Columbia Banking System(US:COLB)2022-10-27 16:00PART I — FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The unaudited consolidated financial statements for Q3 2022 reflect a net income of $64.9 million, with total assets and shareholders' equity declining due to market conditions Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $20,405,369 | $20,945,333 | ($539,964) | | Total Cash and cash equivalents | $317,675 | $824,714 | ($507,039) | | Debt securities available for sale | $4,700,821 | $5,910,999 | ($1,210,178) | | Loans, net | $11,537,390 | $10,486,359 | $1,051,031 | | Total Liabilities | $18,289,888 | $18,356,591 | ($66,703) | | Total deposits | $17,941,325 | $18,010,115 | ($68,790) | | Total Shareholders' Equity | $2,115,481 | $2,588,742 | ($473,261) | | Accumulated other comprehensive income (loss) | ($558,844) | $35,162 | ($594,006) | Consolidated Statements of Income Income Statement Summary (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $162,492 | $132,540 | $456,143 | $381,996 | | Provision for credit losses | $5,250 | $— | ($450) | ($6,300) | | Noninterest Income | $26,627 | $23,958 | $75,813 | $69,854 | | Noninterest Expense | $101,446 | $90,007 | $301,878 | $257,682 | | Net Income | $64,942 | $53,017 | $181,272 | $159,909 | | Diluted EPS | $0.83 | $0.74 | $2.32 | $2.24 | Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended September 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $223,717 | $189,101 | | Net cash used in investing activities | ($559,497) | ($1,933,439) | | Net cash provided by (used in) financing activities | ($171,259) | $1,988,047 | | Increase (decrease) in cash and cash equivalents | ($507,039) | $243,709 | Notes to Financial Statements - The acquisition of Bank of Commerce on October 1, 2021, resulted in the recognition of $57.3 million in goodwill and a $15.9 million core deposit intangible (CDI)30 - As of September 30, 2022, debt securities available for sale had gross unrealized losses of $747.3 million, primarily attributed to changes in interest rates, with no indicated credit loss or intent to sell before cost recovery374547 - The Allowance for Credit Losses (ACL) was $154.9 million, or 1.32% of total loans, at September 30, 2022, a decrease primarily due to significant improvements in portfolio risk ratings74215 - The company has off-balance sheet loan commitments of $3.84 billion as of September 30, 2022, an increase from $3.50 billion at year-end 2021110 - On October 25, 2022, the Federal Reserve Board approved the application for the proposed merger with Umpqua Holdings Corporation, pending other regulatory approvals including from the FDIC144 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported strong Q3 net income of $64.9 million, driven by net interest income growth and margin expansion, with solid financial condition and capital Results of Operations - Net income for Q3 2022 was $64.9 million ($0.83/share), an increase from $58.8 million ($0.75/share) in Q2 2022, primarily driven by a $15.0 million sequential increase in net interest income155 Net Interest Margin (Tax Equivalent) | Period | Net Interest Margin (NIM) | Operating NIM (Non-GAAP) | | :--- | :--- | :--- | | Q3 2022 | 3.47% | 3.50% | | Q2 2022 | 3.16% | 3.23% | - A $5.3 million provision for credit losses was recorded in Q3 2022, up from $2.1 million in Q2 2022, primarily due to loan growth and a less favorable economic forecast157178 - Noninterest income increased by $1.6 million from the prior quarter, mainly due to a $3.7 million gain from a sale-leaseback of owned real estate, partially offset by lower mortgage banking revenue158181 - Noninterest expense rose by $6.1 million from the prior quarter to $101.4 million, which included $3.2 million in merger-related expenses, also driven by higher incentive compensation159186 Financial Condition - Total assets decreased by $540.0 million since year-end 2021 to $20.41 billion, while loans grew by $1.05 billion, with the asset decrease driven by a $1.21 billion decline in available-for-sale securities and a $507.0 million drop in cash190 - The investment portfolio's available-for-sale securities had a net unrealized loss of $746.7 million at September 30, 2022, a significant shift from a net unrealized gain of $13.0 million at year-end 2021, reflecting rising market interest rates197 - Total deposits decreased by $68.8 million since year-end 2021 to $17.94 billion, with noninterest-bearing deposits constituting 49.8% of total deposits220222 Regulatory Capital Ratios (Company) | Ratio | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | CET1 risk-based capital | 12.50% | 13.01% | | Tier 1 risk-based capital | 12.50% | 13.01% | | Total risk-based capital | 13.59% | 14.21% | | Leverage ratio | 9.00% | 8.55% | - Both the Company and the Bank qualified as 'well-capitalized' under all regulatory requirements as of September 30, 2022232 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, which it manages to benefit from a rising rate environment, projecting increased net interest income - The company's primary market risk is interest rate risk, arising from repricing, basis, yield curve, and option risks239240241 Net Interest Income Sensitivity (Year One Projection) | Scenario (Instantaneous Shock) | Change in Net Interest Income ($ thousands) | % Change in Net Interest Income | | :--- | :--- | :--- | | +200 bps | $46,963 | 6.81% | | -100 bps | ($43,095) | (6.25)% | - The company remains asset sensitive and is well-positioned to benefit from a rising interest rate environment, with prudent management of deposit rates being key to realizing this benefit246 Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal controls over financial reporting - The CEO and CFO concluded that as of the end of the reporting period, the company's disclosure controls and procedures are effective249 - No changes occurred in the company's internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls250 PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine litigation not expected to materially impact its financial condition or results - The Company is party to routine litigation which is not expected to have a material adverse impact on its financial condition252 Item 1A. Risk Factors No material changes to risk factors were reported compared to the disclosures in the 2021 Form 10-K - No material changes in risk factors were reported compared to the disclosures in the 2021 Form 10-K253 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,269 common shares for tax withholding purposes, not as part of a formal buyback plan - The company repurchased 1,269 common shares during the quarter, consisting of cancellations to pay shareholders' withholding taxes, not part of a formal buyback plan254 - The Company does not have a current share repurchase plan254