% in Q4 2023 and negative 0.14% in Q1 2023 |
| Return on average common equity | 10.01% | Up from 7.90% in Q4 2023 |
| Return on average tangible common equity | 14.82% | Up from 12.19% in Q4 2023 |
- Total assets were $52.2 billion at March 31, 2024, compared with $52.2 billion at December 31, 2023.
- Total loans and leases were $37.6 billion, up $200.5 million from year-end, driven primarily by commercial real estate, commercial line utilization and construction activity. The loan-to-deposit ratio was 90%.
- Total deposits were $41.7 billion, up $99.1 million from year-end. Interest-bearing deposits increased while non-interest-bearing deposits declined. Brokered deposits were $3.1 billion and estimated uninsured deposits were $13.5 billion.
- Cash and cash equivalents were $2.2 billion. Operating activities generated $185.5 million of cash; investing activities used $77.7 million and financing activities used $69.3 million. Net cash increased $38.6 million during the quarter.
- Borrowings were $3.9 billion, including $2.4 billion of FHLB advances and $1.6 billion of Federal Reserve Bank Term Funding Program borrowings. The latter program ceased accepting new borrowings in March 2024.
- Total available liquidity was $18.6 billion, including $13.0 billion of off-balance-sheet liquidity, cash available after reserve requirements and excess bond collateral.
- Shareholders’ equity was $5.0 billion; the tangible common equity ratio was 6.63%. The consolidated total risk-based capital ratio was 11.95% and the CET1 ratio was 9.77%; all regulatory ratios exceeded “well-capitalized” requirements.
- The company paid a quarterly dividend of $0.36 per common share on March 11, 2024.
Material Changes Versus Comparable Periods
- Net income improved substantially year over year, primarily because the 2023 period included an $88.4 million initial provision for historical Columbia non-PCD loans and $115.9 million of merger-related expenses.
- Net interest income increased year over year as the current period reflected a full quarter of combined-company operations, higher loan yields and purchase-accounting accretion. These benefits were partly offset by materially higher deposit and other funding costs.
- Net interest margin contracted to 3.52% from 4.08% in Q1 2023 and 3.78% in Q4 2023 because of deposit repricing, a shift toward higher-cost funding and product-mix changes.
- Net charge-offs increased to $44.0 million, or 0.47% annualized of average loans and leases, from $16.7 million, or 0.23%, in Q1 2023. FinPac charge-offs were $23.8 million, while commercial charge-offs increased primarily because of a single commercial credit.
- The allowance for credit losses declined to $437.2 million, or 1.16% of loans and leases, from $464.1 million at year-end. The reduction reflected changes in economic assumptions and CECL model recalibration, including a $30.5 million decrease in modeled expected losses.
- Non-performing assets increased to $143.8 million, or 0.28% of assets, from $113.9 million, or 0.22%, at year-end. Management attributed the increase primarily to migration in the SBA portfolio and an owner-occupied commercial real estate property.
- Non-interest expense declined year over year, but intangible amortization increased to $32.1 million from $12.7 million because of merger-related core deposit intangibles. Merger-related expenses fell to $4.5 million from $115.9 million.
- Available-for-sale securities declined to $8.6 billion and carried net unrealized losses of $555.6 million, primarily from higher interest rates and wider market spreads. Management stated that the losses were not attributable to issuer credit deterioration and recorded no related ACL.
Guidance, Outlook, Risks and Unusual Items
- Management expects the first-quarter enterprise-wide operating review to produce consolidated positions, simplified reporting and organizational changes during the second and third quarters of 2024. It targets a fourth-quarter 2024 annualized core expense run rate of $965 million to $985 million, excluding core deposit intangible amortization, merger-related expenses, exit and disposal costs, and the FDIC special assessment.
- Management expects severance and restructuring charges in the second and third quarters of 2024; the filing does not provide a quantified estimate.
- Management believes liquidity is sufficient, but deposit pricing pressure, customer behavior and reliance on more expensive wholesale funding could increase funding costs or reduce liquidity.
- Credit risk is concentrated in real estate-related lending, which represented approximately 75% of the loan and lease portfolio. Multifamily, including construction, represented approximately 19%; office represented approximately 8%. Higher interest rates, weaker real estate values, tighter refinancing markets, unemployment or recession could increase provisions and charge-offs.
- The CECL estimate is sensitive to macroeconomic assumptions. The baseline forecast used for March 31, 2024 assumed U.S. GDP growth of 2.3% in 2024, average unemployment of 3.9% and an average federal funds rate of 4.9%.
- Interest-rate sensitivity modeling indicated limited projected impact on near-term net interest income under modeled parallel-rate scenarios, but the economic value of equity was liability-sensitive to rising rates. Actual results may differ because the models assume a static balance sheet and do not reflect potential management actions.
- The company faces litigation and regulatory contingencies, including matters involving the iCap bankruptcies, Professional Financial Investors-related claims and lawsuits related to the MOVEit vendor security incident affecting 429,252 customers. Legal liabilities accrued were $6.9 million at March 31, 2024. Management believes current matters will not have a material adverse effect, but acknowledges that an unfavorable resolution in a particular period could be material.
- The company’s FDIC assessment expense included $4.8 million related to the special assessment in Q1 2024. The filing also identifies $4.5 million of merger-related expenses and $28.2 million of losses from nonrecurring fair-value measurements of loans and leases.
Important Facts for Investors to Verify
- Whether deposit repricing stabilizes and net interest margin recovers from 3.52%.
- Trends in non-performing assets, commercial real estate and SBA exposures, FinPac losses, and net charge-offs.
- Whether the CECL model recalibration and lower allowance remain appropriate as economic conditions change.
- Execution of the planned expense reductions and the achievement of the $965 million to $985 million annualized fourth-quarter core expense run rate.
- Liquidity after the expiration of the Federal Reserve Term Funding Program and the maturity of $3.9 billion of borrowings within one year.
- Potential effects of the Professional Financial Investors, iCap and MOVEit matters beyond the $6.9 million accrued legal liability.
- Future dividend capacity, regulatory capital requirements and the effect of accumulated other comprehensive losses on tangible capital.