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This discussion should be read in conjunction with the unaudited Consolidated Financial Statements ofColumbia 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 theDecember 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. 34
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 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 theFederal 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 ofBank of Commerce ) and infrastructure may not be realized; •the ability to successfully integrateBank 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 ofFDIC 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; 35 -------------------------------------------------------------------------------- Table of Contents •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 ofRussia's invasion ofUkraine ; •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 inU.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 ofGoodwill " 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. InNovember 2020 , theSEC 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 endedMarch 31, 2022 ,December 31, 2021 andMarch 31, 2021 , where applicable throughout this Management's Discussion and Analysis.
Earnings Summary
Comparison of the current quarter with the previous 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 endedMarch 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. 36
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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 theBank 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 endedMarch 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 the current quarter with the period of the previous year
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 endedMarch 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 theBank 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 endedMarch 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 ofBank 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. 37
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Net interest income
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 Interest Average Average Interest Average Average Interest Average
Balances Earned / Paid Rate Balances Earned / Paid Rate Balances Earned / Paid 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.
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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 Three Months Ended March 31, 2022 Compared to
December 31, 2021 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) Interest variation that is not due solely to volume or rate has been allocated in proportion to the absolute dollar amount of each variation.
Comparison of the current quarter with the previous 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 the current quarter with the period of the previous year
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 theBank of Commerce acquisition.
1 Net operating interest margin (tax equivalent) is a non-GAAP financial measure. See the “Non-GAAP Financial Measures” section of this MD&A.
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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 the current quarter with the previous 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 theBank of Commerce acquisition.
Comparison of the current quarter with the period of the previous year
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 shows the significant components of non-interest revenue and the related dollar and percentage change from period to period:
Three Months Ended Prior Quarter Prior Year Period
March 31, December 31, March 31,
2022 2021 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 the current quarter with the previous 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 the current quarter with the period of the previous year
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. 40
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Non-interest expenses
The following table shows the significant components of non-interest expenses and the related dollar and percentage change from period to period:
Three Months Ended Prior Quarter Prior Year Period
December 31, March 31,
March 31, 2022 2021 2021 $ Change % Change $ Change % Change
(dollars in thousands)
Compensation and employee
benefits $ 63,079 $ 64,169 $ 51,736 $ (1,090) (2) % $ 11,343 22 %
Occupancy 11,009 10,076 9,006 933 9 % 2,003 22 %
Data processing and software 10,324 9,130 8,451 1,194 13 % 1,873 22 %
Legal and professional fees 6,535 7,937 2,815 (1,402) (18) % 3,720 132 %
Amortization of intangibles 2,288 2,376 1,924 (88) (4) % 364 19 %
B&O taxes 1,589 1,571 1,259 18 1 % 330 26 %
Advertising and promotion 726 1,357 760 (631) (46) % (34) (4) %
Regulatory premiums 1,536 1,481 1,105 55 4 % 431 39 %
Net cost (benefit) of
operation of OREO 10 14 (63) (4) (29) % 73 (116) %
Other 7,957 4,511 6,566 3,446 76 % 1,391 21 %
Total non-interest expense
$ 83,559 $ 2,431 2 %$ 21,494 26 %
The following table shows the impact of acquisition-related expenses for the periods indicated on the various components of non-interest expense:
Three Months Ended
March 31, December 31,
2022 2021 March 31, 2021
(in thousands)
Acquisition-related expenses:
Compensation and employee benefits $ 586 $ 4,875 $ -
Occupancy 819 271 -
Data processing and software 1,039 286 -
Legal and professional fees 4,209 5,624 -
Advertising and promotion 134 111 -
Other 270 645 -
Total impact of acquisition-related costs on non-interest expenses
$ 7,057 $ 11,812 $ - Acquisition-related expenses by transaction: Bank of Commerce (1) 2,587 7,667 - Umpqua (2) 4,470 4,145 - Total impact of acquisition-related expense to noninterest expense$ 7,057 $ 11,812 $ - __________ (1) The Company completed the acquisition ofBank of Commerce on October 1, 2021. See Note 3 of the Consolidated Financial Statements in "Item 1. Financial Statements (unaudited)" of this report for further information regarding this transaction. (2) Definitive merger agreement has been entered into; however, completion of this transaction is pending as of the date of this filing. 41
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Comparison of the current quarter with the previous quarter
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 the current quarter with the period of the previous year
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 ofBank 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 December 31, March 31, 2022 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 endedDecember 31, 2021 andMarch 31, 2021 , respectively. The effective tax rate was 21%, 23% and 19% for the three months endedMarch 31, 2022 ,December 31, 2021 andMarch 31, 2021 , respectively. For additional information, please refer to the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
FINANCIAL CONDITION
Total assets were$20.96 billion atMarch 31, 2022 , an increase of$18.6 million fromDecember 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 atMarch 31, 2022 , a decrease of$383.6 million fromDecember 31, 2021 which was primarily due to fair value movement. Total liabilities were$18.60 billion as ofMarch 31, 2022 , an increase of$246.6 million fromDecember 31, 2021 primarily due to an increase in interest-bearing deposits.
AtMarch 31, 2022 , the Company's investment portfolio primarily consisted of debt securities available for sale totaling$5.53 billion compared to$5.91 billion atDecember 31, 2021 and debt securities held to maturity of$2.20 billion atMarch 31, 2022 compared to$2.15 billion atDecember 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 atMarch 31, 2022 . The average duration of our debt securities held to maturity was approximately 5 years and 9 months atMarch 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. 42
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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. AtMarch 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 atDecember 31, 2021 . The change in valuation was the result of fluctuations in market interest rates during the three months endedMarch 31, 2022 . AtMarch 31, 2022 , the Company had$4.68 billion of debt securities available for sale with gross unrealized losses of$337.5 million ; however, we did not consider these investment securities to have an indicated credit loss. All of the Company's debt securities held to maturity were issued byU.S. government agencies orU.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of theU.S. government, are widely recognized as "risk free," and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as ofMarch 31, 2022 . The following table sets forth our securities portfolio by type for the dates indicated: December 31, March 31, 2022 2021 (in thousands) Debt securities available for sale:U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations$ 3,407,654 $ 3,745,601 Other asset-backed securities 408,047 463,063 State and municipal securities 938,965 997,291
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
Total debt securities held to maturity, at amortized cost$ 2,202,437 $ 2,148,327 Equity securities 13,425 13,425 Total investment securities $
7,743,233
For more information on our investment portfolio and equity transactions, see note 4 to the consolidated financial statements under “Item 1. Financial statements (unaudited)” of this report.
Credit risk management
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.
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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 ourChief 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
The following table provides additional details related to the net premium (discount) of acquired and acquired loans:
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.
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Agriculture Loans: Agricultural lending includes agricultural real estate and production loans and lines of credit within our primary market area. We are committed to ourPacific 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 Loans: One to four family residential loans, including home equity loans and lines of credit, are secured by properties located in our primary market areas and generally have ratios loan-to-value of 80% or less 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 ofWashington ,Oregon ,Idaho andCalifornia . For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 5 to the Consolidated Financial Statements in "Item 1. Financial Statements (unaudited)" of this report.
Provision for credit losses
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. AtMarch 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) atDecember 31, 2021 and an ACL of$148.3 million or 1.53% of total loans (excluding loans held for sale) atMarch 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 atMarch 31, 2022 does not include a reserve for the PPP loans as they are fully guaranteed by the SBA. For additional information on our allowances for credit losses and allowance for unfunded commitments and letters of credit, as well as the credit quality of the loan portfolio, see Note 6 to the Consolidated Financial Statements in
“Item 1. Consolidated Financial Statements (Unaudited)” of this report.
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Liquidity and sources of funds
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 theSEC 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 fromDecember 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 extendedFDIC deposit insurance coverage on time deposits. The Company also participates in a similar program to offer extendedFDIC 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. AtMarch 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$821.7 million or 4.6% at year-end 2021. These deposits have varied maturities. The following table sets forth the Company's deposit base by type of product for the dates indicated: March 31, 2022 December 31, 2021 % of % of Balance Total Balance Total (dollars in thousands) Demand and other noninterest-bearing$ 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,$250,000 or more 145,372 0.8 % 160,490 0.9 %
Certificates of deposit insured by the CD option of deposits from the IntraFi network
32,608 0.2 % 35,611 0.2 % Reciprocal money market accounts 1,073,405 5.9 % 786,046 4.4 % Subtotal$ 18,298,661 100.0 %$ 18,009,379 100.0 % Valuation adjustment resulting from acquisition accounting $ 552 $ 736 Total deposits$ 18,299,213 $ 18,010,115 46
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Loans
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. AtMarch 31, 2022 andDecember 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. AtMarch 31, 2022 andDecember 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. OnOctober 1, 2021 , with its acquisition ofBank of Commerce , the Company assumed$10.0 million in aggregate principal amount of subordinated debentures, which are unsecured, and mature onDecember 10, 2025 . Also assumed through theBank of Commerce acquisition were$10.3 million of trust preferred obligations which are redeemable at the Company's option on anyMarch 15 ,June 15 ,September 15 , orDecember 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 ofColumbia Banking System, Inc. common stock. At bothMarch 31, 2022 andDecember 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 atMarch 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.
Contractual obligations, commitments and off-balance sheet arrangements
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. AtMarch 31, 2022 , we had commitments to extend credit of$3.67 billion compared to$3.54 billion atDecember 31, 2021 .
Capital resources
Equity in
InJuly 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 theBasel III capital framework and various provisions of the Dodd-Frank Act, which were fully phased in as ofJanuary 1, 2019 . As ofMarch 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 ofFDIC 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" atMarch 31, 2022 andDecember 31, 2021 . As part of its response to the impact of COVID-19, theU.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 ofMarch 31, 2022 andDecember 31, 2021 have a reduced impact of the increased allowance for credit losses related to the adoption of CECL. 47
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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
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
Net operating interest income (tax equivalent) (1)
$148,836
Average interest earning assets$ 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 endedMarch 31, 2022 andDecember 31, 2021 , respectively, and$1.9 million for the three months endedMarch 31, 2021 . 48
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