(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1301 A Street
Tacoma, Washington98402-2156
(Address of principal executive offices and zip code)
(253) 305-1900
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
COLB
The Nasdaq Stock Market LLC
(Title of each class)
(Trading symbol)
(Name of each exchange on which registered)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
The number of shares of common stock outstanding at April 30, 2022 was 78,639,422
The acronyms, abbreviations and terms listed below are used in various sections of the Form 10-Q, including “Item 1. Financial Statements” and “Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations.”
ACL
Allowance for Credit Losses
FHLB
Federal Home Loan Bank of Des Moines
ASC
Accounting Standards Codification
FRB
Federal Reserve Bank
ASU
Accounting Standards Update
GAAP
Generally Accepted Accounting Principles
Bank of Commerce
Bank of Commerce Holdings
GDP
Gross Domestic Product
B&O
Business and Occupation
LIBOR
London Interbank Offering Rate
Basel III
A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013
Nasdaq
National Association of Securities Dealer Automated Quotations
Capital Rules
Risk-based capital standards currently applicable to the Company and the Bank.
OPPO
Other Personal Property Owned
CARES Act
Coronavirus Aid Relief and Economic Security Act
OREO
Other Real Estate Owned
CDI
Core Deposit Intangible
Pacific Continental
Pacific Continental Corporation
CECL
Current Expected Credit Losses
PCD
Purchased Credit Deteriorated
CEO
Chief Executive Officer
PPP
Paycheck Protection Program
CET1
Common Equity Tier 1
RSA
Restricted Stock Awards
CFO
Chief Financial Officer
RSU
Restricted Stock Units
COVID-19
Novel Coronavirus
SBA
Small Business Administration
DCF
Discounted Cash Flow
SEC
Securities and Exchange Commission
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1.Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The interim unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The Consolidated Financial Statements include the accounts of Columbia Banking System, Inc. (“we”, “our”, “Columbia” or the “Company”) and its subsidiaries, including its wholly owned banking subsidiary Columbia State Bank (“Columbia Bank” or the “Bank”) and Columbia Trust Company (“Columbia Trust”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of results to be anticipated for the year ending December 31, 2022. The accompanying interim unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2021 Annual Report on Form 10-K.
Significant Accounting Policies
The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2021 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2021 Annual Report on Form 10-K disclosure for the year ended December 31, 2021.
2.Accounting Pronouncements Recently Adopted or Issued
Accounting Standards Adopted in 2022
There are no recently issued accounting standards that are applicable to the Company that were adopted in 2022.
Recently Issued Accounting Standards, Not Yet Adopted
In March 2022, the FASB issued ASU 2022-02, Financial Instruments (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU enhance disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the amendments require the disclosure of current-period gross charge-offs by year of origination for financing receivables and net investments in leases within scope. The ASU is effective for interim and annual reporting periods beginning after December 15, 2022; early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
3.Business Combinations
Bank of Commerce
On October 1, 2021, the Company completed its acquisition of Bank of Commerce and its wholly-owned banking subsidiary Merchants Bank of Commerce. The Company acquired 100% of the equity interests of Bank of Commerce.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of the October 1, 2021 acquisition date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $57.3 million and a CDI of $15.9 million. The goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company paid this premium for a number of reasons, including to expand the Company’s current footprint and to enter the California market and the synergies and economies of scale expected from the acquisition. The goodwill is not deductible for income tax purposes.
Of the $1.08 billion net loans acquired, $40.3 million exhibited credit deterioration on the date of purchase. The following table provides a summary of these PCD loans at acquisition:
October 1, 2021
(in thousands)
Par value of PCD loans acquired
$
43,419
PCD ACL at acquisition
(2,616)
Non-credit discount on PCD loans
(525)
Purchase price of PCD loans
$
40,278
The operating results of the Company reported herein include the operating results produced by the acquired assets and assumed liabilities for the period of January 1, 2022 to March 31, 2022. Disclosure of the amount of Bank of Commerce’s revenue and net income (excluding integration costs) included in Columbia’s Consolidated Statements of Income is impracticable due to the integration of the operations and accounting for this acquisition.
For illustrative purposes only, the following table presents certain unaudited pro forma information for the three months ended March 31, 2021. This unaudited, estimated pro forma financial information was calculated as if Bank of Commerce had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of Bank of Commerce with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Columbia expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.
Unaudited Pro Forma for the
Three Months Ended March 31,
2021
(in thousands, except per share amounts)
Total revenues (net interest income plus noninterest income)
$
162,092
Net income
$
55,882
Earnings per share - basic
$
0.72
Earnings per share - diluted
$
0.72
The following table shows the impact of the acquisition-related expenses related to the acquisition of Bank of Commerce for the periods indicated to the various components of noninterest expense:
Three Months Ended March 31,
2022
2021
(in thousands)
Noninterest Expense
Compensation and employee benefits
$
370
$
—
Occupancy
819
—
Data processing and software
1,039
—
Legal and professional fees
92
—
Advertising and promotion
18
—
Other
249
—
Total impact of acquisition-related expenses to noninterest expense
$
2,587
$
—
In addition, related to the recently announced transaction with Umpqua, the Company recognized $4.5 million of acquisition-related expenses for the three months ended March 31, 2022.
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of debt securities:
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
March 31, 2022
(in thousands)
Available for sale
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
3,604,576
$
8,315
$
(205,237)
$
3,407,654
Other asset-backed securities
433,879
377
(26,209)
408,047
State and municipal securities
1,002,490
2,275
(65,800)
938,965
U.S. government agency and government-sponsored enterprise securities
247,727
711
(9,164)
239,274
U.S. government securities
182,500
—
(9,158)
173,342
Non-agency collateralized mortgage obligations
381,988
—
(21,899)
360,089
Total available for sale
$
5,853,160
$
11,678
$
(337,467)
$
5,527,371
Held to maturity
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
2,202,437
$
—
$
(164,400)
$
2,038,037
Total held to maturity
$
2,202,437
$
—
$
(164,400)
$
2,038,037
December 31, 2021
Available for sale
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
3,738,616
$
45,077
$
(38,092)
$
3,745,601
Other asset-backed securities
469,052
3,802
(9,791)
463,063
State and municipal securities
983,704
18,525
(4,938)
997,291
U.S. government agency and government-sponsored enterprise securities
252,755
3,095
(3,274)
252,576
U.S. government securities
158,367
—
(831)
157,536
Non-agency collateralized mortgage obligations
295,547
340
(955)
294,932
Total available for sale
$
5,898,041
$
70,839
$
(57,881)
$
5,910,999
Held to maturity
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
2,148,327
$
50
$
(25,771)
$
2,122,606
Total held to maturity
$
2,148,327
$
50
$
(25,771)
$
2,122,606
There was no allowance for credit losses on both available for sale securities and held to maturity securities as of March 31, 2022 and December 31, 2021. All of the Company’s debt securities held to maturity were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income. There were no amounts of accrued interest reversed against interest income for the three months ended March 31, 2022 and 2021.
Accrued interest receivable for debt securities is included in “Interest receivable” on the Company’s Consolidated Balance Sheet and is not reflected in the balances in the table above. At March 31, 2022 and December 31, 2021, accrued interest receivable for securities available for sale was $18.4 million and $19.2 million, respectively. At March 31, 2022 and December 31, 2021, accrued interest receivable for securities held to maturity was $4.5 million and $4.4 million, respectively. The Company does not measure an allowance for credit losses for accrued interest receivable.
There were no proceeds or gross realized gains and losses on sales and calls of debt securities available for sale, nor were there other securities gains and losses for the three month periods ended March 31, 2022 and 2021. Additionally, there were no gains or losses recognized on equity securities during the three month periods ended March 31, 2022 and 2021.
The scheduled contractual maturities of debt securities at the period presented below are as follows:
March 31, 2022
Available for sale
Held to maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
(in thousands)
Due within one year
$
92,542
$
92,902
$
—
$
—
Due after one year through five years
1,026,274
1,002,760
174,734
162,632
Due after five years through ten years
1,432,895
1,363,245
1,152,092
1,063,768
Due after ten years
3,301,449
3,068,464
875,611
811,637
Total debt securities
$
5,853,160
$
5,527,371
$
2,202,437
$
2,038,037
The following table summarizes the carrying value of securities pledged as collateral to secure public funds, borrowings and other purposes as permitted or required by law:
March 31, 2022
(in thousands)
To secure public funds
$
590,026
To secure borrowings
93,557
Other securities pledged
244,917
Total securities pledged as collateral
$
928,500
The following table shows the gross unrealized losses and fair value of the Company’s debt securities available for sale for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates presented:
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
March 31, 2022
(in thousands)
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
2,667,464
$
(181,337)
$
214,390
$
(23,900)
$
2,881,854
$
(205,237)
Other asset-backed securities
277,210
(16,208)
106,449
(10,001)
383,659
(26,209)
State and municipal securities
657,101
(57,012)
77,447
(8,788)
734,548
(65,800)
U.S. government agency and government-sponsored enterprise securities
25,502
(1,249)
118,135
(7,915)
143,637
(9,164)
U.S. government securities
173,342
(9,158)
—
—
173,342
(9,158)
Non-agency collateralized mortgage obligations
359,060
(21,899)
—
—
359,060
(21,899)
Total
$
4,159,679
$
(286,863)
$
516,421
$
(50,604)
$
4,676,100
$
(337,467)
December 31, 2021
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
2,292,062
$
(30,777)
$
176,946
$
(7,315)
$
2,469,008
$
(38,092)
Other asset-backed securities
195,708
(4,823)
117,751
(4,968)
313,459
(9,791)
State and municipal securities
237,354
(3,862)
40,343
(1,076)
277,697
(4,938)
U.S. government agency and government-sponsored enterprise securities
At March 31, 2022, there were 584 U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligation securities in an unrealized loss position. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company concluded an allowance for credit losses is unnecessary at March 31, 2022.
At March 31, 2022, there were 81 other asset-backed securities in an unrealized loss position. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company concluded an allowance for credit losses is unnecessary at March 31, 2022.
At March 31, 2022, there were 433 state and municipal government securities in an unrealized loss position. The unrealized losses on state and municipal securities were caused by interest rate changes or widening of market spreads subsequent to the purchase of the individual securities. Management monitors published credit ratings of these securities for adverse changes. As of March 31, 2022, none of the rated obligations of state and local government entities held by the Company had a below investment grade credit rating. Because the credit quality of these securities are investment grade and the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company concluded an allowance for credit losses is unnecessary at March 31, 2022.
At March 31, 2022, there were 12 U.S. government agency and government-sponsored enterprise securities in an unrealized loss position. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company concluded an allowance for credit losses is unnecessary at March 31, 2022.
At March 31, 2022, there were 10 U.S. government securities in an unrealized loss position. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company concluded an allowance for credit losses is unnecessary at March 31, 2022.
At March 31, 2022, there were 55 non-agency collateralized mortgage obligations in an unrealized loss position. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company concluded an allowance for credit losses is unnecessary at March 31, 2022.
The Company’s loan portfolio includes originated and purchased loans. The following is an analysis of the loan portfolio by segment and class (net of unearned income):
March 31, 2022
December 31, 2021
(dollars in thousands)
Commercial loans:
Commercial real estate
$
5,047,472
$
4,981,263
Commercial business
3,492,307
3,423,268
Agriculture
765,319
795,715
Construction
409,242
384,755
Consumer loans:
One-to-four family residential real estate
1,003,157
1,013,908
Other consumer
42,187
43,028
Total loans
10,759,684
10,641,937
Less: Allowance for credit losses
(146,949)
(155,578)
Total loans, net
$
10,612,735
$
10,486,359
At March 31, 2022 and December 31, 2021, the Company had no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon, Idaho and California.
At March 31, 2022 and December 31, 2021, $3.51 billion and $3.49 billion of commercial and residential real estate loans were pledged as collateral on FHLB advances and additional borrowing capacity. The Company also pledged $200.3 million and $200.5 million of commercial loans to the FRB for additional borrowing capacity at March 31, 2022 and December 31, 2021, respectively.
Accrued interest receivable for loans is included in “Interest receivable” on the Company’s Consolidated Balance Sheet and is not reflected in the balances in the table above. At March 31, 2022 and December 31, 2021, accrued interest receivable for loans was $32.9 million and $32.4 million, respectively. The Company does not measure an allowance for credit losses for accrued interest receivable.
The following is an aging of the recorded investment of the loan portfolio at the dates presented:
Current Loans
30 - 59 Days Past Due
60 - 89 Days Past Due
Greater than 90 Days Past Due
Total Past Due
Nonaccrual Loans
Total Loans
March 31, 2022
(in thousands)
Commercial loans:
Commercial real estate
$
5,045,647
$
886
$
—
$
—
$
886
$
939
$
5,047,472
Commercial business
3,478,768
3,013
325
—
3,338
10,201
3,492,307
Agriculture
755,439
4,332
495
—
4,827
5,053
765,319
Construction
409,242
—
—
—
—
—
409,242
Consumer loans:
One-to-four family residential real estate
1,001,426
495
—
—
495
1,236
1,003,157
Other consumer
42,151
24
—
—
24
12
42,187
Total
$
10,732,673
$
8,750
$
820
$
—
$
9,570
$
17,441
$
10,759,684
Current Loans
30 - 59 Days Past Due
60 - 89 Days Past Due
Greater than 90 Days Past Due
Total Past Due
Nonaccrual Loans
Total Loans
December 31, 2021
(in thousands)
Commercial loans:
Commercial real estate
$
4,977,781
$
—
$
1,610
$
—
$
1,610
$
1,872
$
4,981,263
Commercial business
3,406,539
2,721
687
—
3,408
13,321
3,423,268
Agriculture
789,112
1,207
—
—
1,207
5,396
795,715
Construction
384,755
—
—
—
—
—
384,755
Consumer loans:
One-to-four family residential real estate
1,010,343
921
211
—
1,132
2,433
1,013,908
Other consumer
42,998
11
—
—
11
19
43,028
Total
$
10,611,528
$
4,860
$
2,508
$
—
$
7,368
$
23,041
$
10,641,937
Loan payments are considered timely when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof is received on the due date of the scheduled payment.
Nonaccrual loans are generally loans placed on a nonaccrual basis when they become 90 days past due or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan. The Company’s policy is to write-off all accrued interest on loans when they are placed on nonaccrual status.
The following table summarizes written-off interest on nonaccrual loans for the periods indicated:
Three Months Ended March 31,
2022
2021
(in thousands)
Commercial loans
$
68
$
211
Consumer loans
8
7
Total
$
76
$
218
The following summarizes the amortized cost of nonaccrual loans for which there was no related ACL for the periods indicated:
March 31, 2022
December 31, 2021
(in thousands)
Commercial loans:
Commercial real estate
$
—
$
932
Commercial business
4,418
5,131
Agriculture
3,662
3,756
Consumer loans:
One-to-four family residential real estate
774
—
Total
$
8,854
$
9,819
The following is an analysis of loans classified as TDR for the periods indicated:
Three Months Ended March 31, 2022
Three Months Ended March 31, 2021
Number of TDR Modifications
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
Number of TDR Modifications
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
(dollars in thousands)
Commercial loans:
Commercial real estate
—
$
—
$
—
1
$
628
$
628
Commercial business
—
—
—
7
$
843
$
843
Agriculture
1
633
633
—
—
—
Consumer loans:
One-to-four family residential real estate
—
—
—
2
140
140
Total
1
$
633
$
633
10
$
1,611
$
1,611
The Company’s loans classified as TDR are loans that have been modified or with respect to which the borrower has been granted special concessions due to financial difficulties that, if not for the challenges of the borrower, the Company would not otherwise consider. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended. The concessions granted in the restructurings, summarized in the table above, largely consisted of maturity extensions, interest rate modifications or a combination of both. In limited circumstances, a reduction in the principal balance of the loan could also be made as a concession. Loans classified as TDR are included with the loans collectively measured for credit losses.
The Company had commitments to lend $714 thousand of additional funds on loans classified as TDR as of March 31, 2022. The Company had $1.5 million of such commitments at December 31, 2021. The Company had no loans classified as TDR that defaulted within 12 months of being classified as TDR during the three months ended March 31, 2022 and December 31, 2021.
The Company offered PPP loans to provide financial support to small and medium-size businesses to cover payroll and certain other expenses during the COVID-19 pandemic. The PPP was established by the CARES Act and is implemented by the U.S. SBA with support from the U.S. Department of Treasury. The program, which was amended by the Paycheck Protection Flexibility Act of 2020, provides small businesses with funds to pay up to 24 weeks of payroll costs including benefits, as well as interest on mortgages, rent and utilities. Funds are provided to small businesses in the form of loans that will be fully forgiven when used for permitted purposes and when at least 60% of the funds are used for payroll costs and applicable employment levels are maintained in accordance with the requirements of the amended PPP. At March 31, 2022, we had $83.2 million of PPP loans outstanding, which are included in commercial business loans.
6.Allowance for Credit Losses and Allowance for Unfunded Commitments and Letters of Credit
The ACL is determined through quarterly assessments of the present value of expected future cash flows within the loan portfolio, which, are deducted from the loan’s amortized cost basis to determine the expected credit losses of the loan portfolio. We estimate the ACL using relevant and reliable available information, which is derived from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Additions to and recaptures from the ACL are charged to current period earnings through the provision for credit losses. Loan amounts that are determined to be uncollectible are charged directly against the ACL and netted against amounts recovered on previously charged-off loans.
For the purpose of calculating portfolio level reserves, we have segmented our loan portfolio into two portfolio segments (Commercial and Consumer). The Commercial and Consumer portfolio segments are then further broken down into loan classes by risk characteristics. The risk characteristics include regulatory call codes, type of industry, risk ratings and collateral type.
The ACL is comprised of reserves measured on a collective (pool) basis using a quantitative DCF model for all loan classes with similar risk characteristics and then qualitatively adjusted for large loan concentrations, policy exemptions granted and other factors. The quantitative DCF model utilizes anticipated period cash flows determined on a loan-level basis. The anticipated cash flows take into account contractual principal and interest payments, anticipated segment level prepayments, probability of defaults and historical loss given defaults. The majority of our loan classes utilize regression models to calculate probability of defaults, in which macroeconomic factors are correlated to historical quarterly defaults. The Commercial segment multi-factor models utilize a mix of 15 macroeconomic factors, including the four most commonly used factors: Real GDP, National Unemployment Rate, Disposable Personal Income and Private Inventories. The Consumer segment multi-factor models utilize a mix of three macroeconomic factors: National Unemployment Rate, Home Price Index and Disposable Income. The Company utilizes an 18 month reasonable and supportable forecast for the macroeconomic factors, after which the probability of default reverts to its historical mean using a straight-line basis constructed on each macroeconomic factor’s absolute historical quarterly change.
Loans are individually measured for credit losses if they do not share similar risk characteristics of other loans within their respective pools. Individually measured loans are primarily nonaccrual and collateral dependent with balances equal to or greater than $500,000 and for which the borrower is experiencing financial difficulty such that full satisfaction of the contractual terms of the loan is in question. Commercial real estate loans are secured by commercial real estate, including owner occupied and non-owner occupied commercial real estate, as well as multifamily residential real estate. Commercial business loans are primarily secured by non-real estate collateral, including equipment and other non-real estate fixed assets, inventory, receivables and cash. Agricultural loans are secured by farmland and other agricultural real estate, as well as equipment, inventory, such as crops and livestock, non-real estate fixed assets and cash. Construction loans are secured by one-to-four family residential real estate and commercial real estate in varying stages of development. One-to-four family residential real estate loans are secured by one-to-four family residential properties. Other consumer loans are secured by personal property. For collateral dependent loans, the Company calculates the allowance as the difference between the amortized cost of the loan and the fair market value of the collateral. The fair market value of the collateral is determined by either the discounted expected future cash flows from the operation of the collateral or the appraised value of the collateral, less costs to sell. If the fair value of the collateral is greater than the amortized cost of the loan, no reserve is recorded.
The Company also records an allowance for credit losses on unfunded loan commitments and letters of credit. We estimate expected credit losses on unfunded commitments in which we are exposed to credit risk, unless we have the option to unconditionally cancel the obligation. Expected credit losses are calculated based on the likelihood that funding will occur and an estimate of what will be funded by analyzing the most recent four-quarter utilization rates, current utilization and our quantitative ACL rate. The allowance for unfunded commitments and letters of credit is included in “Other Liabilities” on the Consolidated Balance Sheets, with changes to the balance being charged to noninterest expense.
We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written-off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status.
The following tables show a detailed analysis of the ACL for the periods indicated:
Beginning Balance
Charge-offs
Recoveries
Provision (Recapture)
Ending Balance
Three Months Ended March 31, 2022
(in thousands)
Commercial loans:
Commercial real estate
$
61,254
$
—
$
14
$
(3,961)
$
57,307
Commercial business
54,712
(1,632)
291
(2,897)
50,474
Agriculture
8,148
(23)
125
(240)
8,010
Construction
5,397
—
8
(6)
5,399
Consumer loans:
One-to-four family residential real estate
24,123
—
294
(61)
24,356
Other consumer
1,944
(246)
340
(635)
1,403
Total
$
155,578
$
(1,901)
$
1,072
$
(7,800)
$
146,949
Beginning Balance
Charge-offs
Recoveries
Provision (Recapture)
Ending Balance
Three Months Ended March 31, 2021
(in thousands)
Commercial loans:
Commercial real estate
$
68,934
$
—
$
36
$
(11,920)
$
57,050
Commercial business
45,250
(3,339)
3,214
13,280
58,405
Agriculture
9,052
—
12
423
9,487
Construction
7,636
—
46
(1,131)
6,551
Consumer loans:
One-to-four family residential real estate
16,875
—
51
(1,288)
15,638
Other consumer
1,393
(127)
61
(164)
1,163
Total
$
149,140
$
(3,466)
$
3,420
$
(800)
$
148,294
The $8.6 million decrease in the ACL at March 31, 2022 compared to the ACL at December 31, 2021 was primarily due to significant improvements in portfolio risk ratings. Additionally, problem loans decreased during the quarter and their percentage within the portfolio is now near pre-pandemic levels. Specifically regarding the forecast used in the March 31, 2022 estimate, management expects the forecasted national unemployment rate to be near pre-pandemic levels throughout the forecast period. Additionally, the commercial real estate index is expected to grow more slowly throughout the year. The home price index is projected to moderate over the forecast period and real GDP growth is projected to slow in 2022. The models used for calculating the ACL are sensitive to changes in these and other economic factors, which could result in volatility as these assumptions change over time. The ACL at March 31, 2022 does not include a reserve for the PPP loans as these loans are fully guaranteed by the SBA.
Changes in the allowance for unfunded commitments and letters of credit, a component of “Other liabilities” in the Consolidated Balance Sheets, are summarized as follows:
Three Months Ended March 31,
2022
2021
(in thousands)
Beginning balance
$
8,500
$
8,300
Net changes in the allowance for unfunded commitments and letters of credit
The extension of credit in the form of loans or other credit products to consumer and commercial clients is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
We evaluate the credit quality of our loan portfolio using regulatory risk ratings, which are based on relevant information about the borrower’s financial condition, including current financial condition, historical payment experience, credit documentation and current economic trends. Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of the loss on the loan increases. All loans risk rated special mention or worse with amortized costs exceeding $250 thousand are reviewed at least quarterly with more frequent review for specific loans.
Pass rated loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. Special Mention rated loans have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans with a risk rating of Substandard or worse are reviewed to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating or accrual status may be adjusted accordingly. Loans risk rated as Substandard reflect loans where a loss is possible if loan weaknesses are not corrected. Doubtful rated loans have a high probability of loss; however, the amount of loss has not yet been determined. Loss rated loans are considered uncollectible and when identified, are charged-off.
The following tables set forth activity in OREO for the periods indicated:
Three Months Ended March 31,
2022
2021
(in thousands)
Balance, beginning of period
$
381
$
553
Proceeds from sale of OREO property
—
(132)
Gain on sale of OREO, net
—
100
Balance, end of period
$
381
$
521
At March 31, 2022, there were no foreclosed residential real estate properties held as OREO. Additionally, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.
8.Goodwill and Other Intangible Assets
Goodwill is not amortized but is reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis on July 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of July 31, 2021 and concluded that there was no impairment.
Our CDIs are evaluated for impairment if events and circumstances indicate a possible impairment. Each CDI is amortized on an accelerated basis over an estimated life of 10 years.
The following table sets forth activity for goodwill and other intangible assets for the periods indicated:
Three Months Ended March 31,
2022
2021
(in thousands)
Goodwill
Total goodwill
$
823,172
$
765,842
Other intangible assets, net
CDI:
Gross CDI balance at beginning of period (1)
88,931
105,473
Accumulated amortization at beginning of period
(55,203)
(79,658)
CDI, net at beginning of period
33,728
25,815
CDI current period amortization
(2,288)
(1,924)
Total CDI, net at end of period
31,440
23,891
Intangible assets not subject to amortization
919
919
Other intangible assets, net at end of period
32,359
24,810
Total goodwill and other intangible assets at end of period
$
855,531
$
790,652
__________
(1) For the three months ended March 31, 2022, the gross CDI balance, beginning of period excludes fully amortized amounts. Prior period column has not been adjusted.
The following table provides the estimated future amortization expense of our CDI for the remaining nine months ending December 31, 2022 and the succeeding four years:
Year ending December 31,
(in thousands)
2022
$
6,410
2023
7,082
2024
5,673
2025
4,366
2026
3,225
9.Revolving Line of Credit
The Company has a $15.0 million short-term credit facility with an unaffiliated bank, for which the term was extended through May 26, 2022 as a result of an amendment executed during the second quarter of 2021. This facility has a variable interest rate and provides the Company additional liquidity, if needed, for various corporate activities including the repurchase of shares of Columbia Banking System, Inc. common stock. There was no outstanding balance at both March 31, 2022 and December 31, 2021. The credit agreement requires the Company to comply with certain covenants including those related to asset quality and capital levels. The Company was in compliance with all covenants associated with this facility at March 31, 2022.
10.Derivatives, Hedging Activities and Balance Sheet Offsetting
The Company is exposed to certain risks arising from both its business and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities as well as the use of derivative financial instruments. Specifically, the Company enters into interest rate-based derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio.
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company used an interest rate collar as part of its interest rate risk management strategy. Interest rate collars designated as cash flow hedges involve the payments of variable-rate amounts if interest rates rise above the cap strike rate on the contract and receipts of variable-rate amounts if interest rates fall below the floor strike rate on the contract. These derivative contracts were used to hedge the variable cash flows associated with existing variable-rate assets.
With respect to derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives are reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During the next 12 months, the Company estimates that there will be $10.4 million reclassified as an increase to interest income.
The Company may use derivatives to hedge the risk or changes in the fair values of interest rate lock commitments and residential mortgage loans held for sale. These derivatives are not designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes interest rate forward loan sales contracts in its derivative risk management strategy.
The Company enters into forward delivery contracts to sell residential mortgage loans to broker-dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts during the three months ended March 31, 2022 and 2021. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker-dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker-dealer equal to the increase or decrease in the market value of the forward contract. At March 31, 2022 and December 31, 2021, the Bank had commitments to originate mortgage loans held for sale totaling $24.1 million and $21.8 million, respectively, and forward sales commitments of $20.5 million and $18.5 million, respectively, which are used to hedge both on-balance sheet and off-balance sheet exposures.
In addition, the Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at March 31, 2022 and December 31, 2021 was $543.8 million and $570.2 million, respectively.
The following table presents the fair value of derivatives, as well as their classification on the Consolidated Balance Sheet as of the dates presented:
Asset Derivatives
Liability Derivatives
March 31, 2022
December 31, 2021
March 31, 2022
December 31, 2021
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
(in thousands)
Derivatives not designated as hedging instruments:
Interest rate lock commitments
Other assets
$
36
Other assets
$
356
Other liabilities
$
—
Other liabilities
$
—
Interest rate forward loan sales contracts
Other assets
$
313
Other assets
$
—
Other liabilities
$
—
Other liabilities
$
27
Interest rate swap contracts
Other assets
$
16,784
Other assets
$
24,257
Other liabilities
$
16,784
Other liabilities
$
24,257
The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income (loss) for the periods indicated:
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Three Months Ended March 31,
2022
2021
(in thousands)
Interest rate collar
Interest income
$
2,575
$
2,576
In January 2019, the Company entered into a $500.0 million notional interest rate collar with a five-year term. In October 2020, the collar was terminated and resulted in a $34.4 million realized gain that was recorded in accumulated other comprehensive income, net of deferred income taxes. The gain will amortize through February 2024 into interest income. The gain will be amortized in this manner as long as the cash flows pertaining to the hedged item are expected to occur.
The following table summarizes the types of derivatives not designated as hedging instruments and the gains (losses) recorded during the periods indicated:
Three Months Ended March 31,
2022
2021
(in thousands)
Interest rate lock commitments
$
(319)
$
(171)
Interest rate forward loan sales contracts
340
670
Interest rate swap contracts
—
112
Total derivative gains (losses)
$
21
$
611
The gains and losses on the Company’s mortgage banking derivatives are included in loan revenue. Mark-to-market gains and losses on the Company’s interest rate swap contracts are recorded to “Other” noninterest expense.
The Company is party to interest rate swap contracts and repurchase agreements that are subject to enforceable master netting arrangements or similar agreements. Under these agreements, the Company may have the right to net settle multiple contracts with the same counterparty.
The following tables show the gross interest rate swap contracts, collar agreements and repurchase agreements in the Consolidated Balance Sheets and the respective collateral received or pledged in the form of cash or other financial instruments. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability. Therefore, instances of over-collateralization are not shown.
Gross Amounts of Recognized Assets/Liabilities
Gross Amounts Offset in the Consolidated Balance Sheets
Net Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheets
Gross Amounts Not Offset in the Consolidated Balance Sheets
Collateral Pledged/Received
Net Amount
March 31, 2022
(in thousands)
Assets
Interest rate swap contracts
$
16,784
$
—
$
16,784
$
(9,940)
$
6,844
Liabilities
Interest rate swap contracts
$
16,784
$
—
$
16,784
$
(180)
$
16,604
Repurchase agreements
$
44,212
$
—
$
44,212
$
(44,212)
$
—
December 31, 2021
Assets
Interest rate swap contracts
$
24,257
$
—
$
24,257
$
(450)
$
23,807
Liabilities
Interest rate swap contracts
$
24,257
$
—
$
24,257
$
(20,747)
$
3,510
Repurchase agreements
$
86,013
$
—
$
86,013
$
(86,013)
$
—
The Company’s agreements with each of its derivative counterparties provide that if the Company defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:
Remaining contractual maturity of the agreements
Overnight and continuous
Up to 30 days
30 - 90 days
Greater than 90 days
Total
March 31, 2022
(in thousands)
Class of collateral pledged for repurchase agreements
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
44,212
$
—
$
—
$
—
$
44,212
Gross amount of recognized liabilities for repurchase agreements
44,212
Amounts related to agreements not included in offsetting disclosure
$
—
The collateral utilized for the Company’s repurchase agreements is subject to market fluctuations as well as prepayments of principal. The Company monitors the risk of the fair value of its pledged collateral falling below acceptable amounts based on the type of the underlying repurchase agreement. The pledged collateral related to the Company’s $44.2 million sweep repurchase agreements, which mature on an overnight basis, is monitored on a daily basis as the underlying sweep accounts can have frequent transaction activity and the amount of pledged collateral is adjusted as necessary.
11.Commitments and Contingent Liabilities
Lease Commitments: The Company’s lease commitments consist primarily of leased locations under various non-cancellable operating leases that expire between 2022 and 2043. The majority of the leases contain renewal options and provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule.
Financial Instruments with Off-Balance Sheet Risk: In the normal course of business, the Company makes loan commitments (typically unfunded loans and unused lines of credit) and issues standby letters of credit to accommodate the financial needs of its customers. At March 31, 2022 and December 31, 2021, the Company’s loan commitments amounted to $3.64 billion and $3.50 billion, respectively.
Standby letters of credit commit the Company to make payments on behalf of customers under specified conditions. Historically, no significant losses have been incurred by the Company under standby letters of credit. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies, including collateral requirements, where appropriate. Standby letters of credit were $35.6 million and $36.0 million at March 31, 2022 and December 31, 2021, respectively.
Legal Proceedings: The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
12.Shareholders’ Equity
Dividends:
The following table summarizes year-to-date dividend activity:
Declared
Regular Cash Dividends Per Common Share
Record Date
Paid Date
January 19, 2022
$
0.30
February 2, 2022
February 16, 2022
The payment of cash dividends is subject to federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both federal and state regulatory requirements.
Subsequent to quarter end, on April 21, 2022, the Company declared a regular quarterly cash dividend of $0.30 per common share payable on May 18, 2022 to shareholders of record at the close of business on May 4, 2022.
The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Fair values are determined as follows:
Debt securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all debt securities.
Loans held for sale include the fair value of residential mortgage loans originated as held for sale determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in the fair value of the related servicing asset, resulting in revaluation adjustments to the recorded fair value.
The fair values of the interest rate lock commitments and interest rate forward loan sales contracts are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3.
Interest rate contracts and the interest rate collar are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.
The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at the dates presented by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
Fair Value
Fair Value Measurements at Reporting Date Using
Level 1
Level 2
Level 3
March 31, 2022
(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations
$
3,407,654
$
—
$
3,407,654
$
—
Other asset-backed securities
408,047
—
408,047
—
State and municipal securities
938,965
—
938,965
—
U.S. government agency and government-sponsored enterprise securities
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations
$
3,745,601
$
—
$
3,745,601
$
—
Other asset-backed securities
463,063
—
463,063
—
State and municipal securities
997,291
—
997,291
—
U.S. government agency and government-sponsored enterprise securities
252,576
—
252,576
—
U.S. government securities
157,536
157,536
—
—
Non-agency collateralized mortgage
294,932
—
294,932
—
Total debt securities available for sale
$
5,910,999
$
157,536
$
5,753,463
$
—
Loans held for sale
$
9,570
$
—
$
9,570
$
—
Other assets:
Interest rate lock commitments
$
356
$
—
$
—
$
356
Interest rate contracts
$
24,257
$
—
$
24,257
$
—
Liabilities
Other liabilities:
Interest rate forward loan sales contracts
$
27
$
—
$
27
$
—
Interest rate contracts
$
24,257
$
—
$
24,257
$
—
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table provides a description of the valuation technique, significant unobservable inputs and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at the dates presented:
Fair Value at March 31, 2022
Valuation Technique
Unobservable Input
Range (Weighted Average)
(dollars in thousands)
Interest rate lock commitments
$
36
Internal pricing model
Pull-through rate
77.94% - 100.00%
(94.64%)
Fair Value at March 31, 2021
Valuation Technique
Unobservable Input
Range (Weighted Average)
(dollars in thousands)
Interest rate lock commitments
$
925
Internal pricing model
Pull-through rate
79.87% - 100.00%
(90.39%)
An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).
The following table includes a rollforward of interest rate lock commitments which utilize Level 3 inputs to determine the fair value on a recurring basis.
Three Months Ended March 31,
2022
2021
(in thousands)
Balance at the beginning of the period
$
356
$
1,096
Change included in earnings
(19)
1,710
Settlements
(301)
(1,881)
Balance at the end of the period
$
36
$
925
Nonrecurring Measurements
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as collateral dependent loans. The following valuation techniques and inputs were used to estimate the fair value of collateral dependent loans.
Collateral dependent loans - A collateral dependent loan is a loan in which repayment is expected to be provided solely by the underlying collateral. The fair market value of the collateral is determined by either the discounted expected future cash flows from the operation of the collateral or the appraised value of the collateral, less costs to sell. The collateral dependent loan valuations are performed in conjunction with the allowance for credit losses process on a quarterly basis.
The following tables set forth information related to the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the current and prior year quarterly periods:
Fair Value at
Fair Value Measurements at Reporting Date Using
Gains (Losses) During the Three Months Ended March 31, 2022
March 31, 2022
Level 1
Level 2
Level 3
(in thousands)
Collateral dependent loans
$
2,262
$
—
$
—
$
2,262
$
(1,465)
Fair Value at
Fair Value Measurements at Reporting Date Using
Gains (Losses) During the Three Months Ended March 31, 2021
March 31, 2021
Level 1
Level 2
Level 3
(in thousands)
Collateral dependent loans
$
1,520
$
—
$
—
$
1,520
$
722
The gains (losses) on collateral dependent loans disclosed above represent the amount of the allowance or provision recapture for credit losses and/or charge-offs during the period applicable to loans held at period-end. The amount of the allowance is included in the ACL.
Quantitative information about Level 3 fair value measurements
The range and weighted average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:
Fair Value at March 31, 2022
Valuation Technique
Unobservable Input
Range (Weighted Average)
(dollars in thousands)
Collateral dependent loans (2)
$
2,262
Fair Market Value of Collateral
Adjustment to Stated Value
N/A (1)
__________
(1) Quantitative disclosures are not provided because there were no adjustments made to the appraisal value during the current period.
(2) Collateral consists of equipment and real estate.
Fair Value at March 31, 2021
Valuation Technique
Unobservable Input
Range (Weighted Average) (1)
(dollars in thousands)
Collateral dependent loans (2)
$
1,520
Fair Market Value of Collateral
Adjustment to Stated Value
42.96% - 75.00% (59.53%)
__________
(1) Discount applied to appraised value or stated value (in the case of accounts receivable and fixed assets).
(2) Collateral consists of accounts receivable and fixed assets.
The following tables summarize carrying amounts and estimated fair values of selected financial instruments by level within the fair value hierarchy at the dates presented:
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale sold under the mandatory delivery method and accounted for under the fair value option as of the dates presented:
March 31, 2022
December 31, 2021
Fair Value
Aggregate Unpaid Principal Balance
Fair Value Less Aggregate Unpaid Principal Balance
Fair Value
Aggregate Unpaid Principal Balance
Fair Value Less Aggregate Unpaid Principal Balance
(in thousands)
$
4,267
$
4,295
$
(28)
$
9,570
$
9,401
$
169
Residential mortgage loans held for sale that are sold under the mandatory delivery method and accounted for under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are reported in loan revenue. For the three months ended March 31, 2022 and 2021, the Company recorded net decreases in fair value of $197 thousand and $88 thousand, respectively, representing the change in fair value reflected in earnings. At March 31, 2022 and December 31, 2021, there were no residential mortgage loans held for sale for which the fair value option was elected that were 90 days or more past due, in nonaccrual status or both.
15.Earnings Per Common Share
The Company applies the two-class method of computing basic and diluted EPS. Under the two-class method, EPS is determined for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.
The following table sets forth the computation of basic and diluted EPS for the periods presented:
Three Months Ended
March 31,
2022
2021
(in thousands except per share amounts)
Basic EPS:
Net income
$
57,522
$
51,853
Less: Earnings allocated to participating securities:
Nonvested restricted shares
46
155
Earnings allocated to common shareholders
$
57,476
$
51,698
Weighted average common shares outstanding
77,925
70,869
Basic earnings per common share
$
0.74
$
0.73
Diluted EPS:
Earnings allocated to common shareholders
$
57,476
$
51,698
Weighted average common shares outstanding
77,925
70,869
Dilutive effect of equity awards
158
240
Weighted average diluted common shares outstanding
78,083
71,109
Diluted earnings per common share
$
0.74
$
0.73
Potentially dilutive RSAs and RSUs that were not included in the computation of diluted EPS because to do so would be anti-dilutive
The following table shows the disaggregation of revenue from contracts with customers for the periods presented:
Three Months Ended March 31,
2022
2021
(in thousands)
Noninterest income:
Revenue from contracts with customers:
Deposit account and treasury management fees
$
7,113
$
6,358
Card revenue
4,967
3,733
Financial services and trust revenue
4,632
3,381
Total revenue from contracts with customers
16,712
13,472
Other sources of noninterest income
7,468
9,694
Total noninterest income
$
24,180
$
23,166
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited Consolidated Financial Statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, “Columbia” and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2021 audited Consolidated Financial Statements and its accompanying notes included in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.
This quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature, as well as the continuing effects of the COVID-19 pandemic on the Company’s business, operations, financial performance and prospects. Forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the factors set forth in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, the following factors, among others, could cause actual results to differ materially from the anticipated results expressed or implied by forward-looking statements:
•national and global economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth and maintain the quality of our earning assets;
•the markets where we operate and make loans could face challenges;
•the risks presented by the economy, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
•continued increases in inflation and the risk that inflation may differ, possibly materially, from expectations, and actions taken by the Federal Reserve in response to inflation and their potential impact on economic conditions;
•risks related to the proposed merger with Umpqua including, among others, (i) failure to complete the merger with Umpqua or unexpected delays related to the merger or either party’s inability to obtain regulatory approvals or satisfy other closing conditions required to complete the merger, (ii) regulatory approvals resulting in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction, (iii) certain restrictions during the pendency of the proposed transaction with Umpqua that may impact the parties’ ability to pursue certain business opportunities or strategic transactions, (iv) diversion of management’s attention from ongoing business operations and opportunities, (v) cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized, (vi) the integration of each party’s management, personnel and operations will not be successfully achieved or may be materially delayed or will be more costly or difficult than expected, (vii) deposit attrition, customer or employee loss and/or revenue loss as a result of the announcement of the proposed merger, (viii) expenses related to the proposed merger being greater than expected, and (ix) shareholder litigation that may prevent or delay the closing of the proposed merger or otherwise negatively impact the Company’s business and operations;
•the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions (including the recent acquisition of Bank of Commerce) and infrastructure may not be realized;
•the ability to successfully integrate Bank of Commerce, or to integrate future acquired entities;
•interest rate changes could significantly reduce net interest income and negatively affect asset yields and funding sources;
•the effect of the discontinuation or replacement of LIBOR;
•results of operations following strategic expansion, including the impact of acquired loans on our earnings, could differ from expectations;
•changes in the scope and cost of FDIC insurance and other coverages;
•changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies could materially affect our financial statements and how we report those results, and expectations and preliminary analysis relating to how such changes will affect our financial results could prove incorrect;
•changes in laws and regulations affecting our businesses, including changes in the enforcement and interpretation of such laws and regulations by applicable governmental and regulatory agencies;
•increased competition among financial institutions and nontraditional providers of financial services;
•continued consolidation in the financial services industry resulting in the creation of larger financial institutions that have greater resources could change the competitive landscape;
•the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;
•our ability to identify and address cyber-security risks, including security breaches, “denial of service attacks,” “hacking” and identity theft;
•any material failure or interruption of our information and communications systems;
•inability to keep pace with technological changes;
•our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk;
•failure to maintain effective internal control over financial reporting or disclosure controls and procedures;
•the effect of geopolitical instability, including wars, conflicts and terrorist attacks, including the impacts of Russia’s invasion of Ukraine;
•our profitability measures could be adversely affected if we are unable to effectively manage our capital;
•the risks from climate change and its potential to disrupt our business and adversely impact the operations and creditworthiness of our customers;
•natural disasters, including earthquakes, tsunamis, flooding, fires and other unexpected events;
•the effect of COVID-19 and other infectious illness outbreaks that may arise in the future, which has created significant impacts and uncertainties in U.S. and global markets;
•changes in governmental policy and regulation, including measures taken in response to economic, business, political and social conditions, including with regard to COVID-19; and
•the effects of any damage to our reputation resulting from developments related to any of the items identified above.
You should take into account that forward-looking statements speak only as of the date of this report. Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under federal securities laws.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the accounting policies related to the ACL, business combinations and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Allowance for Credit Losses,” “Business Combinations” and “Valuation and Recoverability of Goodwill” in our 2021 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies and estimates as compared to those disclosed in our 2021 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income from our broad range of products and services including treasury management, wealth management and debit and credit cards. Our operating expenses consist primarily of compensation and employee benefits, occupancy, data processing and software and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
In November 2020, the SEC issued Final Rule 33-10890, Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information, which modernizes and simplifies certain disclosure requirements of Regulation S-K. One update to Item 303 of Regulation S-K allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year. We have adopted this change, as management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison. Additionally, in the first filing after the adoption of this rule change, we are required to disclose a comparison of the results for the current quarter and the corresponding quarter of the preceding fiscal year. Accordingly, we have compared the results for the three months ended March 31, 2022, December 31, 2021 and March 31, 2021, where applicable throughout this Management’s Discussion and Analysis.
Earnings Summary
Comparison of current quarter to prior quarter
The Company reported net income for the first quarter of $57.5 million or $0.74 per diluted common share, compared to $42.9 million or $0.55 per diluted common share for the fourth quarter of 2021. Net interest income for the three months ended March 31, 2022 was $146.2 million, an increase of $677 thousand from the prior quarter. The increase was primarily a result of higher interest income related to increased yield for the securities portfolio substantially driven by lower premium amortization.
The Company recorded a $7.8 million recapture for credit losses for the first quarter of 2022 compared to a net provision of $11.1 million for the fourth quarter of 2021. The decrease in provision expense for the first quarter of 2022 as compared to the fourth quarter of 2021 was primarily related to improved credit quality. The prior quarter’s net provision was recorded primarily due to the initial allowance for non-PCD loans acquired in the Bank of Commerce acquisition.
Noninterest income for the current quarter was $24.2 million, a decrease of $60 thousand from the prior quarter. The decrease was largely due to lower loan fees and mortgage banking revenue partially offset by financial services and trust revenue and other noninterest income including a gain on the sale of loans of $868 thousand for the current quarter.
Total noninterest expense for the quarter ended March 31, 2022 was $105.1 million, an increase of $2.4 million from the prior quarter. Acquisition-related expenses in the current quarter were $7.1 million compared to $11.8 million for the prior quarter. Taking this into consideration, the largest contributor to the increase in noninterest expense for the current quarter is related to compensation and employee benefits that can be attributed to higher 401k and payroll tax expenses, which are typically elevated in the first quarter. The increase was also attributable to a $500 thousand provision for unfunded loan commitments recorded in the current quarter compared to a $2.0 million recapture recorded in the prior quarter. Higher data processing and software expenses partially offset by lower professional services expense were also drivers of the current quarter increase.
Comparison of current quarter to prior year period
The Company reported net income for the first quarter of $57.5 million or $0.74 per diluted common share, compared to $51.9 million or $0.73 per diluted common share for the first quarter of 2021. Net interest income for the three months ended March 31, 2022 was $146.2 million, an increase of $22.2 million from the prior year period. The increase was primarily due to increases in interest income from loans and securities, which were a result of higher average balances partially related to the Bank of Commerce acquisition.
The Company recorded a $7.8 million recapture for credit losses for the first quarter of 2022 compared to a provision recapture of $800 thousand for the first quarter of 2021. The increase in net provision recapture for the first quarter of 2022 compared to the first quarter of 2021 was principally the result of improved credit quality.
Noninterest income for the current quarter was $24.2 million, an increase of $1.0 million from the prior year period. The increase was largely due to increases associated with other noninterest income, financial services and trust revenue and card revenue offset by lower mortgage banking revenue due to lower overall mortgage production and decreased premium on loan sales as a result of the higher rate environment.
Total noninterest expense for the quarter ended March 31, 2022 was $105.1 million, an increase of $21.5 million from the prior year period. This increase was primarily driven by higher compensation and employee benefits due to our acquisition of Bank of Commerce in the fourth quarter of 2021 and the prior year period having substantial labor costs capitalized for PPP loan originations. Increased acquisition-related expenses related to legal and professional fees, occupancy and data processing and software also contributed to the increase from the prior year period.
The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average cost of interest-bearing liabilities by category and, in total, net interest income and net interest margin:
Three Months Ended
March 31, 2022
December 31, 2021
March 31, 2021
Average Balances
Interest Earned / Paid
Average Rate
Average Balances
Interest Earned / Paid
Average Rate
Average Balances
Interest Earned / Paid
Average Rate
(dollars in thousands)
ASSETS
Loans, net (1)(2)
$
10,665,242
$
108,181
4.11
%
$
10,545,172
$
111,709
4.20
%
$
9,586,984
$
101,477
4.29
%
Taxable securities
7,217,844
37,162
2.09
%
$
6,934,477
$
33,654
1.93
%
4,624,175
22,816
2.00
%
Tax exempt securities (2)
792,763
4,715
2.41
%
$
759,182
$
4,364
2.28
%
606,129
3,492
2.34
%
Interest-earning deposits with banks
590,795
295
0.20
%
$
947,567
$
360
0.15
%
602,083
152
0.10
%
Total interest-earning assets
19,266,644
150,353
3.16
%
$
19,186,398
$
150,087
3.10
%
15,419,371
127,937
3.36
%
Other earning assets
302,865
$
276,828
242,684
Noninterest-earning assets
1,386,157
$
1,394,757
1,229,627
Total assets
$
20,955,666
$
20,857,983
$
16,891,682
LIABILITIES AND SHAREHOLDERS’ EQUITY
Money market accounts
4,530,698
960
0.09
%
4,339,959
951
0.09
%
3,450,750
699
0.08
%
Interest-bearing demand
2,024,757
374
0.07
%
1,967,559
376
0.08
%
1,449,642
265
0.07
%
Savings accounts
1,632,369
77
0.02
%
1,593,434
78
0.02
%
1,221,431
40
0.01
%
Interest-bearing public funds, other than certificates of deposit
776,965
288
0.15
%
787,395
252
0.13
%
663,158
276
0.17
%
Certificates of deposit
437,251
97
0.09
%
458,837
150
0.13
%
336,319
205
0.25
%
Total interest-bearing deposits
9,402,040
1,796
0.08
%
9,147,184
1,807
0.08
%
7,121,300
1,485
0.08
%
FHLB advances and FRB borrowings
7,354
71
3.92
%
7,368
74
3.98
%
7,408
72
3.94
%
Subordinated debentures
10,000
144
5.84
%
43,859
561
5.07
%
35,072
468
5.41
%
Other borrowings and interest-bearing liabilities
76,185
74
0.39
%
56,803
71
0.50
%
53,691
23
0.17
%
Total interest-bearing liabilities
9,495,579
2,085
0.09
%
9,255,214
2,513
0.11
%
7,217,471
2,048
0.12
%
Noninterest-bearing deposits
8,695,832
8,788,127
7,091,316
Other noninterest-bearing liabilities
228,879
230,532
236,302
Shareholders’ equity
2,535,376
2,584,110
2,346,593
Total liabilities & shareholders’ equity
$
20,955,666
$
20,857,983
$
16,891,682
Net interest income (tax equivalent)
$
148,268
$
147,574
$
125,889
Net interest margin (tax equivalent)
3.12
%
3.05
%
3.31
%
__________
(1)Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $4.2 million, $6.2 million and $8.3 million for the three months ended March 31, 2022, December 31, 2021 and March 31, 2021, respectively. The net incremental amortization on acquired loans was $350 thousand for the three months ended March 31, 2022 compared to net incremental accretion of $16 thousand and $1.1 million for the three months ended December 31, 2021 and March 31, 2021, respectively.
(2)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $1.1 million for both the three months ended March 31, 2022 and December 31, 2021 and $1.2 million for the three months ended March 31, 2021. The tax equivalent yield adjustment to interest earned on tax exempt securities was $990 thousand, $917 thousand and $733 thousand for the three months ended March 31, 2022, December 31, 2021 and March 31, 2021, respectively.
The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
Three Months Ended March 31, 2022 Compared to December 31, 2021
Three Months Ended March 31, 2022 Compared to March 31, 2021
Increase (Decrease) Due to
Increase (Decrease) Due to
Volume
Rate
Total (1)
Volume
Rate
Total (1)
(in thousands)
Interest Income
Loans, net
$
1,260
$
(4,788)
$
(3,528)
$
11,065
$
(4,361)
$
6,704
Taxable securities
1,409
2,099
3,508
13,314
1,032
14,346
Tax exempt securities
197
154
351
1,107
116
1,223
Interest-earning deposits with banks
(159)
94
(65)
(3)
146
143
Interest income
$
2,707
$
(2,441)
$
266
$
25,483
$
(3,067)
$
22,416
Interest Expense
Deposits:
Money market accounts
$
41
$
(32)
$
9
$
228
$
33
$
261
Interest-bearing demand
11
(13)
(2)
106
3
109
Savings accounts
2
(3)
(1)
15
22
37
Interest-bearing public funds, other than certificates of deposit
(3)
39
36
44
(32)
12
Certificates of deposit
(6)
(47)
(53)
50
(158)
(108)
Total interest on deposits
45
(56)
(11)
443
(132)
311
FHLB advances and FRB borrowings
—
(3)
(3)
(1)
—
(1)
Subordinated debentures
(498)
81
(417)
(364)
40
(324)
Other borrowings and interest-bearing liabilities
9
(6)
3
13
38
51
Interest expense
$
(444)
$
16
$
(428)
$
91
$
(54)
$
37
__________
(1)The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amount of the change in each.
Comparison of current quarter to prior quarter
Net interest income for the first quarter of 2022 was $146.2 million, up from $145.5 million for the fourth quarter in 2021. The increase was mainly due to higher interest income related to increased yield on the securities portfolio substantially driven by lower premium amortization partially offset by lower yield on the loan portfolio. Also contributing was lower interest expense as a result of the $35.0 million repayment of subordinated debentures in the prior quarter.
The Company’s net interest margin (tax equivalent) increased to 3.12% in the first quarter of 2022, from 3.05% for the prior quarter. This increase was driven by higher yields on securities driven by substantially lower premium amortization partially offset by lower yield on the loan portfolio. A stronger earning assets mix with a lower ratio of low-yield interest-earning deposits with banks was also a contributing factor to the improved net interest margin. The Company’s operating net interest margin (tax equivalent)1 increased to 3.15% from 3.08% compared to the fourth quarter of 2021. The increase was also due to higher yields on securities and a stronger earnings mix as noted above.
Comparison of current quarter to prior year period
Net interest income for the first quarter of 2022 was $146.2 million, up from $124.0 million for the same quarter in 2021. The increase was mainly due to an increase in interest income from loans and securities due to higher average balances partially related to the Bank of Commerce acquisition.
1Operating net interest margin (tax equivalent) is a non-GAAP financial measure. See the “Non-GAAP financial measures” section in this Management’s Discussion and Analysis.
The Company’s net interest margin (tax equivalent) decreased to 3.12% in the first quarter of 2022, from 3.31% for the prior year period. This decrease was driven by lower average rates on loans. The Company’s operating net interest margin (tax equivalent) decreased to 3.15% from 3.30% compared to the first quarter of 2021, which was also due to lower average rates on loans.
Provision for Credit Losses
Comparison of current quarter to prior quarter
During the first quarter of 2022, the Company recorded a $7.8 million recapture for credit losses for the first quarter of 2022 compared to a net provision of $11.1 million for the fourth quarter of 2021. The decrease in provision expense for the first quarter of 2022 as compared to the fourth quarter of 2021 was related to improved credit quality. The prior quarter’s net provision was recorded due to the initial allowance for non-PCD loans acquired in the Bank of Commerce acquisition.
Comparison of current quarter to prior year period
During the first quarter of 2022, the Company recorded a $7.8 million recapture for credit losses compared to an $800 thousand net provision recapture during the first quarter of 2021. This was principally the result of credit quality improvement.
The net provision recapture for credit losses recorded during the current quarter also reflected management’s ongoing assessment of the credit quality of the Company’s loan portfolio. Other factors affecting the provision include net charge-offs, credit quality migration and the size and composition of the loan portfolio and changes in the economic environment during the first quarter of 2022. The amount of provision was calculated in accordance with the Company’s methodology for determining the ACL, discussed in Note 6 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
Three Months Ended
Prior Quarter
Prior Year Period
March 31, 2022
December 31, 2021
March 31, 2021
$ Change
% Change
$ Change
% Change
(dollars in thousands)
Deposit account and treasury management fees
$
7,113
$
7,155
$
6,358
$
(42)
(1)
%
$
755
12
%
Card revenue
4,967
5,108
3,733
(141)
(3)
%
1,234
33
%
Financial services and trust revenue
4,632
3,877
3,381
755
19
%
1,251
37
%
Loan revenue
3,193
4,977
7,369
(1,784)
(36)
%
(4,176)
(57)
%
Bank owned life insurance
1,788
1,753
1,560
35
2
%
228
15
%
Other
2,487
1,370
765
1,117
82
%
1,722
225
%
Total noninterest income
$
24,180
$
24,240
$
23,166
$
(60)
—
%
$
1,014
4
%
Comparison of current quarter to prior quarter
Noninterest income was $24.2 million for the first quarter of 2022, a decrease of $60 thousand from the prior quarter. This decrease was due to lower loan fees and mortgage banking revenue partially offset by higher financial services and trust revenue and other noninterest income including a gain on the sale of loans of $868 thousand in the current quarter.
Comparison of current quarter to prior year period
Noninterest income was $24.2 million for the first quarter of 2022, compared to $23.2 million for the same period in 2021. The increase was primarily due to increases associated with other noninterest income, financial services and trust revenue and card revenue offset by lower mortgage banking revenue due to lower overall mortgage production and decreased premium on loan sales as a result of the higher rate environment.
Noninterest expense was $105.1 million for the first quarter of 2022, an increase of $2.4 million from $102.6 million for the prior quarter. Acquisition-related expenses in the current quarter were $7.1 million compared to $11.8 million for the prior quarter. Taking this into consideration, the largest contributor to the increase in noninterest expense for the current quarter is related to compensation and employee benefits that can be attributed to higher 401k and payroll tax expenses, which are typically elevated in the first quarter. The increase was also attributable to a $500 thousand provision for unfunded loan commitments recorded in the current quarter compared to a $2.0 million recapture recorded in the prior quarter. Higher data processing and software expenses partially offset by lower professional services expense were also drivers of the current quarter increase.
Comparison of current quarter to prior year period
Noninterest expense was $105.1 million for the first quarter of 2022, an increase of $21.5 million from $83.6 million for the prior year period. This increase was mostly attributable to higher compensation and employee benefits due to our acquisition of Bank of Commerce in the fourth quarter of 2021 and the prior year period having substantial labor costs capitalized for PPP loan originations. Increased acquisition-related expenses related to legal and professional fees, occupancy and data processing and software also contributed to the increase from the prior year period.
The provision for unfunded loan commitments for the periods indicated are as follows:
Three Months Ended
March 31, 2022
December 31, 2021
March 31, 2021
(in thousands)
Provision for unfunded loan commitments
$
500
$
(2,000)
$
1,500
Income Taxes
We recorded an income tax provision of $15.6 million for the first quarter of 2022, compared to a provision of $13.1 million and $12.5 million for the three months ended December 31, 2021 and March 31, 2021, respectively. The effective tax rate was 21%, 23% and 19% for the three months ended March 31, 2022, December 31, 2021 and March 31, 2021, respectively. For additional information, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
FINANCIAL CONDITION
Total assets were $20.96 billion at March 31, 2022, an increase of $18.6 million from December 31, 2021. Cash and cash equivalents increased $147.8 million. Loans increased $117.7 million during the first three months of 2022, which was primarily the result of new loan production partially offset by loan payments. Debt securities available for sale were $5.53 billion at March 31, 2022, a decrease of $383.6 million from December 31, 2021 which was primarily due to fair value movement. Total liabilities were $18.60 billion as of March 31, 2022, an increase of $246.6 million from December 31, 2021 primarily due to an increase in interest-bearing deposits.
Investment Securities
At March 31, 2022, the Company’s investment portfolio primarily consisted of debt securities available for sale totaling $5.53 billion compared to $5.91 billion at December 31, 2021 and debt securities held to maturity of $2.20 billion at March 31, 2022 compared to $2.15 billion at December 31, 2021. The decrease in the debt securities available for sale from year-end is due to a $338.7 million decline in unrealized gains, $221.7 million in maturities and repayments, and $7.0 million in premium amortization, partially offset by $183.8 million in purchases. The increase in debt securities held to maturity from year-end is due to purchases of $97.7 million, partially offset by $38.9 million in maturities and repayments and $4.7 million in premium amortization. The average duration of our debt securities available for sale was approximately 5 years and 1 month at March 31, 2022. The average duration of our debt securities held to maturity was approximately 5 years and 9 months at March 31, 2022. These durations take into account calls, where appropriate, and consensus prepayment speeds.
The investment securities are used by the Company as a component of its balance sheet management strategies. From time-to-time, securities may be sold to reposition the portfolio in response to strategies developed by the Company’s asset liability management committee. In accordance with our investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent.
The Company performs a quarterly assessment to determine whether a decline in fair value below amortized cost exists. Amortized cost includes adjustments made to the cost of an investment for accretion, amortization, collection of cash and previous credit losses recognized in earnings.
When the fair value of an available for sale debt security falls below the amortized cost basis, it is evaluated to determine if any of the decline in value is attributable to credit loss. Decreases in fair value attributable to credit loss would be recorded directly to earnings with a corresponding allowance for credit losses, limited by the amount that the fair value is less than the amortized cost basis. If the credit quality subsequently improves, the allowance would be reversed up to a maximum of the previously recorded credit losses. If the Company intends to sell an impaired available for sale debt security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the amortized cost basis, the entire fair value adjustment would be immediately recognized in earnings with no corresponding allowance for credit losses.
At March 31, 2022, the market value of debt securities available for sale had a net unrealized loss of $325.8 million compared to a net unrealized gain of $13.0 million at December 31, 2021. The change in valuation was the result of fluctuations in market interest rates during the three months ended March 31, 2022. At March 31, 2022, the Company had $4.68 billion of debt securities available for sale with gross unrealized losses of $337.5 million; however, we did not consider these investment securities to have an indicated credit loss.
All of the Company’s debt securities held to maturity were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as of March 31, 2022.
The following table sets forth our securities portfolio by type for the dates indicated:
March 31, 2022
December 31, 2021
(in thousands)
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
3,407,654
$
3,745,601
Other asset-backed securities
408,047
463,063
State and municipal securities
938,965
997,291
U.S. government agency and government-sponsored enterprise securities
239,274
252,576
U.S. government securities
173,342
157,536
Non-agency collateralized mortgage securities
360,089
294,932
Total debt securities available for sale, at fair value
$
5,527,371
$
5,910,999
Debt securities held to maturity:
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
2,202,437
$
2,148,327
Total debt securities held to maturity, at amortized cost
The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. In contrast, the monitoring process for the commercial business, real estate construction and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan-by-loan basis.
We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an individually measured allowance is required for collateral dependent nonaccrual loans with balances equal to or greater than $500,000 and with respect to which foreclosure is probable. For the individually measured collateral dependent nonaccrual loan, the allowance for credit losses is equal to the difference between amortized cost of the loan and the determined value of the collateral. However, if the determined value of the collateral is greater than the amortized cost of the loan, no allowance for credit losses will be added for these loans.
For additional discussion on our methodology in managing credit risk within our loan portfolio, see the “Allowance for Credit Losses” section in this Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2021 Annual Report on Form 10-K.
Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of our Chief Credit Officer and approved, as appropriate, by the Board of Directors. Credit Administration, together with the management loan committee, has the responsibility for administering the credit approval process. As another part of its control process, we use an internal credit review and examination function to provide reasonable assurance that loans and commitments are made and maintained as prescribed by our credit policies. Examinations are performed to ensure continued performance and proper risk assessment.
Loan Portfolio Analysis
Our wholly owned banking subsidiary Columbia State Bank is a full service commercial bank, which originates a wide variety of loans, and focuses its lending efforts on originating commercial real estate and commercial business loans.
The following table provides additional detail related to the net premium (discount) of acquired and purchased loans by acquisition:
March 31, 2022
December 31, 2021
(in thousands)
Acquisition:
Bank of Commerce
$
11,377
$
12,923
Pacific Continental
(4,773)
(5,306)
All other purchased and acquired net premium
5,082
5,031
Total net premium at period end
$
11,686
$
12,648
Commercial Real Estate Loans: Commercial real estate loans are secured by properties located within our primary market areas and typically, have loan-to-value ratios of 80% or lower at origination. Our underwriting standards for commercial and multifamily residential loans generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
Commercial Business Loans: Our commercial business lending is directed toward meeting the credit and related deposit and treasury management needs of small to medium sized businesses. Commercial and industrial loans are primarily underwritten based on the identified cash flows of the borrower’s operations and secondarily on the underlying collateral provided by the borrower and/or the strength of the guarantor. The majority of these loan provide financing for working capital and capital expenditures. Loan terms, including, loan maturity, fixed or adjustable interest rate and collateral considerations, are based on factors such as the loan purpose, collateral type and industry and are underwritten on an individual loan basis.
Agriculture Loans: Agricultural lending includes agricultural real estate and production loans and lines of credit within our primary market area. We are committed to our Pacific Northwest communities offering seasonal and longer-term loans and operating lines of credit by lending officers with expertise in the agricultural communities we serve. Typical loan-to-value ratios on term loans can range from 55% to 80% depending upon the type of loan. Operating lines of credit require the borrower to provide a 20% to 25% equity investment. The debt coverage ratio is generally 1.25 or better on all term loans.
Construction Loans: We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits and loan advance limits, as applicable. Our underwriting guidelines for commercial and multifamily residential real estate construction loans generally require that the loan-to-value ratio not exceed 75% and stabilized debt coverage ratios (net operating income divided by annual debt service) of 1.2 or better. As noted above, underwriting standards can be influenced by competition and other factors. However, we endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
One-to-four Family Residential Real Estate Loans: One-to-four family residential loans, including home equity loans and lines of credit, are secured by properties located within our primary market areas and, typically, have loan-to-value ratios of 80% or lower at origination.
Other Consumer Loans: Consumer loans include automobile loans, boat and recreational vehicle financing and other miscellaneous personal loans.
Foreign Loans: The Company has no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon, Idaho and California.
The ACL is an accounting estimate of expected credit losses in our loan portfolio at the balance sheet date. The provision for credit losses is the expense recognized in the Consolidated Statements of Income to adjust the ACL to the levels deemed appropriate by management, as measured by the Company’s credit loss estimation methodologies. The allowance for unfunded commitments and letters of credit is maintained at a level believed by management to be sufficient to absorb estimated expected losses related to these unfunded credit facilities at the balance sheet date.
At March 31, 2022, our ACL was $146.9 million, or 1.37% of total loans (excluding loans held for sale). This compares with an ACL of $155.6 million, or 1.46% of total loans (excluding loans held for sale) at December 31, 2021 and an ACL of $148.3 million or 1.53% of total loans (excluding loans held for sale) at March 31, 2021. The decrease from year end was primarily due to significant improvement in portfolio risk ratings as well as the percentage of problem loans to total loans reaching pre-pandemic levels. The ACL at March 31, 2022 does not include a reserve for the PPP loans as they are fully guaranteed by the SBA.
Our primary sources of funds are customer deposits. Additionally, we utilize advances from the FHLB, borrowings from the FRB, sweep repurchase agreements, subordinated debentures and junior subordinated debentures assumed in acquisitions and a revolving line of credit to supplement our funding needs. These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds are used to make loans, to acquire securities, meet deposit withdrawals and maturing liabilities, to acquire other assets and to fund continuing operations.
In addition, we have a shelf registration statement on file with the SEC registering an unspecified amount of any combination of debt or equity securities, depository shares, purchase contracts, units and warrants in one or more offerings. Specific information regarding the terms of and the securities being offered will be provided at the time of any offering. Proceeds from any future offerings are expected to be used for general corporate purposes, including, but not limited to, the repayment of debt, repurchasing or redeeming outstanding securities, working capital, funding future acquisitions or other purposes identified at the time of any offering.
Deposit Activities
Our deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. We have established a branch system to serve our consumer and business depositors. Deposits increased $289.1 million from December 31, 2021. Management’s strategy for funding asset growth is to make use of public funds and brokered and other wholesale deposits on an as-needed basis. The Company participates in the CD Option of IntraFi Network Deposits program, which is a network that allows participating banks to offer extended FDIC deposit insurance coverage on time deposits. The Company also participates in a similar program to offer extended FDIC deposit insurance coverage on money market accounts. These extended deposit insurance programs are generally available only to existing customers and are not used as a means of generating additional liquidity. At March 31, 2022, brokered deposits, reciprocal money market accounts and other wholesale deposits (excluding public funds) totaled $1.11 billion, or 6.1% of total deposits, compared to $821.7 million or 4.6% at year-end 2021. These deposits have varied maturities.
The following table sets forth the Company’s deposit base by type of product for the dates indicated:
March 31, 2022
December 31, 2021
Balance
% of Total
Balance
% of Total
(dollars in thousands)
Demand and other noninterest-bearing
$
8,790,138
48.1
%
$
8,856,714
49.1
%
Money market
3,501,723
19.1
%
3,525,299
19.6
%
Interest-bearing demand
2,103,053
11.5
%
1,999,407
11.1
%
Savings
1,637,451
8.9
%
1,617,546
9.0
%
Interest-bearing public funds, other than certificates of deposit
775,048
4.2
%
779,146
4.3
%
Certificates of deposit, less than $250,000
239,863
1.3
%
249,120
1.4
%
Certificates of deposit, $250,000 or more
145,372
0.8
%
160,490
0.9
%
Certificates of deposit insured by the CD Option of IntraFi Network Deposits
32,608
0.2
%
35,611
0.2
%
Reciprocal money market accounts
1,073,405
5.9
%
786,046
4.4
%
Subtotal
$
18,298,661
100.0
%
$
18,009,379
100.0
%
Valuation adjustment resulting from acquisition accounting
We rely on FHLB advances and FRB borrowings as another source of both short and long-term funding. FHLB advances and FRB borrowings are secured by investment securities and residential, commercial and commercial real estate loans. At March 31, 2022 and December 31, 2021, we had FHLB advances of $7.3 million and $7.4 million, respectively.
We also utilize wholesale and retail repurchase agreements to supplement our funding sources. Our wholesale repurchase agreements are secured by mortgage-backed securities. At March 31, 2022 and December 31, 2021, we had deposit customer sweep-related repurchase agreements of $44.2 million and $86.0 million, respectively, which mature on a daily basis.
Subordinated debentures and junior subordinated debentures are another source of funding. On October 1, 2021, with its acquisition of Bank of Commerce, the Company assumed $10.0 million in aggregate principal amount of subordinated debentures, which are unsecured, and mature on December 10, 2025. Also assumed through the Bank of Commerce acquisition were $10.3 million of trust preferred obligations which are redeemable at the Company’s option on any March 15, June 15, September 15, or December 15.
The Company has a $15.0 million short-term credit facility with an unaffiliated bank. This facility provides the Company additional liquidity, if needed, for various corporate activities including the repurchase of shares of Columbia Banking System, Inc. common stock. At both March 31, 2022 and December 31, 2021, there was no balance associated with this credit facility. The credit agreement requires the Company to comply with certain covenants including those related to asset quality and capital levels. The Company was in compliance with all covenants associated with this facility at March 31, 2022.
Management anticipates we will continue to rely on FHLB advances, FRB borrowings, the short-term credit facility and wholesale and retail repurchase agreements in the future. We will use those funds primarily to make loans and purchase securities.
We are party to many contractual financial obligations, including repayments of borrowings, operating and equipment lease payments, off-balance sheet commitments to extend credit and investments in affordable housing partnerships. At March 31, 2022, we had commitments to extend credit of $3.67 billion compared to $3.54 billion at December 31, 2021.
Capital Resources
Shareholders’ equity at March 31, 2022 was $2.36 billion, compared to $2.59 billion at December 31, 2021. Shareholders’ equity was 11% and 12% of total period-end assets at March 31, 2022 and December 31, 2021, respectively.
Regulatory Capital
In July 2013, the federal bank regulators approved the Capital Rules (as discussed in our 2021 Annual Report on Form 10-K, “Item 1. Business—Supervision and Regulation and —Regulatory Capital Requirements”), which implement the Basel III capital framework and various provisions of the Dodd-Frank Act, which were fully phased in as of January 1, 2019. As of March 31, 2022, we and the Bank met all capital adequacy requirements under the Capital Rules.
FDIC regulations set forth the qualifications necessary for a bank to be classified as “well-capitalized,” primarily for assignment of FDIC insurance premium rates. Failure to qualify as “well-capitalized” can negatively impact a bank’s ability to expand and to engage in certain activities. The Company and the Bank qualified as “well-capitalized” at March 31, 2022 and December 31, 2021.
As part of its response to the impact of COVID-19, the U.S. federal regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company elected to adopt the interim final rule. As a result, certain capital ratios and amounts as of March 31, 2022 and December 31, 2021 have a reduced impact of the increased allowance for credit losses related to the adoption of CECL.
The following table presents the capital ratios and the capital conservation buffer, as applicable, for the Company and its banking subsidiary as of the dates presented below:
Company
Columbia Bank
March 31, 2022
December 31, 2021
March 31, 2022
December 31, 2021
CET1 risk-based capital ratio
12.88
%
13.01
%
12.94
%
13.06
%
Tier 1 risk-based capital ratio
12.88
%
13.01
%
12.94
%
13.06
%
Total risk-based capital ratio
14.00
%
14.21
%
13.99
%
14.18
%
Leverage ratio
8.64
%
8.55
%
8.70
%
8.60
%
Capital conservation buffer
6.00
%
6.21
%
5.99
%
6.18
%
Non-GAAP Financial Measures
The Company considers operating net interest margin (tax equivalent) to be a useful measurement as it more closely reflects the ongoing operating performance of the Company. Additionally, presentation of the operating net interest margin allows readers to compare certain aspects of the Company’s net interest margin to other organizations that may not have had significant acquisitions. Despite the usefulness of the operating net interest margin (tax equivalent) to the Company, there is no standardized definition for it and, as a result, the Company’s calculations may not be comparable with other organizations. The Company encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
The following table reconciles the Company’s calculation of the operating net interest margin (tax equivalent) to the net interest margin (tax equivalent) for the periods indicated:
Three Months Ended
March 31, 2022
December 31, 2021
March 31, 2021
(dollars in thousands)
Operating net interest margin non-GAAP reconciliation:
Net interest income (tax equivalent) (1)
$
148,268
$
147,574
$
125,889
Adjustments to arrive at operating net interest income (tax equivalent):
Incremental accretion income on acquired loans
350
(16)
(1,055)
Premium amortization on acquired securities
1,031
1,278
520
Operating net interest income (tax equivalent) (1)
$
149,649
$
148,836
$
125,354
Average interest earning assets
$
19,266,644
$
19,186,398
$
15,419,371
Net interest margin (tax equivalent) (1)
3.12
%
3.05
%
3.31
%
Operating net interest margin (tax equivalent) (1)
3.15
%
3.08
%
3.30
%
__________
(1) Tax-exempt interest income has been adjusted to a tax equivalent basis. The amount of such adjustment was an addition to net interest income of $2.1 million for both the three months ended March 31, 2022 and December 31, 2021, respectively, and $1.9 million for the three months ended March 31, 2021.
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We are exposed to interest rate risk, which is the risk that changes in prevailing interest rates will adversely affect assets, liabilities, capital, income and expenses at different times or in different amounts. Generally, there are four sources of interest rate risk as described below:
Repricing risk—Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect an institution’s assets and liabilities.
Basis risk—Basis risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different instruments with the same maturity.
Yield curve risk—Yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same instrument.
Option risk—In banking, option risks are known as borrower options to prepay loans and depositor options to make deposits, withdrawals and early redemptions. Option risk arises whenever a bank’s products give customers the right, but not the obligation, to alter the quantity or the timing of cash flows. We are also exposed to option risk in callable bonds as the counterparty may call the bonds during a low rate environment resulting in reinvestment of the proceeds at lower yields. Option risk is also present in the investment portfolio as mortgage-backed securities could prepay or callable bonds could be called.
Since our earnings are primarily dependent on our ability to generate net interest income, we actively monitor and manage the effects of adverse changes in interest rates on our results of operations. Management of our interest rate risk is overseen by our board of directors, which is responsible for establishing policies and interest rate limits and approving these policies and interest rate limits annually. These policies include our asset/liability management policy, which provides guidelines for controlling our exposure to interest rate risk. These guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. These guidelines also establish limits for interest rate risk sensitivity.
We maintain an Asset/Liability Management Committee which is responsible for developing, monitoring and reviewing asset/liability processes, interest rate risk exposures, strategies and tactics. The Asset/Liability Management Committee reports on a periodic basis to our board of directors. It is the responsibility of management to execute the approved policies, develop and implement risk management strategies and to report to the board of directors on a regular basis.
Interest Rate Risk Sensitivity
We use a number of measures to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analysis. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and may not be realized and, as a result, actual results will differ from our projections. In addition, variances in the timing, magnitude and frequency of interest rate changes, overall market conditions including volumes and pricing, and changes in management strategies, among other factors, will also result in variances between the projected and actual results.
The following table summarizes the expected impact on net interest income over a one or two year period if interest rates gradually increased or decreased during the first year, based on the results of the simulation model as of March 31, 2022:
The following table summarizes the expected impact on net interest income over a one or two year period if interest rates instantaneously increased or decreased, based on the results of the simulation model as of March 31, 2022:
Year one
Year two
Change in basis points (bps)
Change in net interest income
% Change in net interest income
Change in net interest income
% Change in net interest income
(dollars in thousands)
+200
$
48,211
8.56
%
$
92,004
16.27
%
-100
$
(25,606)
(4.55)
%
$
(47,951)
(8.48)
%
The projections are based on the current interest rate environment and we assume our balance sheet remains constant during the next two years. Short-term market interest rates increased slightly since year end and tenors over one year increased by more than 100 basis points. Loan interest rate indexes such as Prime, LIBOR and SOFR also increased modestly but are still near historical lows. Since we do not assume negative interest rates, the downward repricing of these loans is more limited than during a higher interest rate environment. Our ability to reprice deposits downward is also limited given our low cost of funds.
The increase in interest rates improved our projected net interest income in a stable interest rate environment by more than the change in our funding costs. However, this resulted in a modest adverse change in sensitivity in the -100 interest rate shock and ramp as our ability to reprice deposits is limited.
The smaller change in net interest income in the gradual scenarios versus the shock scenarios is due to the ramp up period of the interest rate scenario. Growth in interest income in the gradual and shock rising rate scenarios is constrained by floating rate loans where the floor rate exceeds the fully indexed rate. In year two of the rising rate scenarios, net interest income increases as yields on new loan production and investment security purchases rise faster than funding costs. The decrease in net interest income in the falling rate scenario is due to loan production and investment security purchases at rates lower than the existing portfolios combined with our inability to materially lower funding costs.
Net interest income sensitivity excludes the amortization of premiums, discounts and deferred fees on the existing loan portfolio although the amortization of the collar is included in loan interest income.
On January 23, 2019, the Company entered into an interest rate collar derivative transaction with a $500.0 million notional value based on one month LIBOR. In October 2020, the collar was terminated and resulted in a $34.4 million realized gain that was recorded in accumulated other comprehensive income, net of deferred income taxes. The gain will amortize into interest income through February 2024 which is in line with the initial term of the interest rate collar. The gain will be amortized in this manner as long as the cash flows pertaining to the hedged item are expected to occur.
Item 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is (i) accumulated and communicated to our management (including the CEO and CFO) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company and its subsidiaries are party to routine litigation arising in the ordinary course of business. Management believes that, based on information currently known to it, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial conditions, results of operations or cash flows.
Item 1A. RISK FACTORS
Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of risk factors relating to the Company’s business. The Company believes that there has been no material change in its risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)Not applicable
(b)Not applicable
(c)The following table provides information about repurchases of common stock by the Company during the quarter ended March 31, 2022:
Period
Total Number of Common Shares Purchased (1)
Average Price Paid per Common Share
Total Number of Shares Purchased as Part of Publicly Announced Plan (2)
Maximum Number of Remaining Shares That May Yet Be Purchased Under the Plan (2)
1/1/2022 - 1/31/2022
2,696
$
35.14
—
—
2/1/2022 - 2/28/2022
50,531
36.75
—
—
3/1/2022 - 3/31/2022
54,315
36.32
—
—
107,542
36.49
—
__________
(1) Common shares repurchased by the Company during the quarter consisted of cancellation of shares of common stock to pay the shareholders’ withholding taxes.
(2) The Company does not have a current share repurchase plan.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
Date:
May 5, 2022
By
/s/ CLINT E. STEIN
Clint E. Stein
President and Chief Executive Officer (Principal Executive Officer)
Date:
May 5, 2022
By
/s/ AARON JAMES DEER
Aaron James Deer
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date:
May 5, 2022
By
/s/ BROCK M. LAKELY
Brock M. Lakely
Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)
