Columbia Banking System, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Columbia Banking System, Inc. filed its unaudited Form 10-Q for the quarter ended March 31, 2023. The company provides commercial and retail banking, mortgage, trust, equipment leasing and related financial services across the western United States.
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. Consequently, Q1 2023 includes the acquired historical Columbia operations only after the merger date, and prior-period financial statements primarily reflect standalone UHC results. Reported periods are therefore not directly comparable.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Comparable Period |
|---|---|---|
| Total interest income | $476.0 million | $235.9 million in Q1 2022 |
| Net interest income | $374.7 million | $228.8 million in Q1 2022; $305.5 million in Q4 2022 |
| Tax-equivalent net interest margin | 4.08% | 3.14% in Q1 2022; 4.01% in Q4 2022 |
| Provision for credit losses | $105.5 million | $4.8 million in Q1 2022; $32.9 million in Q4 2022 |
| Non-interest income | $54.7 million | $80.0 million in Q1 2022; $34.9 million in Q4 2022 |
| Non-interest expense | $342.8 million | $182.4 million in Q1 2022; $195.0 million in Q4 2022 |
| Net income/(loss) | $(14.0) million | $91.2 million in Q1 2022; $83.0 million in Q4 2022 |
| Diluted EPS | $(0.09) | $0.70 in Q1 2022; $0.64 in Q4 2022 |
| Return on average assets | (0.14)% | 1.21% in Q1 2022; 1.04% in Q4 2022 |
| Cash flow from operating activities | $(39.0) million | $275.3 million in Q1 2022 |
Net interest income benefited from higher loan yields, rising interest rates, increased average loan balances and one month of combined-company activity. These benefits were partly offset by sharply higher deposit and borrowing costs.
Residential mortgage banking revenue fell to $7.8 million from $60.8 million in Q1 2022, primarily due to an approximately 80% decline in closed mortgage-for-sale volume and weaker gain-on-sale activity. Mortgage servicing rights also recorded a $2.9 million fair-value loss from valuation assumptions, partly offset by a $2.7 million MSR hedge gain.
Balance Sheet, Liquidity and Capital
| Balance Sheet Metric | March 31, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $54.0 billion | $31.8 billion |
| Total loans and leases | $37.1 billion | $26.2 billion |
| Total deposits | $41.6 billion | $27.1 billion |
| Cash and cash equivalents | $3.6 billion | $1.3 billion |
| Available-for-sale securities | $9.2 billion | $3.2 billion |
| Total borrowings | $6.0 billion | $906.2 million |
| Shareholders’ equity | $4.9 billion | $2.5 billion |
| Tangible common equity ratio | 6.03% | 7.77% |
| Loan-to-deposit ratio | 89% | 97% |
The merger added approximately $19.2 billion of assets and $15.2 billion of deposits. Existing customer deposits declined, reflecting inflation and tighter market liquidity. Borrowings increased primarily through $5.9 billion of FHLB advances, substantially all maturing in 2023, with interest rates of 4.97% to 5.38%.
Management reported total available liquidity of approximately $17.9 billion, equal to 33% of total assets, 43% of deposits and 121% of estimated uninsured deposits. The company also had available FHLB lines of $5.5 billion, Federal Reserve lines of $1.3 billion, Bank Term Funding Program availability of $2.3 billion and additional uncommitted federal funds lines of $600 million.
At March 31, 2023, consolidated total risk-based capital was 10.90%, CET1 capital was 8.87%, and Tier 1 leverage capital was 9.47%. All regulatory ratios exceeded the applicable “well-capitalized” thresholds, although capital ratios declined from December 31, 2022 because of merger-related fair-value marks and balance-sheet growth.
Material Changes and Unusual Items
- The merger produced approximately $1.0 billion of goodwill and $702.3 million of other intangible assets at March 31, 2023.
- Merger-related expenses were $115.9 million, including legal and professional costs of $49.4 million, personnel costs of $21.5 million, premises and equipment costs of $21.3 million and charitable contributions of $20.0 million.
- The provision for credit losses included an $88.4 million initial provision for acquired non-PCD loans and reflected updated economic assumptions.
- The allowance for credit losses increased to $436.5 million from $315.4 million, including $417.5 million for loans and leases and $19.0 million for unfunded commitments.
- Net charge-offs were $16.7 million, or 0.23% annualized of average loans and leases, compared with $5.5 million, or 0.10%, in Q1 2022.
- Non-performing assets increased to $76.0 million, or 0.14% of total assets, while non-performing loans and leases were $75.6 million, or 0.20% of total loans.
- The available-for-sale securities portfolio had a $396.7 million net unrealized loss, primarily attributable to interest-rate and market-spread changes rather than issuer credit deterioration.
- Core systems conversion was completed on March 20, 2023; branch consolidations were scheduled through Q2 2023.
Outlook, Risks and Contingencies
Management stated that liquidity was sufficient for current conditions and operating needs, but warned that deposit balances could decline further because of pricing pressure and customer behavior. Higher deposit pricing or additional wholesale funding could increase interest expense.
The allowance for credit losses is sensitive to economic forecasts. Management used Moody’s February 2023 baseline scenario, which assumed U.S. GDP growth of 1.3% in 2023 and average unemployment of 3.5%. A more adverse scenario assumed a recession beginning in Q2 2023 and unemployment peaking at 6.4% in early 2024. Future deterioration could require additional credit-loss provisions.
Approximately 74% of the loan and lease portfolio was real-estate related. Key risks include commercial real estate values, refinancing conditions, higher interest rates, unemployment, inflation, recession, deposit retention, funding costs, bank-industry liquidity stress, merger integration, goodwill impairment, cybersecurity, regulatory changes and operational execution.
The company faces a certified class-action lawsuit related to the alleged failure and bankruptcy of two commercial real estate investment companies. Plaintiffs estimate damages of $386.2 million to $429.8 million before considering $110.0 million of bankruptcy recoveries. The company had $3.9 million accrued for legal matters and stated that it believes it has meritorious defenses, although an unfavorable outcome could be material to a particular reporting period.
LIBOR-indexed loans represented approximately 13% of the loan and lease portfolio at March 31, 2023. The company stated that its LIBOR transition program was mostly complete ahead of the June 30, 2023 cessation date and that affected instruments would transition primarily to Term SOFR or other replacement rates.
Important Facts for Investors to Verify
- Assess underlying earnings excluding the $115.9 million of merger-related expenses and the $88.4 million initial provision for acquired non-PCD loans.
- Review post-merger deposit trends, uninsured deposit levels, deposit pricing and reliance on $6.0 billion of borrowings maturing within one year.
- Monitor commercial real estate exposure, criticized loans, non-performing assets, charge-offs and changes in the $436.5 million ACL.
- Evaluate whether the 6.03% tangible common equity ratio and 8.87% CET1 ratio provide adequate capacity for further balance-sheet growth or unexpected losses.
- Verify the final purchase-price allocation, goodwill and intangible-asset values, which remained preliminary and subject to adjustment during the measurement period.
- Track realization of expected merger efficiencies, branch consolidations, integration costs and any effects on customer or employee retention.
- Review the class-action litigation, insurance coverage, accrued reserves and potential range of loss.
- Monitor mortgage banking volumes, MSR valuations and sensitivity to interest rates and prepayment speeds.
- Confirm completion and financial impact of the LIBOR-to-SOFR transition.