Columbia Banking System, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. Columbia is a bank holding company operating primarily through Columbia State Bank, with 145 branches across Washington, Oregon and Idaho. The filing presents audited full-year results; fourth-quarter information is included in unaudited quarterly data.
Business Context
- Provides commercial, consumer, mortgage, treasury management, wealth management and trust services, with a focus on small and medium-sized businesses, professionals and individuals.
- Substantially all loans and deposits are concentrated in the Pacific Northwest, increasing exposure to regional economic and real estate conditions.
- The Company had 2,187 full- and part-time employees at year-end and operated 145 branches, compared with 146 at December 31, 2019.
- COVID-19 materially affected operating conditions, borrower credit quality, deposit flows, loan deferrals and the allowance for credit losses.
Financial Performance and Position
| Metric | 2020 | 2019 | Change |
|---|
| Net interest income | $500.1 million | $493.4 million | +1% |
| Provision for credit losses | $77.7 million | $3.5 million | +$74.2 million |
| Noninterest income | $104.5 million | $97.2 million | +8% |
| Noninterest expense | $334.5 million | $345.5 million | -3% |
| Net income | $154.2 million | $194.5 million | -21% |
| Diluted EPS | $2.17 | $2.68 | -19% |
| Net interest margin, tax equivalent | 3.65% | 4.24% | -59 basis points |
| Return on average assets | 1.00% | 1.46% | Down |
| Return on average common equity | 6.82% | 9.19% | Down |
- Interest income declined to $517.8 million from $530.0 million as loan and securities yields fell in the low-rate environment. Interest expense declined to $17.7 million from $36.5 million, supporting modest net interest income growth.
- Noninterest income benefited from $16.7 million of investment securities gains, including a $13.4 million fair-value increase on retained Visa Class B shares and a $3.0 million gain on sold shares. Loan revenue also increased, partly from mortgage sales and interest-rate swap activity.
- Income before taxes was $192.4 million, compared with $241.6 million in 2019. The effective tax rate was 20% in both years.
Balance Sheet, Cash Flow, Debt and Liquidity
| Metric at December 31 | 2020 | 2019 | Change |
|---|
| Total assets | $16.58 billion | $14.08 billion | +18% |
| Total loans | $9.43 billion | $8.74 billion | +7.8% |
| Allowance for credit losses | $149.1 million | $84.0 million | +78% |
| Deposits | $13.87 billion | $10.68 billion | +30% |
| Cash and cash equivalents | $653.8 million | $247.7 million | +164% |
| Investment securities | $5.21 billion | $3.75 billion | +39% |
| FHLB advances | $7.4 million | $953.5 million | Down $946.1 million |
| Shareholders’ equity | $2.35 billion | $2.16 billion | +9% |
- Cash provided by operating activities was $192.3 million. Investing activities used $1.92 billion, primarily for securities purchases and net loan originations. Financing activities provided $2.13 billion, principally from a $3.19 billion increase in deposits.
- Liquidity included unused credit lines of approximately $2.09 billion at the FHLB and $234.4 million at the Federal Reserve at year-end.
- Total contractual obligations were $14.06 billion, primarily deposits. Other significant obligations included operating leases of $75.2 million and subordinated debentures of $35.1 million.
- Subordinated debentures had a $35.0 million principal amount, are callable at par on June 30, 2021, mature June 30, 2026 and reset to three-month LIBOR plus 4.715% after the call date.
Credit Quality and Capital
- Net charge-offs increased to $14.2 million from $2.9 million. Nonperforming assets rose modestly to $35.4 million from $33.6 million, while nonperforming assets as a percentage of year-end assets improved to 0.21% from 0.24%.
- The ACL increased to 1.58% of loans from 0.96%, primarily reflecting COVID-19 economic impacts and adoption of the CECL methodology. CECL adoption reduced beginning retained earnings by $2.5 million, net of tax.
- Commercial real estate and commercial business loans represented approximately 43% and 38% of total loans, respectively. Approximately 56% of gross loans were secured by real estate.
- PPP loans outstanding were $651.6 million at year-end. The Company reported $970.8 million of PPP loans outstanding before forgiveness activity and had approved or submitted more than $400 million of forgiveness applications to the SBA.
- The Company and Bank remained well-capitalized. Company ratios included 12.88% CET1, 14.45% total risk-based capital and 8.86% leverage; Bank ratios were 13.08%, 14.33% and 9.08%, respectively. Ratios benefited from the permitted temporary regulatory capital transition for CECL.
Material Changes Versus 2019
- Net income and diluted EPS declined primarily because the credit-loss provision increased sharply in response to COVID-19 and CECL, despite lower funding costs and higher net interest income.
- Deposits grew substantially, driven by PPP proceeds, government stimulus distributions and reduced consumer and business spending. Excess liquidity was deployed into securities and used to repay FHLB advances.
- The securities portfolio expanded materially, while gross unrealized losses decreased to $7.3 million from $20.4 million.
- COVID-19 loan deferrals declined substantially during the second half of the year. At December 31, 2020, 70 loans totaling $146.7 million remained in deferral programs.
- The Company terminated a $500 million interest-rate collar in October 2020, recording a $34.4 million after-tax gain in accumulated other comprehensive income to be amortized into interest income through February 2024.
- The Company repurchased 731,000 shares for $20.0 million under its prior authorization and approved a new authorization for up to 3.5 million shares and $100 million through December 31, 2021; no shares were repurchased under the new plan during 2020.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal quantitative earnings guidance. Management expects continued uncertainty from COVID-19, including potential borrower defaults, unemployment, business disruption, credit losses and market volatility.
- Key risks include concentration in Washington, Oregon and Idaho; commercial real estate and commercial business exposure; interest-rate and margin pressure; possible deterioration in collateral values; liquidity and funding risks; cybersecurity and operational disruption; regulatory changes; and competition from larger banks and nonbank providers.
- LIBOR is expected to be discontinued or replaced. The Company is implementing fallback language and evaluating alternative indexes; management does not currently anticipate a material financial-statement impact, but notes potential costs and litigation risk.
- Goodwill totaled $765.8 million, or approximately 4.6% of assets. No goodwill impairment was recorded in 2020, but future impairment could materially affect earnings and equity.
- Management and Deloitte & Touche LLP reported effective internal control over financial reporting, and the financial statement audit opinion was unqualified. The principal critical audit matter was the subjective estimation of the ACL.
- Management stated that pending or threatened legal proceedings are not expected to have a material effect on the financial statements.
Investor Verification Checklist
- Verify the sustainability of deposit growth and whether excess liquidity can be deployed at acceptable yields as PPP balances and pandemic-related deposits normalize.
- Assess future credit-loss provisions, deferrals, criticized loans and nonperforming assets as government support expires and borrowers resume scheduled payments.
- Review commercial real estate and commercial business concentrations, collateral values and regional economic trends in the Pacific Northwest.
- Reconcile reported capital ratios with and without the temporary CECL regulatory capital transition.
- Evaluate the effect of low interest rates, deposit repricing, loan yields, securities prepayments and the LIBOR transition on future net interest margin.
- Separate recurring earnings from unusual items, particularly Visa-related gains, securities gains, PPP-related revenue and the terminated interest-rate collar.
- Confirm dividend and share-repurchase capacity, including regulatory restrictions and the Company’s reliance on dividends from Columbia Bank.
