ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
See the discussion of forward-looking statements and risk factors in Part I Item 1 and Item 1A of this Annual Report on Form 10-K.
The following discussion and analysis of our financial condition and results of operations constitutes management's review of the factors that affected our financial and operating performance for the years ended December 31, 2023 and 2022. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K. Since the Merger was accounted for as a reverse acquisition, the Company's financial results for any periods prior to the Merger Date reflect UHC results only on a standalone basis, and all share and per-share data have been restated based on the exchange ratio from the Merger of 0.5958. Accordingly, for a discussion of the year ended December 31, 2021, including a comparison to the year ended December 31, 2022, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, on Umpqua Holding Corporation's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on February 24, 2023.
EXECUTIVE OVERVIEW
Business Combination
•Columbia completed its previously announced merger with UHC on February 28, 2023. Promptly following the Merger, Columbia’s wholly-owned bank subsidiary, Columbia State Bank, merged with and into UHC’s wholly-owned bank subsidiary, Umpqua Bank, with Umpqua Bank surviving such merger. The Company acquired approximately $19.2 billion in assets, including $10.9 billion in loans measured at fair value and $15.2 billion in deposits. The comparison of the year ended December 31, 2023 to prior periods is significantly impacted by the Merger. See Note 2 - Business Combination to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information regarding the Mergers.
Financial Performance
•Earnings per diluted common share were $1.78 for the year ended December 31, 2023, compared to $2.60 for the year ended December 31, 2022. The decrease for the year ended December 31, 2023, as compared to the prior period, reflects an increase in average diluted shares to 195.9 million for the year ended December 31, 2023, as compared to 129.7 million for the year ended December 31, 2022, due to shares issued on February 28, 2023 in connection with the Merger.
•Net income was $348.7 million for the year ended December 31, 2023, as compared to $336.8 million for the year ended December 31, 2022. The increase was primarily driven by higher interest income as a result of additional loans and securities acquired through the Merger and the favorable impact of higher interest rates on loan repricing, as well as higher non-interest income related to customers added through the Merger. The increase was partially offset by an increase in interest expense as a result of higher funding costs related to balances added through the Merger, deposit and liability mix shifting, and rising interest rates, as well as higher provision for credit loss largely due to the initial provision for historical Columbia non-PCD loans and higher non-interest expense due to the Merger. Net income in 2023 was also impacted by lower mortgage banking income following strategic business changes made in 2022 and reduced demand for single-family mortgage loans.
•Net interest margin, on a tax equivalent basis, was 3.91% for the year ended December 31, 2023, compared to 3.62% for the year ended December 31, 2022. The increase is primarily due to an increase in interest earning asset yields given upward interest rate movements, with the most impactful average rate increases in the loan and taxable securities categories, as well as ten months of purchase accounting accretion and amortization. These effects were partially offset by higher funding costs. Trends affecting net interest margin had a similar impact on net interest income, which increased to $1.8 billion for the year ended December 31, 2023, compared to $1.1 billion for the year ended December 31, 2022, partly reflecting a larger balance sheet for the year ended December 31, 2023 due to the Merger.
•Non-interest income was $203.9 million for the year ended December 31, 2023, compared to $199.5 million for the year ended December 31, 2022. The increase was primarily driven by increases in service charges on deposits, card-based fees, and financial services and trust revenue, due to ten months of the higher run rate for the combined organization, in addition to a favorable change in the fair value adjustment for certain loans held for investment of $61.1 million, partially offset by a decrease in mortgage banking revenue driven by a $34.8 million decrease related to origination and sales of residential mortgages and an unfavorable change of $51.3 million related to fair value of the MSR asset.
•Non-interest expense was $1.3 billion for the year ended December 31, 2023, compared to $735.0 million for the year ended December 31, 2022. This reflects an increase in salaries and employee benefits of $174.9 million, due to ten months of the higher expense run rate as a combined organization, an increase in merger-related expenses of $154.3 million, an increase in intangible amortization of $107.2 million due to the core deposit intangible asset associated with the Merger, and an increase in FDIC assessments of $57.4 million largely driven by the $32.9 million FDIC special assessment expense incurred during the fourth quarter of 2023.
•Total gross loans and leases were $37.4 billion as of December 31, 2023, an increase of $11.3 billion, or 43%, compared to December 31, 2022. The increase in total loans was primarily due to $10.9 billion in loans acquired through the Merger, which offset the sale of $743.9 million in loans during the year. The Bank is focused on generating business through customer relationships that drive balanced growth in loans, deposits, and core fee income.
•Total deposits were $41.6 billion as of December 31, 2023, an increase of $14.5 billion, or 54%, from December 31, 2022. The increase was primarily due to $15.2 billion in deposits acquired in the Merger, partially offset by lower customer balances due primarily to the impact of inflation and market liquidity tightening. The deposit portfolio mix also reflects a migration from non-interest bearing to interest-bearing accounts and alternative investments, as customers evaluated the interest rate earned on excess cash balances in the higher interest rate environment.
•Total consolidated assets were $52.2 billion as of December 31, 2023, compared to $31.8 billion as of December 31, 2022. The increase was primarily due to $19.2 billion in acquired assets as a result of the Merger, with the majority of the increase attributable to loans and investment securities. Refer to Note 2 - Business Combination for more information pertaining to the completed Merger.
Credit Quality
•Non-performing assets increased to $113.9 million, or 0.22% of total assets, as of December 31, 2023, compared to $58.8 million, or 0.18% of total assets, as of December 31, 2022. Non-performing loans were $112.9 million, or 0.30% of total loans and leases, as of December 31, 2023, compared to $58.6 million, or 0.22% of total loans and leases, as of December 31, 2022. The increases in non-performing assets and non-performing loans reflects assets acquired in the Merger and a move toward a more normalized credit environment following a phase of exceptionally high-quality performance.
•The ACL was $464.1 million, or 1.24% of loans and leases, as of December 31, 2023, an increase of $148.7 million, as compared to $315.4 million, or 1.21% of loans and leases, as of December 31, 2022. The increase in the ACL was due to loan portfolio growth, largely reflective of loans acquired through the Merger, and changes in the economic forecasts used in credit models. As a result of the Merger, the ACL increased by $120.7 million, which reflects a $32.3 million upward adjustment at closing with no impact to the statement of operations due to acquired PCD loans and acquired unfunded commitments, in addition to an $88.4 million provision expense due to acquired non-PCD loans.
•The Company had a provision for credit losses of $213.2 million for the year ended December 31, 2023, compared to a provision for credit losses of $84.0 million in the prior year. The increase in provision expense for the year ended December 31, 2023 as compared to the prior year reflects the $88.4 million initial provision for historical Columbia non-PCD loans related to the Merger, changes in the economic forecasts used in credit models, and portfolio migration trends. As a percentage of average outstanding loans and leases, the provision for credit losses for the year ended December 31, 2023 was 0.60%, as compared to 0.35% for the prior year.
Liquidity
•Total cash and cash equivalents were $2.2 billion as of December 31, 2023, an increase of $867.9 million from December 31, 2022. The increase is mainly due to an increase in borrowings to support short-term liquidity, as there was reduced available liquidity within the banking industry as a result of recent volatility in response to the bank failures in early 2023.
•Including secured off-balance sheet lines of credit, total available liquidity was $18.7 billion as of December 31, 2023, representing 36% of total assets, 45% of total deposits, and 138% of uninsured deposits.
Capital and Growth Initiatives
•The Company realized $143 million in annualized cost-savings due to the Merger as of December 31, 2023, exceeding our original $135 million target.
•The Company's total risk-based capital ratio was 11.9% and its common equity tier 1 risk-based capital ratio was 9.6% as of December 31, 2023, as compared to 13.7% and 11.0%, respectively, as of December 31, 2022. The decline in regulatory capital ratios was primarily driven by initial fair value marks related to historical Columbia asset and liability balances added to the balance sheet as a result of the Merger, and we expect net capital accretion as purchase accounting marks accrete into income on a quarterly basis. Post-closing capital ratios, as reported for the quarter ended March 31, 2023, represented the low point for the year as regulatory capital ratios expanded thereafter as capital generated through earnings offset capital paid out to shareholders through dividends.
•The Company paid cash dividends of $1.43 per common share during the year ended December 31, 2023.
FDIC Special Assessment
•In November 2023, the FDIC approved the final rule to impose a special assessment to recover the losses to the deposit insurance fund resulting from the closures of Silicon Valley Bank and Signature Bank. Under the final rule, the assessment base is the estimated uninsured deposits, as reported in Umpqua Bank and Columbia State Bank's December 31, 2022 Call Reports, excluding the first $5 billion in estimated uninsured deposits, allocated in proportion to each Bank's estimated uninsured deposits. The FDIC will collect the special assessment at an annual rate of approximately 13.4 basis points over eight quarterly assessment periods beginning in the first quarterly assessment period of 2024. The company accrued $32.9 million in the fourth quarter of 2023 related to the special assessment, which is included in non-interest expense on the Consolidated Statements of Operations.
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.
The consolidated financial statements are prepared in conformity with GAAP and follow general practices within the financial services industry, in which the Company operates. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain estimates inherently have a greater reliance on the use of assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.
Management believes the ACL, business combinations and goodwill estimates are important to the portrayal of the Company's financial condition and results of operations and requires difficult, subjective, or complex judgments and, therefore, management considers them to be critical accounting estimates.
Allowance for Credit Losses
The Bank has established an Allowance for Credit Losses Committee, which is responsible for, among other things, regularly reviewing the ACL methodology, including allowance levels, and ensuring that it is designed and applied in accordance with generally accepted accounting principles.
CECL is not prescriptive in the methodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments, utilizing quantitative and qualitative factors.
The Company utilizes complex models to obtain reasonable and supportable forecasts of future economic conditions dependent upon specific macroeconomic variables related to each of the Company's loan and lease portfolios. Loans and leases deemed to be collateral-dependent are individually evaluated for loss based on the value of the underlying collateral or a discounted cash flow analysis.
The adequacy of the ACL is monitored on a regular basis and is based on management's evaluation of numerous factors, including: the CECL model outputs; quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for significant problem loans; historical charge-off and recovery experience; and other pertinent information. As of December 31, 2023, the Bank used Moody's Analytics' November 2023 baseline forecast to estimate the ACL. To assess the sensitivity in the ACL results and, when necessary, to inform qualitative adjustments, the Bank used a second scenario, Moody's Analytics' November 2023 S2 scenario, that differs in terms of severity. For additional information related to the Company's ACL, see Note 6 in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Management believes that the ACL was adequate as of December 31, 2023.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. Under this accounting method, the acquired company’s assets and liabilities are recorded at fair value at the date of the acquisition, except as provided for by the applicable accounting guidance, and the results of operations of the acquired company are combined with the acquiree’s results from the date of the acquisition forward. The difference between the purchase price and the fair value of
the net assets acquired (including identifiable intangible assets) is recorded as goodwill. Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The ACL for PCD loans is recognized within acquisition accounting. The ACL for non-PCD assets is recognized as provision for credit losses in the same reporting period as the acquisition. Fair value adjustments are amortized or accreted into the statement of operations over the estimated life of the acquired assets or assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the acquisition. The use of different assumptions could produce significantly different valuation results, which could have material positive or negative effects on our results of operations.
The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. In addition, the Company engages third-party specialists to assist in the development of fair values. Preliminary estimates of fair values may be adjusted for a period of time subsequent to the effective time of the acquisition if new information is obtained about facts and circumstances that existed as of the effective time of the acquisition that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period. Management uses various valuation methodologies to estimate the fair value of these assets and liabilities and often involves a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets, and certain other assets and liabilities.
Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of assets, including goodwill and liabilities, which could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill is recorded.
Goodwill
Goodwill is tested for impairment at the reporting unit level on an annual basis as of October 31 each year, and more frequently if events or circumstances indicate that there may be impairment. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount. If the fair value of the reporting unit is less than its carrying value, the difference is the amount of impairment and goodwill is written down to the fair value of the reporting unit. The Company has a single reporting unit.
In testing goodwill, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In this qualitative assessment, the Company evaluates events and circumstances which may include, but are not limited to: the general economic environment; banking industry and market conditions; a significant adverse change in legal factors; significant decline in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group within the reporting unit; and an adverse action or assessment by a regulator.
If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Company performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments about economic and industry factors and the growth and earnings prospects of the Bank. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations.
Based on the results of the annual goodwill impairment test, it was determined that no goodwill impairment charges were required as our single reporting unit’s fair value exceeded its carrying amount. As of December 31, 2023, we determined there were no events or circumstances which would more likely than not reduce the fair value of our reporting unit below its carrying amount.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding Recent Accounting Pronouncements is included in Note 1 of the Notes to Consolidated Financial Statements in Item 8 below.
RESULTS OF OPERATIONS
As of December 31, 2023, Columbia's financial results for any periods ended prior to February 28, 2023, the Merger Date, reflect UHC results only on a standalone basis. Accordingly, Columbia's reported financial results for the first quarter of 2023 reflect only UHC financial results through the closing of the Merger. As a result of these two factors, Columbia's financial results for the year ended December 31, 2023, may not be directly comparable to prior or future reported periods.
Comparison of current year to prior year
For the year ended December 31, 2023, the Company had net income of $348.7 million, compared to net income of $336.8 million for the same period in the prior year. The increase was mainly attributable to an increase in net interest income, partially offset by increases in non-interest expense and the provision for credit losses. The increase in net interest income was due to higher loan interest income from increasing rates and higher average loan and lease balances, as well as the addition of historical Columbia portfolios. In addition to the favorable impact of higher interest rates, the increase in net interest income is due to the impact of purchase accounting accretion and amortization that was $253.6 million for the year ended December 31, 2023. These increases were partially offset by higher funding costs. The increase in non-interest expense was mainly driven by higher salaries and employee benefits, merger-related expense, and intangible amortization, all of which were impacted by the Merger. The change in the provision was primarily due to the initial provision for historical Columbia non-PCD loans, in addition to changes in the economic forecasts used in credit models and portfolio migration trends.
The following table presents the return on average assets (GAAP), average common shareholders' equity (GAAP), and average tangible common shareholders' equity (non-GAAP) for the years ended December 31, 2023, 2022, and 2021. For each period presented, the table includes the calculated ratios based on reported net income. To the extent return on average common shareholders' equity is used to compare our performance with other financial institutions that do not have merger and acquisition-related intangible assets, we believe it is beneficial to also consider the return on average tangible common shareholders' equity. The return on average tangible common shareholders' equity is calculated by dividing net income by average shareholders' common equity less average goodwill and other intangible assets, net (excluding MSR). The return on average tangible common shareholders' equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average common shareholders' equity.
Return on Average Assets, Common Shareholders' Equity and Tangible Common Shareholders' Equity
For the Years Ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | 2023 | | 2022 | | 2021 |
Return on average assets | 0.70 | % | | 1.09 | % | | 1.39 | % |
Return on average common shareholders' equity | 7.81 | % | | 13.07 | % | | 15.56 | % |
Return on average tangible common shareholders' equity | 11.46 | % | | 13.11 | % | | 15.63 | % |
Calculation of average common tangible shareholders' equity: | | | | | |
Average common shareholders' equity | $ | 4,466,725 | | | $ | 2,575,577 | | | $ | 2,700,711 | |
Less: average goodwill and other intangible assets, net | 1,423,075 | | | 6,847 | | | 12,057 | |
Average tangible common shareholders' equity | $ | 3,043,650 | | | $ | 2,568,730 | | | $ | 2,688,654 | |
Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy. Columbia believes the exclusion of certain intangible assets in the computation of tangible common equity and the tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company. Tangible common equity is calculated as total shareholders' equity less goodwill and other intangible assets, net (excluding MSR). In addition, tangible assets are total assets less goodwill and other intangible assets, net (excluding MSR). The tangible common equity ratio is calculated as tangible common shareholders' equity divided by tangible assets. Tangible common equity and the tangible common equity ratio are considered non-GAAP financial measures and should be viewed in conjunction with total shareholders' equity and the total shareholders' equity ratio.
The following table provides a reconciliation of ending shareholders' equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as of December 31, 2023, and 2022:
| | | | | | | | | | | |
(dollars in thousands) | December 31, 2023 | | December 31, 2022 |
Total shareholders' equity | $ | 4,995,034 | | | $ | 2,479,826 | |
Subtract: | | | |
Goodwill | 1,029,234 | | | — | |
Other intangible assets, net | 603,679 | | | 4,745 | |
Tangible common shareholders' equity | $ | 3,362,121 | | | $ | 2,475,081 | |
Total assets | $ | 52,173,596 | | | $ | 31,848,639 | |
Subtract: | | | |
Goodwill | 1,029,234 | | | — | |
Other intangible assets, net | 603,679 | | | 4,745 | |
Tangible assets | $ | 50,540,683 | | | $ | 31,843,894 | |
Total shareholders' equity to total assets ratio | 9.57 | % | | 7.79 | % |
Tangible common equity ratio | 6.65 | % | | 7.77 | % |
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not reviewed or audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
NET INTEREST INCOME
Net interest income for 2023 increased by $723.2 million or 68% compared to the same period in 2022, due primarily to a $1.1 billion increase in loan interest income resulting from higher average rates and higher average loan and lease balances, attributable to the addition of historical Columbia portfolios and organic growth over the past year, as well as ten months of purchase accounting accretion and amortization, partially offset by a $413.5 million increase in interest expense on deposits as a result of the higher rate environment and higher average balances in deposits, largely due to the Merger, and a $234.0 million increase in term borrowings to support liquidity due to industry-wide deposit balance contraction, general liquidity management, and loan and lease growth that outpaced deposit growth during 2023 when acquired balances are excluded.
The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax equivalent basis was 3.91% for 2023, an increase of 29 basis points compared to 2022. This increase primarily resulted from an increase in the average yields on interest-earning assets due to the higher rate environment and ten months of purchase accounting accretion and amortization, which more than offset correspondingly higher funding costs.
The yield on loans and leases for 2023 increased by 166 basis points as compared to 2022, primarily attributable to the rising interest rate environment and purchase accounting accretion and amortization related to the Merger.
The cost of interest-bearing liabilities increased 209 basis points for 2023, as compared to 2022, due to a higher mix of higher-cost time deposits and term borrowings, as well as rising interest rates driving up the cost of other deposits. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds.
The Federal Reserve increased the target range for the federal funds rate by 5.25% between March 2022 and July 2023, which marked the final increase to the federal funds rate to date during the current interest rate cycle. During that period, our net interest margin expanded as our asset sensitive balance sheet became increasingly profitable due to active rate increases by the Federal Reserve. Since the Federal Reserve ceased increasing the federal funds rate, we have experienced an increase in our funding costs that outpaces the increase in our earning asset yields as our deposits have continued to reprice higher and our funding base has experienced a shift toward higher-cost sources as Federal Reserve actions have reduced available liquidity within the banking industry. As a result, our net interest margin contracted from 3.93% in August 2023 to 3.63% in December 2023 due to the impact of higher funding costs and minimal change to the average yield on earning assets.
Our cost of funds in 2023 was significantly impacted by higher balances in non-core funding sources such as brokered deposits and term borrowings, which carry a higher rate of interest as compared to our core deposit funding base. These balances, along with higher balances in public funds, time deposits, and other higher-cost deposit categories contributed to an increase in our cost of interest bearing deposits and interest bearing liabilities to 2.71% and 3.15% in December 2023, from 1.97% and 2.72% in August 2023, respectively. The cost of interest bearing deposits and interest bearing liabilities as of December 31, 2023 (the “spot rate”) was 2.75% and 3.19%, respectively, detailing that our cost of funds continued to increase through the month of December. Additional shifts in our funding mix will likely continue to pressure our cost of funds in 2024. Financial statement Note 13 – Interest-Bearing Deposits provides additional detail on the pricing characteristics of our time and brokered deposits scheduled to mature during 2024. As of December 31, 2023, we had approximately $6.0 billion in time deposits, including $2.6 billion in brokered time deposits, with a weighted average rate of 4.66% maturing in 2024.
The following table presents condensed average balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| 2023 | | 2022 | | 2021 |
(dollars in thousands) | Average Balance | | Interest Income or Expense | | Average Yields or Rates | | Average Balance | | Interest Income or Expense | | Average Yields or Rates | | Average Balance | | Interest Income or Expense | | Average Yields or Rates |
INTEREST-EARNING ASSETS: | | | | | | | | | | | | | | | | |
Loans held for sale | $ | 87,675 | | | $ | 3,871 | | | 4.42 | % | | $ | 208,141 | | | $ | 8,812 | | | 4.23 | % | | $ | 500,070 | | | $ | 15,149 | | | 3.03 | % |
Loans and leases (1) | 35,412,594 | | | 2,109,744 | | | 5.95 | % | | 24,225,518 | | | 1,041,446 | | | 4.29 | % | | 21,925,108 | | | 875,366 | | | 3.99 | % |
Taxable securities | 7,479,573 | | | 289,944 | | | 3.88 | % | | 3,343,721 | | | 72,702 | | | 2.17 | % | | 3,321,142 | | | 61,717 | | | 1.86 | % |
Non-taxable securities (2) | 740,376 | | | 28,236 | | | 3.81 | % | | 216,943 | | | 6,669 | | | 3.07 | % | | 248,256 | | | 7,458 | | | 3.00 | % |
Temporary investments and interest-bearing cash | 2,147,348 | | | 111,659 | | | 5.20 | % | | 1,561,808 | | | 19,706 | | | 1.26 | % | | 2,936,273 | | | 3,864 | | | 0.13 | % |
Total interest earning assets (1)(2) | 45,867,566 | | | 2,543,454 | | | 5.54 | % | | 29,556,131 | | | 1,149,335 | | | 3.88 | % | | 28,930,849 | | | 963,554 | | | 3.33 | % |
Goodwill and other intangible assets | 1,423,075 | | | | | | | 6,847 | | | | | | | 12,057 | | | | | |
Other assets | 2,205,678 | | | | | | | 1,254,418 | | | | | | | 1,324,466 | | | | | |
Total assets | $ | 49,496,319 | | | | | | | $ | 30,817,396 | | | | | | | $ | 30,267,372 | | | | | |
INTEREST-BEARING LIABILITIES: | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 6,280,333 | | | $ | 97,162 | | | 1.55 | % | | $ | 3,886,390 | | | $ | 8,185 | | | 0.21 | % | | $ | 3,462,035 | | | $ | 1,865 | | | 0.05 | % |
Money market deposits | 9,962,837 | | | 185,035 | | | 1.86 | % | | 7,552,666 | | | 26,415 | | | 0.35 | % | | 7,624,707 | | | 5,964 | | | 0.08 | % |
Savings deposits | 2,994,333 | | | 3,384 | | | 0.11 | % | | 2,411,448 | | | 880 | | | 0.04 | % | | 2,200,608 | | | 729 | | | 0.03 | % |
Time deposits | 4,743,615 | | | 176,073 | | | 3.71 | % | | 1,743,988 | | | 12,715 | | | 0.73 | % | | 2,217,464 | | | 18,593 | | | 0.84 | % |
Total interest-bearing deposits | 23,981,118 | | | 461,654 | | | 1.93 | % | | 15,594,492 | | | 48,195 | | | 0.31 | % | | 15,504,814 | | | 27,151 | | | 0.18 | % |
Repurchase agreements and federal funds purchased | 269,853 | | | 3,923 | | | 1.45 | % | | 465,600 | | | 997 | | | 0.21 | % | | 454,994 | | | 280 | | | 0.06 | % |
Borrowings | 4,522,656 | | | 242,914 | | | 5.37 | % | | 226,665 | | | 8,920 | | | 3.94 | % | | 195,985 | | | 2,838 | | | 1.45 | % |
Junior and other subordinated debentures | 421,195 | | | 37,665 | | | 8.94 | % | | 399,568 | | | 19,889 | | | 4.98 | % | | 369,259 | | | 12,127 | | | 3.28 | % |
Total interest-bearing liabilities | 29,194,822 | | | 746,156 | | | 2.56 | % | | 16,686,325 | | | 78,001 | | | 0.47 | % | | 16,525,052 | | | 42,396 | | | 0.26 | % |
Non-interest-bearing deposits | 14,927,443 | | | | | | | 11,053,921 | | | | | | | 10,669,531 | | | | | |
Other liabilities | 907,329 | | | | | | | 501,573 | | | | | | | 372,078 | | | | | |
Total liabilities | 45,029,594 | | | | | | | 28,241,819 | | | | | | | 27,566,661 | | | | | |
Common equity | 4,466,725 | | | | | | | 2,575,577 | | | | | | | 2,700,711 | | | | | |
Total liabilities and shareholders' equity | $ | 49,496,319 | | | | | | | $ | 30,817,396 | | | | | | | $ | 30,267,372 | | | | | |
NET INTEREST INCOME (2) | | | $ | 1,797,298 | | | | | | | $ | 1,071,334 | | | | | | | $ | 921,158 | | | |
NET INTEREST SPREAD (2) | | | | | 2.98 | % | | | | | | 3.41 | % | | | | | | 3.07 | % |
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN | | | | | 3.91 | % | | | | | | 3.62 | % | | | | | | 3.18 | % |
(1)Non-accrual loans and leases are included in the average balance.
(2)Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. The amount of such adjustment was an addition to recorded income of approximately $4.1 million, $1.3 million, and $1.5 million for the years ended December 31, 2023, 2022, and 2021, respectively.
The following table sets forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for 2023 compared to 2022, as well as between 2022 and 2021. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| 2023 compared to 2022 | | 2022 compared to 2021 |
| Increase (decrease) in interest income and expense due to changes in | | Increase (decrease) in interest income and expense due to changes in |
(in thousands) | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest-earning assets: | | | | | | | | | | | |
Loans held for sale | $ | (5,304) | | | $ | 363 | | | $ | (4,941) | | | $ | (10,935) | | | $ | 4,598 | | | $ | (6,337) | |
Loans and leases | 581,254 | | | 487,044 | | | 1,068,298 | | | 97,290 | | | 68,790 | | | 166,080 | |
Taxable securities | 133,038 | | | 84,204 | | | 217,242 | | | 422 | | | 10,563 | | | 10,985 | |
Non-taxable securities (1) | 19,611 | | | 1,956 | | | 21,567 | | | (959) | | | 170 | | | (789) | |
Temporary investments and interest-bearing deposits | 9,861 | | | 82,092 | | | 91,953 | | | (2,612) | | | 18,454 | | | 15,842 | |
Total interest-earning assets (1) | 738,460 | | | 655,659 | | | 1,394,119 | | | 83,206 | | | 102,575 | | | 185,781 | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing demand deposits | 7,873 | | | 81,104 | | | 88,977 | | | 255 | | | 6,065 | | | 6,320 | |
Money market deposits | 10,935 | | | 147,685 | | | 158,620 | | | (57) | | | 20,508 | | | 20,451 | |
Savings deposits | 259 | | | 2,245 | | | 2,504 | | | 73 | | | 78 | | | 151 | |
Time deposits | 48,352 | | | 115,006 | | | 163,358 | | | (3,648) | | | (2,230) | | | (5,878) | |
Repurchase agreements and federal funds purchased | (810) | | | 3,736 | | | 2,926 | | | 348 | | | 369 | | | 717 | |
Borrowings | 229,574 | | | 4,420 | | | 233,994 | | | 508 | | | 5,574 | | | 6,082 | |
Junior and other subordinated debentures | 1,131 | | | 16,645 | | | 17,776 | | | 1,066 | | | 6,696 | | | 7,762 | |
Total interest-bearing liabilities | 297,314 | | | 370,841 | | | 668,155 | | | (1,455) | | | 37,060 | | | 35,605 | |
Net increase in net interest income (1) | $ | 441,146 | | | $ | 284,818 | | | $ | 725,964 | | | $ | 84,661 | | | $ | 65,515 | | | $ | 150,176 | |
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate.
PROVISION FOR CREDIT LOSSES
The Company had a $213.2 million provision for credit losses for 2023, as compared to an $84.0 million provision for credit losses for 2022. The increase is primarily driven by the initial provision for historical Columbia non-PCD loans of $88.4 million, changes in the economic forecast used in credit models, organic growth in the loan and lease portfolio, and portfolio migration trends. As a percentage of average outstanding loans and leases, the provision for credit losses recorded for 2023 was 0.60%, as compared to 0.35% for the prior period.
Net charge-offs were $96.7 million for 2023, or 0.27% of average loans and leases, compared to net charge-offs of $30.9 million, or 0.13% of average loans and leases, for 2022. The majority of net charge-offs relate to leases and equipment finance loans, included within the commercial loan portfolio.
Typically, loans in non-accrual status will not have an ACL as they will be written down to their net realizable value or charged off. However, the net realizable value for homogeneous leases and equipment finance agreements are determined by the loss given default calculated by the CECL model, and therefore homogeneous leases and equipment finance agreements on non-accrual will have an ACL amount until they become 181 days past due, at which time they are charged off. The non-accrual leases and equipment finance agreements of $28.4 million as of December 31, 2023 have a related ACL of $24.7 million, with the remaining loans written down to the estimated fair value of the collateral, less estimated costs to sell, and are expected to be resolved with no additional material loss, absent further decline in market prices.
NON-INTEREST INCOME
The following table presents the key components of non-interest income and the related dollar and percentage change for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 compared to 2022 |
(dollars in thousands) | 2023 | | 2022 | | Change Amount | | Change Percent |
Service charges on deposits | $ | 65,525 | | | $ | 48,365 | | | $ | 17,160 | | | 35 | % |
Card-based fees | 55,263 | | | 37,370 | | | 17,893 | | | 48 | % |
Financial services and trust revenue | 13,471 | | | 90 | | | 13,381 | | | nm |
Residential mortgage banking revenue, net | 16,789 | | | 106,859 | | | (90,070) | | | (84) | % |
Gain on sale of debt securities, net | 13 | | | 2 | | | 11 | | | nm |
Gain (loss) on equity securities, net | 2,300 | | | (7,099) | | | 9,399 | | | (132) | % |
Gain on loan and lease sales, net | 4,414 | | | 6,696 | | | (2,282) | | | (34) | % |
| | | | | | | |
Bank owned life insurance income | 15,624 | | | 8,253 | | | 7,371 | | | 89 | % |
Other income (loss) | 30,528 | | | (1,008) | | | 31,536 | | | nm |
Total non-interest income | $ | 203,927 | | | $ | 199,528 | | | $ | 4,399 | | | 2 | % |
nm = not meaningful and applies to percentages +/- 500% | | | | | | | |
Service charges on deposits were impacted by a 46% increase in average deposits in 2023 compared to 2022, primarily due to the Merger, which resulted in an increase in service charges in 2023 compared to 2022 due to the higher volume of overall deposits as a combined company.
Card-based fees increased in 2023 compared to 2022 mainly due to the Merger and ten months of combined operations. The largest drivers in the increase were debit interchange fees and merchant processing fees, which were impacted by the higher volume of transactions associated with the larger client base as a combined company.
Financial services and trust revenue increased in 2023 compared to 2022, primarily due to the Merger and ten months of combined operations. The largest drivers in the increase were in brokerage service revenue related to wealth management and trust services based on increased volume with the larger client base.
Residential mortgage banking revenue decreased for 2023, compared to 2022. The variance was due to a net fair value loss of $28.5 million related to the MSR asset for the year ended December 31, 2023, compared to a net fair value gain of $22.8 million for the same period in 2022, which is net of MSR hedge losses of $4.7 million for the current year compared to $14.5 million in the prior year. In addition, revenue from origination and sale of mortgages decreased by $34.8 million compared to the prior period due to a 76% decline in closed loan volume of for-sale mortgages. The Company undertook several strategic actions in 2022 and 2023 to restructure its mortgage business given lower mortgage origination volume in the higher rate environment and a focus on relationship banking that drives balanced growth in loans, deposits, and core fee income. These changes were intended to reduce expenses, limit the impact of fair value changes to the statement of operations, and moderate portfolio mortgage growth, and they include the sale of approximately one-third of the MSR portfolio in September 2023, which related to a non-relationship component of the serviced loan portfolio. This sale had a small contribution to the decrease in mortgage banking revenue during 2023 as servicing income declined in the fourth quarter of 2023 due to a smaller serviced loan portfolio. Due to the smaller portfolio of serviced loans, mortgage banking revenue is expected to be lower in 2024, consistent with the fourth quarter of 2023.
The following table presents our residential mortgage banking revenues for the years ended December 31, 2023 and 2022: | | | | | | | | | | | | | |
(dollars in thousands) | 2023 | | 2022 | | |
Origination and sale | $ | 11,881 | | | $ | 46,712 | | | |
Servicing | 33,417 | | | 37,358 | | | |
Change in fair value of MSR asset: | | | | | |
Changes due to collection/realization of expected cash flows over time | (17,694) | | | (20,272) | | | |
Changes in valuation inputs or assumptions (1) | (6,122) | | | 57,537 | | | |
MSR hedge loss | (4,693) | | | (14,476) | | | |
Residential mortgage banking revenue, net | $ | 16,789 | | | $ | 106,859 | | | |
| | | | | |
Loans Held for Sale Production Statistics: | | | | | |
Closed loan volume for-sale | $ | 441,568 | | | $ | 1,839,466 | | | |
Gain on sale margin | 2.69 | % | | 2.54 | % | | |
(1)The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.
Other income (loss) in 2023 compared to 2022 increased primarily due to a favorable change in the fair value of certain loans held for investment resulting in a fair value gain of $2.6 million for the year ended December 31, 2023 as compared to a fair value loss of $58.5 million for the year ended December 31, 2022; fair value changes for these loans have an inverse relationship with relevant interest rate changes during the year. The favorable change between periods was partially offset by a decrease in swap derivatives fair value, resulting in a loss of $4.6 million for the year ended December 31, 2023 compared to a gain of $16.2 million in the prior year period, resulting in an unfavorable change of $20.8 million, as well as other miscellaneous fluctuations in income.
NON-INTEREST EXPENSE
The following table presents the key elements of non-interest expense and the related dollar and percentage change for the years ended December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 compared to 2022 | | |
(dollars in thousands) | 2023 | | 2022 | | Change Amount | | Change Percent | | | | | | | | |
Salaries and employee benefits | $ | 616,103 | | | $ | 441,226 | | | $ | 174,877 | | | 40 | % | | | | | | | | |
Occupancy and equipment, net | 183,480 | | | 138,451 | | | 45,029 | | | 33 | % | | | | | | | | |
Communications | 16,252 | | | 10,429 | | | 5,823 | | | 56 | % | | | | | | | | |
Marketing | 11,399 | | | 6,540 | | | 4,859 | | | 74 | % | | | | | | | | |
Services | 57,641 | | | 51,323 | | | 6,318 | | | 12 | % | | | | | | | | |
FDIC assessments | 71,402 | | | 13,964 | | | 57,438 | | | 411 | % | | | | | | | | |
Intangible amortization | 111,296 | | | 4,095 | | | 107,201 | | | nm | | | | | | | | |
Merger-related expenses | 171,659 | | | 17,356 | | | 154,303 | | | nm | | | | | | | | |
Other expenses | 73,468 | | | 51,566 | | | 21,902 | | | 42 | % | | | | | | | | |
Total non-interest expense | $ | 1,312,700 | | | $ | 734,950 | | | $ | 577,750 | | | 79 | % | | | | | | | | |
nm = not meaningful and applies to percentages +/- 500% | | | | | | | | |
Salaries and employee benefits increased for 2023, as compared to 2022, primarily due to our employee base increasing by approximately 1,500, or 43%, compared to December 31, 2022, mostly attributable to the Merger. The current year includes ten months of expense as a combined company with a larger employee base.
Occupancy and equipment, net increased for 2023, compared to 2022, due mainly to an increase in branch locations and software costs related to the Merger.
FDIC assessments increased for 2023, as compared to 2022, due to $32.9 million in expense related to the FDIC special assessment to replenish the Deposit Insurance Fund following bank closures in March 2023, in addition to an increase in the deposit insurance assessment rates by two basis points for all insured depository institutions in 2023, and the impact of having a larger balance sheet as a result of the Merger.
Intangible amortization increased for 2023, as compared to 2022, due to amortization associated with the core deposit intangible added as a result of the Merger.
Merger-related expense increased for 2023, as compared to 2022, with significant expenses due to the completion of the Merger in the first quarter of 2023. These expenses include acquisition-related expenses, facility closure related costs, customer communications, restructuring expenses (including associate severance and retention charges) and expenses related to conversions of systems, including consulting costs. Merger-related expenses are expected to decrease in 2024, as we completed systems integrations in 2023. Refer to Note 2 - Business Combination for the breakout of merger-related expense.
Other expense increased for 2023, as compared to 2022, which included an increase of $11.8 million related to state and local taxes due to locations added with the Merger, as well as miscellaneous fluctuations in other expenses captured in this category.
While the Merger drove increases across expense categories as the Company is now significantly larger, the expense run rate of the combined organization benefits from $143 million in annualized merger-related cost savings, net of associated reinvestments, which were achieved as of December 31, 2023 and compare favorably to our original $135 million target announced in October 2021.
INCOME TAXES
Our consolidated effective tax rate as a percentage of pre-tax income for 2023 was 26.0%, compared to 25.3% for 2022. The 2023 effective tax rate differed from the federal statutory rate of 21% principally because of state taxes, net tax-exempt income on investment securities, non-deductible FDIC assessments, and tax credits and benefits arising from low-income housing investments. Refer to Note 12 - Income Taxes for more information about the Company's taxes.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
Cash and cash equivalents were $2.2 billion as of December 31, 2023, compared to $1.3 billion at December 31, 2022. The increase is mainly due to an increase in borrowings to support short-term liquidity, as there was reduced available liquidity within the banking industry as a result recent volatility in response to the bank failures in early 2023.
INVESTMENT SECURITIES
The composition of our investment securities portfolio reflects management's investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio provides a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements) and collateral for certain public funds deposits.
Equity and other securities consist primarily of investments in fixed income mutual funds to support our CRA initiatives and securities invested in rabbi trusts for the benefit of certain current or former executives and employees as required by the underlying agreements. Equity and other securities were $77.0 million at December 31, 2023, compared to $73.0 million as of December 31, 2022. This increase is primarily due to an increase in rabbi trust assets of $2.3 million due to the Merger.
Investment debt securities available for sale were $8.8 billion as of December 31, 2023, compared to $3.2 billion as of December 31, 2022. The increase was primarily due to the addition of $6.2 billion in securities acquired at fair value through the Merger, which were categorized as available for sale. Following the close of the Merger, we restructured a portion of the historical Columbia securities portfolio during the first week of March by selling $1.2 billion of securities and purchasing $919.2 million of securities with the proceeds. The restructure transactions resulted in no gain or loss on the statement of operations. Purchases included agencies, mortgage-backed securities, and collateralized mortgage obligation. The restructuring reduced the potential adverse impact to net interest income of a declining interest rate environment as we believe this scenario presents more risk to net interest income than a "higher-for-longer" interest rate scenario. The net unrealized loss on investment securities available for sale decreased by $109.2 million between December 31, 2023 and December 31, 2022.
The following tables present the par value, amortized cost, unrealized gains, unrealized losses, and approximate fair values of debt securities as available for sale and held to maturity investment debt securities portfolio by major type as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
(dollars in thousands) | Current Par | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | % of Portfolio |
Available for sale: | | | | | | | | | | | |
U.S. Treasury and agencies | $ | 1,546,374 | | | $ | 1,551,074 | | | $ | 6,192 | | | $ | (78,874) | | | $ | 1,478,392 | | | 17 | % |
Obligations of states and political subdivisions | 1,135,345 | | | 1,073,264 | | | 20,451 | | | (21,610) | | | 1,072,105 | | | 12 | % |
Mortgage-backed securities and collateralized mortgage obligations | 7,103,633 | | | 6,638,439 | | | 28,558 | | | (387,624) | | | 6,279,373 | | | 71 | % |
| | | | | | | | | | | |
Total available for sale securities | $ | 9,785,352 | | | $ | 9,262,777 | | | $ | 55,201 | | | $ | (488,108) | | | $ | 8,829,870 | | | 100 | % |
Held to maturity: | | | | | | | | | | | |
| | | | | | | | | | | |
Mortgage-backed securities and collateralized mortgage obligations | $ | 3,564 | | | $ | 2,300 | | | $ | 725 | | | $ | — | | | $ | 3,025 | | | 100 | % |
| | | | | | | | | | | |
Total held to maturity securities | $ | 3,564 | | | $ | 2,300 | | | $ | 725 | | | $ | — | | | $ | 3,025 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(dollars in thousands) | Current Par | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | % of Portfolio |
Available for sale: | | | | | | | | | | | |
U.S. Treasury and agencies | $ | 1,007,753 | | | $ | 1,035,532 | | | $ | — | | | $ | (99,358) | | | $ | 936,174 | | | 29 | % |
Obligations of states and political subdivisions | 289,590 | | | 297,610 | | | 231 | | | (28,041) | | | 269,800 | | | 8 | % |
Mortgage-backed securities and collateralized mortgage obligations | 2,371,329 | | | 2,405,139 | | | 3 | | | (414,950) | | | 1,990,192 | | | 63 | % |
| | | | | | | | | | | |
Total available for sale securities | $ | 3,668,672 | | | $ | 3,738,281 | | | $ | 234 | | | $ | (542,349) | | | $ | 3,196,166 | | | 100 | % |
Held to maturity: | | | | | | | | | | | |
| | | | | | | | | | | |
Mortgage-backed securities and collateralized mortgage obligations | $ | 3,873 | | | $ | 2,476 | | | $ | 721 | | | $ | — | | | $ | 3,197 | | | 100 | % |
| | | | | | | | | | | |
Total held to maturity securities | $ | 3,873 | | | $ | 2,476 | | | $ | 721 | | | $ | — | | | $ | 3,197 | | | 100 | % |
The following table presents information regarding the amortized cost, fair value, average yield, and maturity structure of the investment portfolio as of December 31, 2023: | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Amortized Cost | | Fair Value | | Average Yield (1) |
U.S. treasury and agencies | | | | | |
One year or less | $ | 59,019 | | | $ | 58,050 | | | 2.78 | % |
One to five years | 1,272,107 | | | 1,218,008 | | | 3.00 | % |
Five to ten years | 219,948 | | | 202,334 | | | 2.89 | % |
Over ten years | — | | | — | | | — | % |
Total U.S. treasury and agencies | 1,551,074 | | | 1,478,392 | | | 2.97 | % |
Obligations of states and political subdivisions | | | | | |
One year or less | 39,992 | | | 39,843 | | | 3.71 | % |
One to five years | 403,767 | | | 403,595 | | | 3.77 | % |
Five to ten years | 390,433 | | | 379,242 | | | 3.70 | % |
Over ten years | 239,072 | | | 249,425 | | | 5.24 | % |
Total obligations of states and political subdivisions | 1,073,264 | | | 1,072,105 | | | 4.09 | % |
Other Securities | | | | | |
Mortgage-backed securities and collateralized mortgage obligations | 6,640,739 | | | 6,282,398 | | | 3.77 | % |
Total debt securities | $ | 9,265,077 | | | $ | 8,832,895 | | | 3.68 | % |
(1) Weighted average yields are stated on a federal tax equivalent basis of 21%. Weighted average yields for available for sale investments have been calculated on an amortized cost basis.
The mortgage-related securities in the table above include both pooled mortgage-backed issues and high-quality collateralized mortgage obligation structures, with an average duration of 5.4 years. These mortgage-related securities provide yield spread to U.S. Treasury or agency securities; however, the cash flows arising from them can be volatile due to refinancing of the underlying mortgage loans. We review investment securities on an ongoing basis for the presence of impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is more likely than not that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.
The net unrealized loss on historical Columbia securities was eliminated as of February 28, 2023 as part of the reverse merger method of accounting; however, historical Umpqua Bank balances were not marked as part of the Merger. Gross unrealized losses in the available for sale investment portfolio was $488.1 million as of December 31, 2023. This consisted primarily of unrealized losses on mortgage-backed securities and collateralized mortgage obligations of $387.6 million. The unrealized losses were primarily attributable to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not attributable to changes in credit quality. In the opinion of management, no ACL was considered necessary on these debt securities as of December 31, 2023.
RESTRICTED EQUITY SECURITIES
Restricted equity securities were $179.3 million and $47.1 million as of December 31, 2023 and 2022, respectively, the majority of which represents the Bank's investment in the FHLB. The increase is attributable to $101.8 million associated with the Merger, in addition to the purchase of FHLB stock during the period due to increased FHLB borrowing activity. FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member institutions, and can only be purchased and redeemed at par. As of December 31, 2023, the Bank's minimum required investment in FHLB stock was $178.8 million.
LOANS AND LEASES
Total loans and leases outstanding as of December 31, 2023 increased $11.3 billion compared to December 31, 2022. The increase was primarily attributable to the addition of $10.9 billion in net loans acquired through the Merger, noting that net organic growth during the period was partially offset by sales of $743.9 million in loans for the year ended December 31, 2023 and net charge-offs of $117.0 million. We elected to sell $666.3 million in non-relationship jumbo residential mortgage, commercial, and commercial real estate loans during 2023, as these loans were transactional in nature. The loan to deposit ratio as of December 31, 2023 was 90%, as compared to 97% as of December 31, 2022. The decline is primarily related to the Merger as the addition of the historical Columbia loans and deposits during the first quarter of 2023 reduced the ratio to 89% as of March 31, 2023.
The following table presents the concentration distribution of our loan and lease portfolio by major type as of December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
(dollars in thousands) | Amount | | % | | Amount | | % |
Commercial real estate | | | | | | | |
Non-owner occupied term, net | $ | 6,482,940 | | | 17 | % | | $ | 3,894,840 | | | 15 | % |
Owner occupied term, net | 5,195,605 | | | 14 | % | | 2,567,761 | | | 10 | % |
Multifamily, net | 5,704,734 | | | 15 | % | | 5,285,791 | | | 20 | % |
Construction & development, net | 1,747,302 | | | 5 | % | | 1,077,346 | | | 4 | % |
Residential development, net | 323,899 | | | 1 | % | | 200,838 | | | 1 | % |
Commercial | | | | | | | |
Term, net | 5,536,765 | | | 15 | % | | 3,029,547 | | | 12 | % |
Lines of credit & other, net | 2,430,127 | | | 6 | % | | 960,054 | | | 4 | % |
Leases & equipment finance, net | 1,729,512 | | | 5 | % | | 1,706,172 | | | 6 | % |
Residential | | | | | | | |
Mortgage, net | 6,157,166 | | | 16 | % | | 5,647,035 | | | 21 | % |
Home equity loans & lines, net | 1,938,166 | | | 5 | % | | 1,631,965 | | | 6 | % |
Consumer & other, net | 195,735 | | | 1 | % | | 154,632 | | | 1 | % |
Total, net of deferred fees and costs | $ | 37,441,951 | | | 100 | % | | $ | 26,155,981 | | | 100 | % |
| | | | | | | |
| | | | | | | |
The following table presents the maturity distribution of our loan portfolios and the rate sensitivity of these loans to changes in interest rates as of December 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| By Maturity | | Loans Over One Year by Rate Sensitivity |
(in thousands) | One Year or Less | | One Through Five Years | | Five Through 15 Years | | Over 15 Years | | Total | | Fixed Rate | | Floating/Adjustable Rate |
Commercial real estate, net | $ | 1,645,014 | | | $ | 4,538,292 | | | $ | 8,711,135 | | | $ | 4,560,039 | | | $ | 19,454,480 | | | $ | 5,741,680 | | | $ | 12,067,786 | |
Commercial, net | $ | 3,395,316 | | | $ | 3,978,575 | | | $ | 2,047,485 | | | $ | 275,028 | | | $ | 9,696,404 | | | $ | 4,121,220 | | | $ | 2,179,868 | |
Residential, net | $ | 8,490 | | | $ | 10,692 | | | $ | 948,039 | | | $ | 7,128,111 | | | $ | 8,095,332 | | | $ | 3,145,841 | | | $ | 4,941,001 | |
Consumer & other, net | $ | 20,506 | | | $ | 150,194 | | | $ | 24,358 | | | $ | 677 | | | $ | 195,735 | | | $ | 63,060 | | | $ | 112,169 | |
Commercial Real Estate and Commercial Loans
Commercial real estate and commercial loans are the largest classifications within earning assets, representing 40% and 20%, respectively, of average earning assets for the year ended December 31, 2023, as compared to 41% and 18%, respectively for the year ended December 31, 2022. The increase in commercial real estate and commercial loan balances between December 31, 2023 and December 31, 2022 was driven by the Merger, as well as disciplined loan production that was balanced across our market footprint and product lines, partially offset by commercial real estate and commercial loan sales during the period.
Commercial Real Estate Loans
The commercial real estate portfolio includes loans to developers and institutional sponsors supporting income-producing or for-sale commercial real estate properties. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement.
As of December 31, 2023, commercial real estate loans held in our loan portfolio were $19.5 billion, an increase of $6.4 billion compared to December 31, 2022. The increase reflects an increase in loans acquired through the Merger, partially offset by sales in transactional commercial real estate loans during the year. Commercial real estate concentrations are managed with a goal of optimizing geographic and business diversity, primarily in our footprint. Delinquency and non-accrual loan movements over the year suggest a move toward a more normalized credit environment following a phase of exceptional high quality.
Loans secured by office properties represent approximately 8% of our total loan portfolio at December 31, 2023, with a breakout of 57% non-owner occupied, 39% owner occupied, and 4% construction loans. Construction loans represent approximately 29% of office loans repricing in 2024, and excluding these balances, only 12% of our office portfolio reprices through 2025. Office properties located in suburban markets secure the majority of our office portfolio as only 6% of non-owner occupied loans are located in downtown core business districts.
Loans secured by multifamily properties, including construction, represent approximately 19% of the total loan portfolio. These assets continue to perform well due to demand for rental properties in our geographical footprint. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Bank's primary market areas in particular, could have an adverse impact on the repayment of these loans.
The following table provides detail on commercial real estate loans by property type:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
(in thousands) | | Outstanding | | Non-accrual | | Outstanding | | Non-accrual |
Commercial real estate loans by property type: | | | | | | |
Multifamily | | $ | 6,978,498 | | | $ | — | | | $ | 6,024,199 | | | $ | — | |
Office | | 2,980,240 | | | 13,335 | | | 1,794,254 | | | 647 | |
Industrial | | 2,812,295 | | | 2,053 | | | 1,523,576 | | | 421 | |
Retail | | 2,083,960 | | | 3,715 | | | 1,288,377 | | | 756 | |
Special Purpose | | 1,348,343 | | | 4,566 | | | 573,317 | | | 122 | |
Hotel/Motel | | 755,132 | | | 2,622 | | | 377,019 | | | 2,933 | |
Other | | 2,496,012 | | | 2,398 | | | 1,445,834 | | | 132 | |
Total commercial real estate loans | | $ | 19,454,480 | | | $ | 28,689 | | | $ | 13,026,576 | | | $ | 5,011 | |
| | | | | | | | |
Commercial Loans
Commercial loans are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. We focus on borrowers doing business within our geographic markets. Commercial loans are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. Lease and equipment financing products are designed to address the diverse financing needs of small to large companies, primarily for the acquisition of equipment. As of December 31, 2023, commercial loans held in our loan portfolio were $9.7 billion, an increase of $4.0 billion compared to December 31, 2022. The increase reflects loans acquired through the Merger, partially offset by commercial loan sales of $499.4 million during 2023, as these loans were transactional in nature.
The leases and equipment finance portfolio represents approximately 18% of the commercial portfolio and 5% of the total loan portfolio. The leasing portfolio has elevated non-performing and charge-offs centered in the trucking or transportation portion of the portfolio. Delinquency and non-accrual loan movements in the transportation and trucking portfolio over the year were anticipated and a slow recovery is expected for this portfolio.
The following table provides detail on commercial loans by industry type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 | |
(in thousands) | | Outstanding | | Non-accrual | | Outstanding | | Non-accrual | |
Commercial loans by industry type: | | | | | | | | | |
Agriculture | | $ | 829,555 | | | $ | 2,167 | | | $ | 252,324 | | | $ | 652 | | |
Contractors | | 733,531 | | | 6,143 | | | 453,602 | | | 3,721 | | |
Dentist | | 715,348 | | | 886 | | | — | | | — | | |
Finance/Insurance | | 754,115 | | | 3 | | | 371,716 | | | 6 | | |
Gaming | | 532,698 | | | — | | | 394,623 | | | — | | |
Healthcare | | 312,788 | | | 2,062 | | | 190,221 | | | 1,870 | | |
Manufacturing | | 736,298 | | | 2,636 | | | 481,268 | | | 2,411 | | |
Professional | | 445,455 | | | 3,113 | | | 337,113 | | | 1,176 | | |
Public Admin | | 649,895 | | | 7 | | | 450,123 | | | — | | |
Rental and Leasing | | 692,101 | | | 165 | | | 312,567 | | | 283 | | |
Retail | | 225,223 | | | 1,276 | | | 175,145 | | | 276 | | |
Support Services | | 411,565 | | | 1,047 | | | 278,299 | | | 913 | | |
Transportation/Warehousing | | 852,735 | | | 21,951 | | | 850,869 | | | 11,609 | | |
Wholesale | | 673,349 | | | 396 | | | 511,958 | | | 333 | | |
Other | | 1,131,748 | | | 3,830 | | | 635,945 | | | 2,441 | | |
Total commercial portfolio | | $ | 9,696,404 | | | $ | 45,682 | | | $ | 5,695,773 | | | $ | 25,691 | | |
Residential Real Estate Loans
Residential real estate loans represent mortgage loans and lines of credit to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. As of December 31, 2023, residential real estate loans held in our loan portfolio were $8.1 billion, an increase of $816.3 million as compared to December 31, 2022. The growth due to the inclusion of loans from the Merger was partially offset by the sale of $159.2 million in non-relationship jumbo residential mortgage loans during 2023, as these loans were transactional in nature. Future decreases in interest rates could result in an increase in the level of refinancing and new originations of residential real estate loans.
Consumer Loans
Consumer loans, including secured and unsecured personal loans, home equity and personal lines of credit, and motor vehicle loans, increased $41.1 million to $195.7 million as of December 31, 2023, as compared to December 31, 2022, reflecting an increase in direct loans directly correlated to the Merger.
ASSET QUALITY AND NON-PERFORMING ASSETS
The following table summarizes our non-performing assets and restructured loans, as of December 31, 2023 and 2022: | | | | | | | | | | | | | | |
(dollars in thousands) | December 31, 2023 | | December 31, 2022 |
Loans and leases on non-accrual status | | | |
| Commercial real estate, net | $ | 28,689 | | | $ | 5,011 | |
| Commercial, net | 45,682 | | | 25,691 | |
| | | | |
| | | | |
| Total loans and leases on non-accrual status | 74,371 | | | 30,702 | |
Loans and leases past due 90 days or more and accruing | | | |
| Commercial real estate, net | 870 | | | 1 | |
| Commercial, net | 8,232 | | | 7,909 | |
| Residential, net (1) | 29,102 | | | 19,894 | |
| Consumer & other, net | 326 | | | 134 | |
| Total loans and leases past due 90 days or more and accruing (1) | 38,530 | | | 27,938 | |
Total non-performing loans and leases | 112,901 | | | 58,640 | |
Other real estate owned | 1,036 | | | 203 | |
Total non-performing assets | $ | 113,937 | | | $ | 58,843 | |
Allowance for credit losses on loans and leases | $ | 440,871 | | | $ | 301,135 | |
Reserve for unfunded commitments | 23,208 | | | 14,221 | |
Allowance for credit losses | $ | 464,079 | | | $ | 315,356 | |
Asset quality ratios: | | | |
| Non-performing assets to total assets (1) | 0.22 | % | | 0.18 | % |
| Non-performing loans and leases to total loans and leases (1) | 0.30 | % | | 0.22 | % |
| Non-accrual loans and leases to total loans and leases | 0.20 | % | | 0.12 | % |
| ACL on loan and lease losses to total loans and leases | 1.18 | % | | 1.15 | % |
| ACL to total loans and leases | 1.24 | % | | 1.21 | % |
| ACL to non-accrual loans and leases | 624 | % | | 1,027 | % |
| ACL to total non-performing loans and leases | 411 | % | | 538 | % |
(1)Excludes government guaranteed GNMA mortgage loans that Columbia has the right but not the obligation to repurchase that are past due 90 days or more totaling $1.0 million as of December 31, 2023.
As of December 31, 2023, there were approximately $138.1 million of loans and leases, or 0.37% of total loans and leases, modified due to borrowers experiencing financial difficulties, which was accounted for under the guidance per ASU 2022-02 that was adopted in January 2023. Prior to the adoption, as of December 31, 2022, loans of $6.8 million were classified as accruing restructured loans.
A decline in economic conditions and other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, placed on non-accrual status, restructured, or transferred to other real estate owned in the future. As of December 31, 2023, there was an increase in non-performing loans as compared to December 31, 2022, which is representative of a more normalized credit environment.
ALLOWANCE FOR CREDIT LOSSES
The ACL totaled $464.1 million as of December 31, 2023, an increase of $148.7 million from the $315.4 million as of December 31, 2022. The following table shows the activity in the ACL for the years ended December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | 2023 | | 2022 | | | | | | |
Allowance for credit losses on loans and leases | | | | | | | | | |
| Balance, beginning of period | $ | 301,135 | | | $ | 248,412 | | | | | | | |
| Initial ACL recorded for PCD loans acquired during the period | 26,492 | | | — | | | | | | | |
| Provision for credit losses on loans and leases (1) | 209,979 | | | 83,605 | | | | | | | |
| Charge-offs: | | | | | | | | | |
| Commercial real estate, net | (803) | | | (136) | | | | | | | |
| Commercial, net | (109,862) | | | (41,073) | | | | | | | |
| Residential, net | (547) | | | (224) | | | | | | | |
| Consumer & other, net | (5,762) | | | (3,556) | | | | | | | |
| Total loans charged-off | (116,974) | | | (44,989) | | | | | | | |
| Recoveries: | | | | | | | | | |
| Commercial real estate, net | 333 | | | 384 | | | | | | | |
| Commercial, net | 16,884 | | | 11,029 | | | | | | | |
| Residential, net | 1,123 | | | 662 | | | | | | | |
| Consumer & other, net | 1,899 | | | 2,032 | | | | | | | |
| Total recoveries | 20,239 | | | 14,107 | | | | | | | |
| Net (charge-offs) recoveries: | | | | | | | | | |
| Commercial real estate, net | (470) | | | 248 | | | | | | | |
| Commercial, net | (92,978) | | | (30,044) | | | | | | | |
| Residential, net | 576 | | | 438 | | | | | | | |
| Consumer & other, net | (3,863) | | | (1,524) | | | | | | | |
| Total net charge-offs | (96,735) | | | (30,882) | | | | | | | |
| Balance, end of period | $ | 440,871 | | | $ | 301,135 | | | | | | | |
Reserve for unfunded commitments | | | | | | | | | |
| Balance, beginning of period | $ | 14,221 | | | $ | 12,767 | | | | | | | |
| Initial ACL recorded for unfunded commitments acquired during the period | 5,767 | | | — | | | | | | | |
| Provision for credit losses on unfunded commitments | 3,220 | | | 1,454 | | | | | | | |
| Balance, end of period | 23,208 | | | 14,221 | | | | | | | |
Total allowance for credit losses | $ | 464,079 | | | $ | 315,356 | | | | | | | |
As a percentage of average loans and leases (annualized): | | | | | | | | | |
| Net charge-offs | 0.27 | % | | 0.13 | % | | | | | | |
| Commercial real estate, net | — | % | | — | % | | | | | | |
| Commercial, net | 1.04 | % | | 0.56 | % | | | | | | |
| Residential, net | (0.01) | % | | (0.01) | % | | | | | | |
| Consumer & other, net | 1.93 | % | | 0.90 | % | | | | | | |
| Provision for credit losses | 0.60 | % | | 0.35 | % | | | | | | |
Recoveries as a percentage of charge-offs | 17.30 | % | | 31.36 | % | | | | | | |
(1) For the year ended December 31, 2023, the provision for credit losses on loans and leases includes $88.4 million initial provision related to non-PCD loans acquired during the period.
The provision for credit losses includes the provision for credit losses on loans and leases and the provision for unfunded commitments. The increase in the provision is due to the initial provision for historical Columbia non-PCD loans, organic growth in the loan and lease portfolios, updates to the economic forecasts used in credit models, and portfolio migration trends.
The following table sets forth the allocation of the ACLLL and percent of loans and leases in each category to total loans and leases, net of deferred fees, as of December 31 for each of the last two years: | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
(dollars in thousands) | Amount | | % | | Amount | | % |
Commercial real estate | $ | 125,888 | | | 52 | % | | $ | 77,813 | | | 50 | % |
Commercial | 244,821 | | | 26 | % | | 167,135 | | | 22 | % |
Residential | 62,004 | | | 21 | % | | 50,329 | | | 27 | % |
Consumer & other | 8,158 | | | 1 | % | | 5,858 | | | 1 | % |
Allowance for credit losses on loans and leases | $ | 440,871 | | | | | $ | 301,135 | | | |
The following table shows the change in the ACL from December 31, 2022 to December 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | December 31, 2022 | | 2023 net (charge-offs) recoveries | | Reserve build | | December 31, 2023 | | % of loans and leases, net outstanding |
Commercial real estate | | $ | 85,020 | | | $ | (470) | | | $ | 52,508 | | | $ | 137,058 | | | 0.70 | % |
Commercial | | 170,184 | | | (92,978) | | | 175,456 | | | 252,662 | | | 2.61 | % |
Residential | | 53,525 | | | 576 | | | 10,843 | | | 64,944 | | | 0.80 | % |
Consumer & other | | 6,627 | | | (3,863) | | | 6,651 | | | 9,415 | | | 4.81 | % |
Total allowance for credit losses | | $ | 315,356 | | | $ | (96,735) | | | $ | 245,458 | | | $ | 464,079 | | | 1.24 | % |
% of loans and leases outstanding | | 1.21 | % | | | | | | 1.24 | % | | |
To calculate the ACL, the CECL models use a forecast of future economic conditions and are dependent upon specific macroeconomic variables that are relevant to each of the Bank's loan and lease portfolios. For the fourth quarter of 2023, the Bank used Moody's Analytics' November 2023 baseline economic forecast, which shows a worsening economic situation from the forecast used in the prior quarter. Refer to Note 6 - Allowance for Credit Losses for further information on key components of the forecast. The models for calculating the ACL are sensitive to changes to economic variables, which could result in volatility as these assumptions change over time.
We believe that the ACL as of December 31, 2023 is sufficient to absorb losses inherent in the loan and lease portfolio and in credit commitments outstanding as of that date based on the information available. If the economic conditions decline, the Bank may need additional provisions for credit losses in future periods.
RESIDENTIAL MORTGAGE SERVICING RIGHTS
The following table presents the key elements of our residential mortgage servicing rights asset as of December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | 2023 | | 2022 | | 2021 |
Balance, beginning of period | $ | 185,017 | | | $ | 123,615 | | | $ | 92,907 | |
| | | | | |
Additions for new MSR capitalized | 5,347 | | | 24,137 | | | 38,522 | |
Sale of MSR assets | (57,305) | | | — | | | — | |
Changes in fair value: | | | | | |
Changes due to collection/realization of expected cash flows over time | (17,694) | | | (20,272) | | | (18,903) | |
Changes due to valuation inputs or assumptions (1) | (6,122) | | | 57,537 | | | 11,089 | |
Balance, end of period | $ | 109,243 | | | $ | 185,017 | | | $ | 123,615 | |
(1) The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.
Information related to our serviced loan portfolio as of December 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | |
(dollars in thousands) | December 31, 2023 | | December 31, 2022 | | |
Balance of loans serviced for others | $ | 8,175,664 | | | $ | 13,020,189 | | | |
MSR as a percentage of serviced loans | 1.34 | % | | 1.42 | % | | |
Residential MSR are adjusted to fair value quarterly with the change recorded in residential mortgage banking revenue on the Consolidated Statements of Operations. The value of servicing rights can fluctuate based on changes in interest rates and other factors. Generally, as interest rates decline and borrowers are able to take advantage of a refinance incentive, prepayments increase, and the total value of existing servicing rights declines as expectations of future servicing fee collections decline. Historically, the fair value of our residential MSR will increase as market rates for mortgage loans rise and decrease if market rates fall.
Due to changes to inputs in the valuation model including changes in discount rates and prepayment speeds, the fair value of the MSR asset decreased by $6.1 million for the year ended December 31, 2023, as compared to an increase of $57.5 million for the year ended December 31, 2022. In September 2023, the Company closed the sale of $57.3 million in mortgage servicing rights associated with $4.3 billion of residential mortgage loans serviced for others.
The fair value of the MSR asset decreased by $17.7 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns, and payoffs, as compared to a decrease of $20.3 million in 2022.
GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 2023, the Company had $1.0 billion in goodwill due to the Merger, compared to no goodwill at December 31, 2022. Goodwill is recorded in connection with business combinations and represents the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill is reviewed for potential impairment annually, on October 31, or more frequently if events or circumstances indicate a potential impairment. For the year ended December 31, 2023 there were no goodwill impairment losses recognized.
As of December 31, 2023, we had other intangible assets of $603.7 million, compared to $4.7 million as of December 31, 2022. The increase is as a result of the core deposit intangible asset of $710.2 million associated with the Merger, partially offset by amortization of $111.3 million during the year ended December 31, 2023. As part of a business acquisition, the fair value of identifiable intangible assets such as core deposits, which includes all deposits except certificates of deposit, was recognized at the Merger Date. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives. The core deposit intangible assets recorded are amortized on an accelerated basis over a period of 10 years using the sum-of-the-years-digits method. Intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. No impairment losses have been recognized in the periods presented.
DEPOSITS
Total deposits were $41.6 billion as of December 31, 2023, an increase of $14.5 billion, or 54%, compared to year-end 2022. The increase is mainly attributable to the addition of $15.2 billion in deposits related to the Merger, partially offset by lower customer balances due primarily to the impact of inflation and market liquidity tightening. The deposit portfolio mix also reflects a migration from non-interest bearing to interest-bearing accounts and alternative investments, as customers evaluated the interest rate earned on excess cash balances in the higher interest rate environment.
The following table presents the deposit balances by major category as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
(dollars in thousands) | Amount | | % | | Amount | | % |
Non-interest bearing demand | $ | 14,256,452 | | | 34 | % | | $ | 10,288,849 | | | 38 | % |
Interest-bearing demand | 8,044,432 | | | 19 | % | | 4,080,469 | | | 15 | % |
Money market | 10,324,454 | | | 25 | % | | 7,721,011 | | | 29 | % |
Savings | 2,754,113 | | | 7 | % | | 2,265,052 | | | 8 | % |
Time, greater than $250,000 | 1,034,094 | | | 2 | % | | 582,838 | | | 2 | % |
Time, $250,000 or less | 5,193,475 | | | 13 | % | | 2,127,393 | | | 8 | % |
Total deposits | $ | 41,607,020 | | | 100 | % | | $ | 27,065,612 | | | 100 | % |
The following table presents the time deposits in excess of the FDIC insurance limit, which is currently $250,000, by time remaining until maturity as of December 31, 2023: | | | | | |
(in thousands) | Amount |
Three months or less | $ | 268,543 | |
Over three months through six months | 255,113 | |
Over six months through twelve months | 457,554 | |
Over twelve months | 52,884 | |
Uninsured deposits, greater than $250,000 | $ | 1,034,094 | |
The Company's total core deposits, which are deposits less time deposits greater than $250,000 and all brokered deposits, were $37.4 billion as of December 31, 2023, compared to $25.6 billion as of December 31, 2022. The Company's total brokered deposits were $3.1 billion or 8% of total deposits as of December 31, 2023, compared to $866.9 million or 3% of total deposits as of December 31, 2022, primarily due to increases in brokered CDs to fund loan growth and liquidity needs.
The FDIC generally provides a standard amount of insurance of $250,000 per depositor for each account ownership category defined by the FDIC. Depositors may qualify for coverage of accounts over $250,000 if they have funds in different ownership categories and all FDIC requirements are met. All deposits that an account owner has in the same ownership category at the same bank are added together and insured up to the standard insurance amount. As of December 31, 2023 and December 31, 2022, approximately $28.1 billion, or 68%, and $17.0 billion, or 63%, respectively, of the Bank’s deposits were estimated to be insured. Uninsured deposits as of December 31, 2023, totaled $13.5 billion, as compared to $10.1 billion as of December 31, 2022. The increase was primarily driven by balances added with the Merger. Uninsured deposits are an estimated amount based on the methodologies and assumptions used for the Bank's regulatory requirements. We reviewed our methodologies and assumptions following the industry events that brought the level of uninsured deposits into focus during the first half of 2023, which resulted in the reclassification of select balances. As of December 31, 2023, total available liquidity was $18.7 billion, or 138% of uninsured deposits.
BORROWINGS
As of December 31, 2023, the Bank had outstanding securities sold under agreements to repurchase of $252.1 million, a decrease of $56.7 million from December 31, 2022. As of December 31, 2023, the Bank had no outstanding federal funds purchased balances. The Bank had outstanding borrowings consisting of FHLB advances of $3.8 billion and FRB BTFP borrowings of $200.0 million as of December 31, 2023. Total borrowings increased $3.0 billion since December 31, 2022, primarily due to borrowings added through the Merger, general liquidity management, and loan and lease growth that outpaced deposit growth during 2023 when acquired balances are excluded. The FHLB advances have fixed rates ranging from 5.5% to 5.7% and are set to mature in 2024. FHLB advances are secured by investment securities and loans secured by real estate. The FRB borrowing has a fixed rate of 4.8% and matures in 2024, although the Company has the ability to refinance or repay balances without penalty. The FRB borrowings are secured by investment securities.
JUNIOR AND OTHER SUBORDINATED DEBENTURES
We had junior and other subordinated debentures with carrying values of $424.3 million and $411.5 million as of December 31, 2023 and 2022, respectively. The increase is mainly due to the addition of $10.0 million in subordinated debt and $10.3 million in junior subordinated debt due to the Merger, partially offset by a $7.9 million decrease in fair value for the junior subordinated debentures elected to be carried at fair value. The change in fair value was due to a decrease in the implied forward curve and the spot curve shifting higher, partially offset by a decrease in credit spread. As of December 31, 2023, substantially all of the junior subordinated debentures had interest rates that are adjustable on a quarterly basis based on a spread over three-month term SOFR. These instruments are covered under federal legislation, and the Federal Reserve’s regulations implementing that legislation, which allowed us to replace the LIBOR index with forward term SOFR, plus the statutorily prescribed tenor spread adjustment. Accordingly, these instruments transitioned from LIBOR to SOFR as of July 1, 2023.
LIQUIDITY AND SOURCES OF FUNDS
The principal objective of our liquidity management program is to maintain the Bank's ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank's liquidity strategy includes maintaining a sufficient on-balance sheet liquidity position to provide flexibility, to grow deposit balances and fund growth in lending and investment portfolios, as well as to deleverage non-deposit liabilities as economic conditions permit. As a result, the Company believes that it has sufficient cash and access to borrowings to effectively manage through the current economic conditions, as well as meet its working capital and other needs. The Company will continue to prudently evaluate and maintain liquidity sources, including the ability to fund future loan growth and manage our borrowing sources.
We monitor the sources and uses of funds daily to maintain an acceptable liquidity position. One source of funds includes public deposits. Individual state laws require banks to collateralize public deposits, typically as a percentage of their public deposit balance in excess of FDIC insurance. Public deposits represented 7% of total deposits at both December 31, 2023 and 2022. The amount of collateral required varies by state and may also vary by institution within each state, depending on the individual state's risk assessment of depository institutions. Changes in the pledging requirements for uninsured public deposits may require pledging additional collateral to secure these deposits, drawing on other sources of funds to finance the purchase of assets that would be available to be pledged to satisfy a pledging requirement, or could lead to the withdrawal of certain public deposits from the Bank.
The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $41.6 billion as of December 31, 2023, compared with $27.1 billion as of December 31, 2022. The Bank also has liquidity from excess bond collateral of $5.1 billion.
In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can sell securities under agreements to repurchase, issue brokered certificates of deposit, or utilize off-balance sheet funding sources.
The Bank maintains a substantial level of total available liquidity in the form of off-balance sheet funding sources. These liquidity sources include capacity to borrow from uncommitted lines of credit, advances from the FHLB, the Federal Reserve Bank’s Discount Window and the BTFP. The ability to take new advances under the BTFP ends in March 2024. Availability of the uncommitted lines of credit is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.
The following table presents total off-balance sheet liquidity as of the date presented:
| | | | | | | | | | | | | | | | | |
| December 31, 2023 |
(dollars in thousands) | Gross Availability | | Utilization | | Net Availability |
FHLB lines | $ | 11,995,003 | | | $ | 3,769,833 | | | $ | 8,225,170 | |
Federal Reserve Discount Window | 1,588,131 | | | — | | | 1,588,131 | |
Federal Reserve BTFP | 1,478,716 | | | 200,000 | | | 1,278,716 | |
Uncommitted lines of credit | 600,000 | | | — | | | 600,000 | |
Total off-balance sheet liquidity | $ | 15,661,850 | | | $ | 3,969,833 | | | $ | 11,692,017 | |
The following table presents total available liquidity as of the date presented:
| | | | | |
(dollars in thousands) | December 31, 2023 |
Total off-balance sheet liquidity | $ | 11,692,017 | |
Cash and cash equivalents, less reserve requirements | 1,910,219 | |
Excess bond collateral | 5,124,585 | |
Total available liquidity | $ | 18,726,821 | |
The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company's revenues are obtained from dividends declared and paid by the Bank. There were $353.0 million of dividends paid by the Bank to the Company in 2023. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Company. FDIC and Oregon Division of Financial Regulation approval is required for quarterly dividends from Umpqua Bank to the Company.
Although we expect the Bank's and the Company's liquidity positions to remain satisfactory during 2024, it is possible that our deposit balances may not be maintained at previous levels due to pricing pressure or customers' behavior in the current economic environment. In addition, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased interest expense on deposits. We may utilize borrowings or other funding sources, which are generally more costly than deposit funding, to support our liquidity levels.
Commitments and Other Contractual Obligations - The Company participates in many different contractual arrangements which may or may not be recorded on its balance sheet, under which the Company has an obligation to pay certain amounts, provide credit or liquidity enhancements, or provide market risk support. Our material contractual obligations are primarily for time deposits and borrowings. As of December 31, 2023, time deposits totaled $6.2 billion, of which $6.0 billion matures in a year or less. Total borrowings as of December 31, 2023 were $4.0 billion, all of which mature within one year. These arrangements also include off-balance sheet commitments to extend credit, letters of credit and various forms of guarantees. As of December 31, 2023, our loan commitments were $11.3 billion. A portion of the commitments will eventually result in funded loans and increase our profitability through net interest income when drawn and unused commitment fees prior to being drawn. Refer to Note 18 - Commitments and Contingencies for further information. Financing commitments, letters of credit and deferred purchase commitments are presented at contractual amounts and do not necessarily reflect future cash outflows as many are expected to expire unused or partially used.
CONCENTRATIONS OF CREDIT RISK
Information regarding Concentrations of Credit Risk is included in Notes 3, 5, and 18 of the Notes to Consolidated Financial Statements in Item 8 below.
CAPITAL RESOURCES
Shareholders' equity as of December 31, 2023 and 2022 was $5.0 billion and $2.5 billion, respectively. The fluctuation in shareholders' equity during the year ended December 31, 2023 was principally due to the increase in common stock of $2.3 billion as a result of the Merger and net income of $348.7 million during the period, partially offset by cash dividends paid of $272.5 million for the year ended December 31, 2023.
The Federal Reserve Board has guidelines in place for risk-based capital requirements applicable to U.S. banks and bank/financial holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulation, associated with various categories of assets, both on and off-balance sheet. Refer to the discussion of the capital adequacy requirements in Supervision and Regulation in Item 1 of this 10-K.
Under the Basel III guidelines, capital strength is measured in three tiers, which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. The guidelines require an 8% total risk-based capital ratio, of which 6% must be Tier 1 capital and 4.5% must be CET1. Our CET1 capital primarily includes shareholders' equity less certain deductions for goodwill and other intangibles, net of taxes, net unrealized gains (losses) on AFS securities, net of tax, net unrealized gains (losses) related to fair value of liabilities, net of tax, and certain deferred tax assets that arise from tax loss and credit carry-forwards, and totaled $3.9 billion as of December 31, 2023. Tier 1 capital is primarily comprised of common equity Tier 1 capital, less certain additional deductions applied during the phase-in period, and totaled $3.9 billion as of December 31, 2023. Tier 2 capital components include all, or a portion of, the ACL in excess of Tier 1 statutory limits and combined trust preferred security debt issuances. The total of Tier 1 capital plus Tier 2 capital components is referred to as Total Risk-Based Capital and was $4.8 billion as of December 31, 2023.
A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as period-end shareholders' equity, less accumulated other comprehensive income, goodwill and deposit-based intangibles, divided by average assets as adjusted for goodwill and other intangible assets. Although a minimum leverage ratio of 4% is required for the highest-rated financial holding companies that are not undertaking significant expansion programs, the Federal Reserve Board may require a financial holding company to maintain a leverage ratio greater than 4% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and financial holding companies.
The following table sets forth the Company's and the Bank's capital ratios as of December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Company | | Bank |
| 2023 | | 2022 | | 2023 | | 2022 |
CET1 risk-based capital ratio | 9.64 | % | | 11.02 | % | | 10.52 | % | | 11.92 | % |
Tier 1 risk-based capital ratio | 9.64 | % | | 11.02 | % | | 10.52 | % | | 11.92 | % |
Total risk-based capital ratio | 11.86 | % | | 13.71 | % | | 11.57 | % | | 12.92 | % |
Leverage ratio | 7.60 | % | | 9.14 | % | | 8.30 | % | | 9.89 | % |
Basel III also requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. The common equity Tier 1, Tier 1, and total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%, respectively. As of December 31, 2023, the Company and Bank were in compliance with the capital conservation buffer requirements.
As of December 31, 2023, the most recent notification from the FDIC categorized the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's regulatory capital category.
Along with enactment of the CARES Act, the federal bank regulatory authorities issued an interim final rule to provide banking organizations that are required to implement CECL before the end of 2020 the option to delay the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. The Company elected this capital relief and delayed the estimated regulatory capital impact of adopting CECL, relative to the incurred loss methodology's effect on regulatory capital.
As of December 31, 2023, all four of the capital ratios of the Bank exceeded the minimum ratios required by federal regulation. Management monitors these ratios on a regular basis to ensure that the Bank remains within regulatory guidelines.
The Company's dividend policy considers, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth to determine the amount of dividends declared, if any, on a quarterly basis. There is no assurance that future cash dividends on common shares will be declared or increased. We cannot predict the extent of the economic decline that could result in inadequate earnings, regulatory restrictions and limitations, changes to our capital requirements, or a decision to increase capital by retention of earnings, that may result in the inability to pay dividends at previous levels, or at all.
During the first quarter of 2023 and before the Merger’s close, Columbia declared a cash dividend of $0.30 per common share and UHC declared a cash dividend of $0.21 per common share. Upon the closing of the Merger, which was accounted for as a reverse merger using the acquisition method of accounting, as described in Note 2 - Business Combination, all pre-closing financial data, including the dividend per common share, reflect historical UHC data, adjusted as described in Note 2. As such, the cash dividend for the first quarter of 2023 is reported as $0.35 per common share. Columbia declared a cash dividend of $0.36 per common share for all remaining quarters of 2023. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, the overall payout ratio, and expected asset growth.
The payment of future cash dividends is at the discretion of our Board and subject to a number of factors, including results of operations, general business conditions, growth, financial condition, and other factors deemed relevant by the Board. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in the Supervision and Regulation section in Item 1 above.
The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the years ended December 31, 2023, 2022, and 2021: | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Dividend declared per common share (1) | $ | 1.43 | | | $ | 1.40 | | | $ | 1.40 | |
Dividend payout ratio | 80 | % | | 54 | % | | 44 | % |
(1) Periods prior to February 28, 2023 have been restated as a result of the adjustment to common shares outstanding based on the exchange ratio from the Merger of 0.5958.
As of December 31, 2023, the Company does not have a share repurchase authorization from its Board of Directors. The Company did not repurchase any shares during either 2023 or 2022. The timing and amount of future repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, our capital plan, and bank or bank holding company regulatory approvals. In addition, our stock plans provide that award holders may pay for the exercise price and tax withholdings in part or entirely by tendering previously held shares.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| | | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
| Page |
| |
| |
| |
| |
| |
| |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Columbia Banking System, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Columbia Banking System, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements").
We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because management's assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment and our audit of the Company's internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Fair Value of Acquired Loans Held for Investment and Core Deposit Intangible Recognized as Part of the Merger with Umpqua Holdings Corporation — Refer to Notes 1 and 2 to the consolidated financial statements.
Critical Audit Matter Description
On February 28, 2023, Umpqua Holdings Corporation ("UHC") merged with and into Columbia. Promptly following the Merger ("the Merger"), Columbia’s wholly owned bank subsidiary, Columbia State Bank, merged with and into UHC’s wholly owned bank subsidiary, Umpqua Bank, with Umpqua Bank as the surviving bank.
The Merger was accounted for as a reverse merger using the acquisition method of accounting; therefore, UHC was deemed the acquirer for financial reporting purposes, with Columbia as the legal acquirer. Under the reverse acquisition method of accounting, the assets and liabilities of Columbia as of February 28, 2023 were recorded at their respective fair values. Accordingly, the purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date, which are measured in accordance with fair value measurement principles. The allocation of the total purchase consideration to the estimated fair values of the acquired loans held for investment ("acquired loans") and core deposit intangible assets acquired was $10.9 billion and $710.2 million at the Merger Date, respectively.
The valuation of acquired loans was performed by a third party, utilizing a discounted cash flow methodology, as of the Merger Date to assess the fair value. The assumptions include credit loss expectations, discount rates, and prepayment speeds.
The valuation of core deposit intangible assets was performed by a third party, utilizing a discounted cash flow methodology, as of the Merger Date to assess the fair value. The assumptions include expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds, and the interest costs associated with customer deposits.
We identified the fair value of the acquired loans and the core deposit intangible assets as part of the Merger as a critical audit matter because a high degree of auditor judgement and an increased extent of effort, including the involvement of our valuation specialists, was required to evaluate the reasonableness of the methodologies and certain assumptions used by management to determine the fair values. Specifically, the (i) credit loss expectations and (ii) discount rates used for acquired loans, and the (iii) discount rate, (iv) expected customer attrition rates, (v) net maintenance cost of the deposit base, (vi) alternative cost of funds, and (vii) the interest costs associated with customer deposits for core deposit intangible assets.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the methodologies and certain assumptions used by management to determine the fair values of the acquired loans and the core deposit intangible asset as part of the Merger included the following, among others:
•We tested the effectiveness of controls over the purchase accounting allocation, including those over the valuation methodologies and assumptions utilized.
•We evaluated, with the assistance of our fair value specialists, the appropriateness of the (i) valuation methodologies, (ii) credit loss expectations and discount rates used for acquired loans, and the discount rate, expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds, and the interest costs associated with customer deposits for core deposit intangible assets, as well as the (iii) mathematical accuracy of the valuation calculations.
•We tested the completeness and accuracy of the certain underlying loan and deposit information used in the valuation of the acquired loans and the core deposit intangible assets, respectively.
Allowance for Credit Losses on Loans and Leases— Refer to Notes 1 and 6 to the consolidated financial statements
Critical Audit Matter Description
The Bank’s estimate of current expected credit losses for loans and leases is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Management judgement is required to determine which loss estimation methods are appropriate for their circumstances.
The allowance for credit losses on loans and leases ("ACLLL") is measured on a collective (pool) basis when similar characteristics exist. The Company has selected models at the portfolio level using a risk-based approach, with larger, more complex portfolios having more complex models. These models calculate two predictive metrics: the probability of default (“PD”) and loss given default ("LGD"). These models estimate the PD and LGD for loans utilizing inputs that include forecasted future economic conditions and that are dependent upon specific macroeconomic variables relevant to each of the Bank’s loan and lease portfolios. All loans and leases that have not been modeled receive a loss rate via an extrapolated rate methodology. The loans and leases receiving an extrapolated rate include certain loans acquired through the Merger, newly originated loans and leases and loans and leases without the granularity of data necessary to be modeled.
For ACLLL calculation purposes, the Bank considered the financial and economic environment at the time of assessment and economic scenarios that differed in the levels of severity and sensitivity to the ACLLL results. At each measurement date, the Bank selects the scenario that reflects its view of future economic conditions and is determined to be the most probable outcome. Along with the quantitative factors produced by the models, management also considers qualitative factors when determining the ACLLL.
Given the size of the ACLLL, the complexity of the models, and the management judgements required for the selection of appropriate models, forecasting economic conditions, and determining qualitative adjustments, performing audit procedures to evaluate the ACLLL requires a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists.
We have identified the ACLLL estimate for certain loan portfolios as a critical audit matter based upon the above factors, which includes the economic forecast selection, model applicability, and assessment of qualitative adjustments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the ACLLL included the following, among others:
•We tested the effectiveness of controls over model applicability, the selection of forecasted economic assumptions used in the models, data transfers in to and out of the models, and overall model results.
•We involved credit specialists to assist us in evaluating the reasonableness and conceptual soundness of the methodologies applied in the credit loss estimation models.
•We tested the completeness and accuracy of certain data elements used in the models.
•We tested the reasonableness of the (i) extrapolation model, including assessment of the applicability of loss rates on acquired loans, (ii) the economic scenario selected by management for use in the models, and (iii) certain qualitative adjustments within the ACLLL estimate.
/s/ Deloitte & Touche LLP
Portland, Oregon
February 27, 2024
We have served as the Company's auditor since 2018.
COLUMBIA BANKING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2023 and 2022
| | | | | | | | | | | |
(in thousands, except shares) | December 31, 2023 | | December 31, 2022 |
ASSETS | | | |
Cash and due from banks | $ | 498,496 | | | $ | 327,313 | |
Interest-bearing cash and temporary investments | 1,664,038 | | | 967,330 | |
Total cash and cash equivalents | 2,162,534 | | | 1,294,643 | |
Investment securities | | | |
Equity and other, at fair value | 76,995 | | | 72,959 | |
Available for sale, at fair value | 8,829,870 | | | 3,196,166 | |
Held to maturity, at amortized cost | 2,300 | | | 2,476 | |
Loans held for sale | 30,715 | | | 71,647 | |
Loans and leases (at fair value: $275,140 and $285,581) | 37,441,951 | | | 26,155,981 | |
Allowance for credit losses on loans and leases | (440,871) | | | (301,135) | |
Net loans and leases | 37,001,080 | | | 25,854,846 | |
Restricted equity securities | 179,274 | | | 47,144 | |
Premises and equipment, net | 338,970 | | | 176,016 | |
Operating lease right-of-use assets | 115,811 | | | 78,598 | |
Goodwill | 1,029,234 | | | — | |
Other intangible assets, net | 603,679 | | | 4,745 | |
Residential mortgage servicing rights, at fair value | 109,243 | | | 185,017 | |
Bank-owned life insurance | 680,948 | | | 331,759 | |
Deferred tax asset, net | 347,203 | | | 132,823 | |
Other assets | 665,740 | | | 399,800 | |
Total assets | $ | 52,173,596 | | | $ | 31,848,639 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Deposits | | | |
Non-interest-bearing | $ | 14,256,452 | | | $ | 10,288,849 | |
Interest-bearing | 27,350,568 | | | 16,776,763 | |
Total deposits | 41,607,020 | | | 27,065,612 | |
Securities sold under agreements to repurchase | 252,119 | | | 308,769 | |
Borrowings | 3,950,000 | | | 906,175 | |
Junior subordinated debentures, at fair value | 316,440 | | | 323,639 | |
Junior and other subordinated debentures, at amortized cost | 107,895 | | | 87,813 | |
Operating lease liabilities | 130,576 | | | 91,694 | |
| | | |
Other liabilities | 814,512 | | | 585,111 | |
Total liabilities | 47,178,562 | | | 29,368,813 | |
COMMITMENTS AND CONTINGENCIES (NOTE 18) | | | |
SHAREHOLDERS' EQUITY | | | |
Preferred Stock, no par value, shares authorized: 2,000,000, issued and outstanding: 0 | — | | | — | |
Common stock, no par value, shares authorized: 520,000,000 in 2023 and 238,320,000(1) in 2022; issued and outstanding: 208,584,667 in 2023 and 129,320,962(1) in 2022 | 5,802,747 | | | 3,450,493 | |
Accumulated deficit | (467,571) | | | (543,803) | |
Accumulated other comprehensive loss | (340,142) | | | (426,864) | |
Total shareholders' equity | 4,995,034 | | | 2,479,826 | |
Total liabilities and shareholders' equity | $ | 52,173,596 | | | $ | 31,848,639 | |
(1) Periods prior to February 28, 2023 have been restated as a result of the adjustment to common shares outstanding based on the exchange ratio from the Merger of 0.5958.
See accompanying notes to consolidated financial statements.
COLUMBIA BANKING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2023, 2022, and 2021
| | | | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | 2023 | | 2022 | | 2021 |
INTEREST INCOME | | | | | |
Interest and fees on loans and leases | $ | 2,113,615 | | | $ | 1,050,258 | | | $ | 890,515 | |
Interest and dividends on investment securities: | | | | | |
Taxable | 276,841 | | | 72,264 | | | 60,399 | |
Exempt from federal income tax | 24,109 | | | 5,351 | | | 5,947 | |
Dividends | 13,103 | | | 438 | | | 1,318 | |
Interest on temporary investments and interest-bearing deposits | 111,659 | | | 19,706 | | | 3,864 | |
Total interest income | 2,539,327 | | | 1,148,017 | | | 962,043 | |
INTEREST EXPENSE | | | | | |
Interest on deposits | 461,654 | | | 48,195 | | | 27,151 | |
Interest on securities sold under agreement to repurchase and federal funds purchased | 3,923 | | | 997 | | | 280 | |
Interest on borrowings | 242,914 | | | 8,920 | | | 2,838 | |
Interest on junior and other subordinated debentures | 37,665 | | | 19,889 | | | 12,127 | |
Total interest expense | 746,156 | | | 78,001 | | | 42,396 | |
Net interest income | 1,793,171 | | | 1,070,016 | | | 919,647 | |
PROVISION (RECAPTURE) FOR CREDIT LOSSES | 213,199 | | | 84,016 | | | (42,651) | |
Net interest income after provision (recapture) for credit losses | 1,579,972 | | | 986,000 | | | 962,298 | |
NON-INTEREST INCOME | | | | | |
Service charges on deposits | 65,525 | | | 48,365 | | | 42,086 | |
Card-based fees | 55,263 | | | 37,370 | | | 36,114 | |
Financial services and trust revenue | 13,471 | | | 90 | | | 5,112 | |
Residential mortgage banking revenue, net | 16,789 | | | 106,859 | | | 186,811 | |
Gain on sale of debt securities, net | 13 | | | 2 | | | 8 | |
Gain (loss) on equity securities, net | 2,300 | | | (7,099) | | | (1,511) | |
Gain on loan and lease sales, net | 4,414 | | | 6,696 | | | 15,715 | |
| | | | | |
Bank owned life insurance income | 15,624 | | | 8,253 | | | 8,302 | |
Other income (loss) | 30,528 | | | (1,008) | | | 63,681 | |
Total non-interest income | 203,927 | | | 199,528 | | | 356,318 | |
NON-INTEREST EXPENSE | | | | | |
Salaries and employee benefits | 616,103 | | | 441,226 | | | 480,820 | |
Occupancy and equipment, net | 183,480 | | | 138,451 | | | 137,546 | |
Communications | 16,252 | | | 10,429 | | | 11,564 | |
Marketing | 11,399 | | | 6,540 | | | 7,381 | |
Services | 57,641 | | | 51,323 | | | 48,800 | |
FDIC assessments | 71,402 | | | 13,964 | | | 9,238 | |
Intangible amortization | 111,296 | | | 4,095 | | | 4,520 | |
Merger-related expenses | 171,659 | | | 17,356 | | | 15,183 | |
| | | | | |
Other expenses | 73,468 | | | 51,566 | | | 45,404 | |
Total non-interest expense | 1,312,700 | | | 734,950 | | | 760,456 | |
Income before provision for income taxes | 471,199 | | | 450,578 | | | 558,160 | |
Provision for income taxes | 122,484 | | | 113,826 | | | 137,860 | |
Net income | $ | 348,715 | | | $ | 336,752 | | | $ | 420,300 | |
Earnings per common share(1): | | | | | |
Basic | $ | 1.79 | | | $ | 2.60 | | | $ | 3.22 | |
Diluted | $ | 1.78 | | | $ | 2.60 | | | $ | 3.21 | |
Weighted average number of common shares outstanding(1): | | | | | |
Basic | 195,304 | | | 129,277 | | | 130,499 | |
Diluted | 195,871 | | | 129,732 | | | 131,030 | |
(1) Periods prior to February 28, 2023 have been restated as a result of the adjustment to common shares outstanding based on the exchange ratio from the Merger of 0.5958.
See accompanying notes to consolidated financial statements.
COLUMBIA BANKING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2023, 2022, and 2021
| | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
Net income | $ | 348,715 | | | $ | 336,752 | | | $ | 420,300 | |
Available for sale securities: | | | | | |
Unrealized gains (losses) arising during the period | 109,221 | | | (548,193) | | | (124,970) | |
Income tax (expense) benefit related to unrealized gains (losses) | (28,411) | | | 140,995 | | | 32,142 | |
| | | | | |
Reclassification adjustment for net realized gains in earnings | (13) | | | (2) | | | (8) | |
Income tax expense related to realized gains | 3 | | | 1 | | | 2 | |
Net change in unrealized gains (losses) for available for sale securities | 80,800 | | | (407,199) | | | (92,834) | |
| | | | | |
Junior subordinated debentures, at fair value: | | | | | |
Unrealized gains (losses) arising during the period | 7,866 | | | (28,842) | | | (37,899) | |
Income tax (expense) benefit related to unrealized gains (losses) | (2,045) | | | 7,418 | | | 9,747 | |
Net change in unrealized gains (losses) for junior subordinated debentures, at fair value | 5,821 | | | (21,424) | | | (28,152) | |
| | | | | |
Pension plan liability adjustment: | | | | | |
Amortization of unrecognized net actuarial gain included in net periodic pension cost | 136 | | | — | | | — | |
Income tax expense related to unrecognized actuarial loss | (35) | | | — | | | — | |
Net change in pension plan liability adjustment | 101 | | | — | | | — | |
Other comprehensive income (loss), net of tax | 86,722 | | | (428,623) | | | (120,986) | |
Comprehensive income (loss) | $ | 435,437 | | | $ | (91,871) | | | $ | 299,314 | |
See accompanying notes to consolidated financial statements.
COLUMBIA BANKING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2023, 2022, and 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | |
(in thousands, except shares) | Shares | | Amount | | | | Total |
Balance at January 1, 2021 | 131,210,850 | | | $ | 3,514,599 | | | $ | (932,767) | | | $ | 122,745 | | | $ | 2,704,577 | |
Net income | | | | | 420,300 | | | | | 420,300 | |
Other comprehensive loss, net of tax | | | | | | | (120,986) | | | (120,986) | |
Stock-based compensation | | | 10,906 | | | | | | | 10,906 | |
Stock repurchased and retired | (2,477,567) | | | (80,690) | | | | | | | (80,690) | |
Issuances of common stock under stock plans | 332,193 | | | 34 | | | | | | | 34 | |
Cash dividends on common stock ($1.40 per share) (1) | | | | | (184,871) | | | | | (184,871) | |
Balance at December 31, 2021 | 129,065,476 | | | $ | 3,444,849 | | | $ | (697,338) | | | $ | 1,759 | | | $ | 2,749,270 | |
Net income | | | | | 336,752 | | | | | 336,752 | |
Other comprehensive loss, net of tax | | | | | | | (428,623) | | | (428,623) | |
Stock-based compensation | | | 9,753 | | | | | | | 9,753 | |
Stock repurchased and retired | (120,380) | | | (4,163) | | | | | | | (4,163) | |
Issuances of common stock under stock plans | 375,866 | | | 54 | | | | | | | 54 | |
Cash dividends on common stock ($1.40 per share) (1) | | | | | (183,217) | | | | | (183,217) | |
Balance at December 31, 2022 | 129,320,962 | | | $ | 3,450,493 | | | $ | (543,803) | | | $ | (426,864) | | | $ | 2,479,826 | |
Net income | | | | | 348,715 | | | | | 348,715 | |
Other comprehensive income, net of tax | | | | | | | 86,722 | | | 86,722 | |
Stock-based compensation | | | 18,073 | | | | | | | 18,073 | |
Stock repurchased and retired | (263,835) | | | (6,282) | | | | | | | (6,282) | |
Issuances of common stock under stock plans | 605,988 | | | — | | | | | | | — | |
Issuances of common stock under the employee stock purchase plan | 58,440 | | | 1,185 | | | | | | | 1,185 | |
Stock issued in connection with acquisition | 78,863,112 | | | 2,339,278 | | | | | | | 2,339,278 | |
Cash dividends on common stock ($1.43 per share) (1) | | | | | (272,483) | | | | | (272,483) | |
Balance at December 31, 2023 | 208,584,667 | | | $ | 5,802,747 | | | $ | (467,571) | | | $ | (340,142) | | | $ | 4,995,034 | |
(1) Periods prior to February 28, 2023 have been restated as a result of the adjustment to common shares outstanding based on the exchange ratio from the Merger of 0.5958.
See accompanying notes to consolidated financial statements.
COLUMBIA BANKING SYSTEM, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended December 31, 2023, 2022, and 2021 | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | $ | 348,715 | | | $ | 336,752 | | | $ | 420,300 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Deferred income tax expense | 12,895 | | | 14,383 | | | 40,805 | |
(Accretion) amortization of investment (discounts) premiums, net | (67,702) | | | 6,601 | | | 14,404 | |
Gain on sales of investment securities, net | (13) | | | (2) | | | (8) | |
| | | | | |
Provision (recapture) for credit losses | 213,199 | | | 84,016 | | | (42,651) | |
Change in cash surrender value of bank owned life insurance | (15,962) | | | (8,353) | | | (8,402) | |
Depreciation, amortization, and accretion | 144,252 | | | 28,305 | | | 31,498 | |
Gain on sale of premises and equipment | (31,472) | | | (2,747) | | | (574) | |
| | | | | |
| | | | | |
Additions to residential mortgage servicing rights carried at fair value | (5,347) | | | (24,137) | | | (38,522) | |
Change in fair value residential mortgage servicing rights carried at fair value | 23,816 | | | (37,265) | | | 7,814 | |
Stock-based compensation | 18,073 | | | 9,753 | | | 10,906 | |
Net (increase) decrease in equity and other investments | (448) | | | 1,156 | | | 352 | |
(Gain) loss on equity securities, net | (2,300) | | | 7,099 | | | 1,511 | |
(Gain) loss on sale of loans and leases, net | (10,200) | | | 1,953 | | | (145,723) | |
Change in fair value of loans held for sale | 341 | | | 10,670 | | | 21,427 | |
Origination of loans held for sale | (441,568) | | | (1,839,466) | | | (4,747,104) | |
Proceeds from sales of loans held for sale | 602,634 | | | 2,076,548 | | | 4,952,918 | |
Change in other assets and liabilities: | | | | | |
Net (increase) decrease in other assets | (24,163) | | | 169,540 | | | 153,148 | |
Net (decrease) increase in other liabilities | (94,910) | | | 230,223 | | | (9,376) | |
Net cash provided by operating activities | 669,840 | | | 1,065,029 | | | 662,723 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Purchases of investment securities available for sale | (926,216) | | | (276,812) | | | (1,838,923) | |
Proceeds from investment securities available for sale | 1,694,850 | | | 396,100 | | | 761,249 | |
| | | | | |
Purchases of restricted equity securities | (290,817) | | | (180,543) | | | (53) | |
Redemption of restricted equity securities | 260,697 | | | 144,315 | | | 30,803 | |
Net change in loans and leases | (1,335,189) | | | (3,744,493) | | | (735,422) | |
Proceeds from sales of loans and leases | 748,264 | | | 148,978 | | | 246,667 | |
Change in premises and equipment | 40,688 | | | (27,086) | | | (15,478) | |
Purchases of bank owned life insurance | (28,243) | | | — | | | — | |
Proceeds from bank owned life insurance death benefits | 4,799 | | | 4,339 | | | 4,127 | |
Proceeds from sale of mortgage servicing rights | 57,305 | | | — | | | — | |
Net cash received from sale of Umpqua Investments, Inc. | — | | | — | | | 10,781 | |
| | | | | |
Cash received in the Merger | 274,587 | | | — | | | — | |
Other | 1,011 | | | 2,110 | | | 1,974 | |
Net cash provided (used) in investing activities | $ | 501,736 | | | $ | (3,533,092) | | | $ | (1,534,275) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net (decrease) increase in deposit liabilities | $ | (651,130) | | | $ | 470,945 | | | $ | 1,972,519 | |
Net (decrease) increase in securities sold under agreements to repurchase | (126,675) | | | (183,478) | | | 116,863 | |
Net decrease in federal funds purchased | (14,000) | | | — | | | — | |
Proceeds from borrowings | 17,350,000 | | | 1,650,000 | | | — | |
Repayment of borrowings | (16,586,522) | | | (750,000) | | | (765,000) | |
| | | | | |
Net proceeds from issuance of common stock | 1,185 | | | 54 | | | 34 | |
Dividends paid on common stock | (270,261) | | | (182,273) | | | (183,734) | |
| | | | | |
Repurchase and retirement of common stock | (6,282) | | | (4,163) | | | (80,690) | |
Net cash (used) provided by financing activities | (303,685) | | | 1,001,085 | | | 1,059,992 | |
Net increase (decrease) in cash and cash equivalents | 867,891 | | | (1,466,978) | | | 188,440 | |
Cash and cash equivalents, beginning of period | 1,294,643 | | | 2,761,621 | | | 2,573,181 | |
Cash and cash equivalents, end of period | $ | 2,162,534 | | | $ | 1,294,643 | | | $ | 2,761,621 | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended December 31, 2023, 2022, and 2021 (Continued) | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | |
Cash paid during the period for: | | | | | |
Interest | $ | 692,991 | | | $ | 71,209 | | | $ | 42,820 | |
Income taxes | $ | 138,910 | | | $ | 71,804 | | | $ | 105,119 | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | |
Change in unrealized gains and losses on investment securities available for sale, net of taxes | $ | 80,800 | | | $ | (407,199) | | | $ | (92,834) | |
| | | | | |
Change in unrealized gains and losses on junior subordinated debentures carried at fair value, net of taxes | $ | 5,821 | | | $ | (21,424) | | | $ | (28,152) | |
| | | | | |
| | | | | |
Transfer of loans to loans held for sale | $ | 118,085 | | | $ | — | | | $ | — | |
Transfer of loans held for sale to loans | $ | 5,754 | | | $ | 25,057 | | | $ | 315,887 | |
| | | | | |
| | | | | |
Acquisition: | | | | | |
Assets acquired | $ | 19,230,586 | | | $ | — | | | $ | — | |
Liabilities assumed | (17,920,542) | | | — | | | — | |
Net assets acquired | $ | 1,310,044 | | | $ | — | | | $ | — | |
| | | | | |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies
Nature of Operations-Columbia Banking System, Inc. is headquartered in Tacoma, Washington, and is engaged primarily in the business of commercial and consumer banking. The Company provides a broad range of banking and other financial services to corporate, institutional, small business, and individual customers through its wholly-owned banking subsidiary Umpqua Bank. The Bank has a wholly-owned subsidiary, Financial Pacific Leasing, Inc., which is a commercial equipment leasing company.
The Company and its subsidiaries are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.
Basis of Financial Statement Presentation-On February 28, 2023, UHC merged with and into Columbia, with Columbia continuing as the surviving legal corporation. Promptly following the Merger, Columbia’s wholly-owned bank subsidiary, Columbia State Bank, merged with and into UHC’s wholly-owned bank subsidiary, Umpqua Bank, with Umpqua Bank as the surviving bank. Upon completion of the Merger, the combined company became Columbia Banking System, Inc. (together with its direct and indirect subsidiaries, "we," "us," "our," "Columbia" or the "Company"), which is a financial holding company with its wholly-owned banking subsidiary Umpqua Bank (the "Bank").
The Merger was accounted for as a reverse merger using the acquisition method of accounting; therefore, UHC was deemed the acquirer for financial reporting purposes, even though Columbia was the legal acquirer. The Merger was effectively an all-stock transaction and has been accounted for as a business combination. Columbia's financial results for any periods ended prior to February 28, 2023, the Merger Date, reflect UHC results only on a standalone basis. Accordingly, Columbia's reported financial results for the three months ended March 31, 2023 reflect only UHC financial results through the closing of the Merger and may not be directly comparable to the prior or future reported periods. The number of shares issued and outstanding, earnings per share, additional paid-in capital, and all references to share quantities or metrics of Columbia have been retrospectively restated to reflect the equivalent number of shares issued in the Merger as the Merger was accounted for as a reverse acquisition using the acquisition method of accounting. Under the reverse acquisition method of accounting, the assets and liabilities of Columbia were recorded at their respective fair values as of February 28, 2023 ("historical Columbia"). Refer to Note 2 - Business Combination for additional information on this acquisition.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with prevailing practices within the banking and securities industries. In preparing such financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the ACL, business combinations, and goodwill.
In connection with the Merger, effective February 28, 2023, the Company realigned its operating segments based on changes in its internal reporting structure and changes to the Company's Chief Operating Decision Maker. The Company now reports as a single reportable segment. Previously, UHC reported two segments: Core Banking and Mortgage Banking; however, in 2022 the mortgage banking segment's scale of mortgage operations was downsized as a smaller impact on the financial statements was expected in the future. The revised presentation of segment data has been applied retroactively for all periods presented in these financial statements.
Consolidation-The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and the Bank's wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has wholly-owned trusts that were formed to issue trust preferred securities and related common securities of the Trusts. The Company has not consolidated the accounts of the Trusts in its consolidated financial statements as they are considered to be variable interest entities for which the Company is not a primary beneficiary. As a result, the junior subordinated debentures issued by the Company to the Trusts are reflected on the Company's consolidated balance sheet as junior subordinated debentures.
Subsequent events-The Company has evaluated events and transactions through the date that the consolidated financial statements were issued for potential recognition or disclosure.
Business Combinations-The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity recognizes the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values. This method often involves estimates based on third-party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period. Acquisition‑related costs, including conversion and restructuring charges, are expensed as incurred. Fair values are subject to refinement over the measurement period, not to exceed one year after the closing date.
Cash and Cash Equivalents-Cash and cash equivalents include cash and due from banks and temporary investments which are interest-bearing balances due from other banks. Cash and cash equivalents generally have a maturity of 90 days or less at the time of purchase.
Equity and Other Securities-Equity and other securities are carried at fair value with realized and unrealized gains or losses recorded in non-interest income.
Investment Securities Available for Sale-Debt securities are classified as available for sale if the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a debt security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
Securities available for sale are carried at fair value. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Unrealized holding gains or losses are included in other comprehensive income as a separate component of shareholders' equity, net of tax. 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 ACL, 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 ACL.
Loans Held for Sale-Loans held for sale represent residential mortgage loans intended to be sold in the secondary market and non-mortgage loans that management has an active plan to sell. The Company has elected to account for residential mortgage loans held for sale at fair value and non-mortgage loans at the lower of cost or fair value. Fair value is 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, resulting in revaluation adjustments to the recorded fair value. The inputs used in the fair value measurements are considered Level 2 inputs. The use of the fair value option allows the change in the fair value of loans to more effectively offset the change in the fair value of derivative instruments that are used as economic hedges to loans held for sale. Loan origination fees and direct origination costs are recognized immediately in net income. Interest income on loans held for sale is included in interest income on the Consolidated Statements of Operations and recognized when earned. Loans held for sale are placed on non-accrual in a manner consistent with loans held for investment. The Company recognizes the gain or loss on the sale of loans when the sales criteria for derecognition are met.
Originated Loans and Leases-Loans are stated at the amount of unpaid principal, net of unearned income and any deferred fees or costs. All discounts and premiums are recognized over the contractual life of the loan as yield adjustments. Leases are recorded at the amount of minimum future lease payments receivable and estimated residual value of the leased equipment, net of unearned income and any deferred fees. Initial direct costs related to lease originations are deferred as part of the investment in direct financing leases and amortized over their term using the effective interest method. Unearned lease income is amortized over the lease term using the effective interest method.
Acquired Loans and Leases-Loans and leases purchased without more-than-insignificant credit deterioration are recorded at their fair value at the acquisition date. However, loans and leases purchased with more-than-insignificant credit deterioration will be recorded with their applicable ACL to determine the amortized cost basis. The difference between the fair value and principal balance is recognized as an adjustment to the yield over the remaining life of the loan and lease.
Income Recognition on Non-Accrual Loans-Loans are classified as non-accrual if the collection of principal and interest is doubtful. Generally, this occurs when a loan is past due beyond its maturity, principal payment, or interest payment due date by 90 days or more, unless such loans are well-secured and in the process of collection. Loans that are less than 90 days past due may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt.
Generally, when a loan is classified as non-accrual, all uncollected accrued interest is reversed from interest income and the accrual of interest income is discontinued. In addition, any cash payments subsequently received are applied as a reduction of principal outstanding. In cases where the future collectability of the principal balance in full is expected, interest income may be recognized on a cash basis. A loan may be restored to accrual status when the borrower's financial condition improves so that full collection of future contractual payments is considered likely. For those loans placed on non-accrual status due to payment delinquency, return to accrual status will typically not occur until the borrower demonstrates repayment ability over a period of not less than six months.
Allowance for Credit Losses-ASC Topic 326 requires an expected loss model, which encompasses allowances for credit losses expected to be incurred over the life of the portfolio. The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts.
The allowance for credit losses on loans and leases is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The Bank has elected to exclude accrued interest receivable from the measurement of its ACL given the well-defined non-accrual policies which results in timely reversal of outstanding interest through interest income. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Fluctuations in the allowance are reported in the statement of operations as a component of provision for credit losses.
The Bank has established an Allowance for Credit Losses Committee, which is responsible for, among other things, regularly reviewing the ACL methodology, including allowance levels, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. CECL is not prescriptive in the methodology used to determine the expected credit loss estimate. Instead, management has flexibility in selecting the methodology. The expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments utilizing quantitative and qualitative factors. There are also specific considerations for PCD and CDL.
The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts. When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it has estimated expected credit losses for the remaining life using an approach that reverts to historical credit loss information for the longer-term portion of the asset's life. The allowance related to the extrapolated population is based on loan segment, PD credit classification, and vintage year of the modeled loans and leases. A loss factor is calculated and applied to the non-modeled loans and leases.
The Company utilizes complex models to obtain reasonable and supportable forecasts. Most of the models calculate two predictive metrics: the probability of default and loss given default. The PD measures the probability that a loan will default within a given time horizon and primarily measures the adequacy of the debtor's cash flow as the primary source of repayment of the loan or lease. The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary sources of repayment related to the collateral. Acquired and newly originated loans and leases that have not been modeled receive a loss rate via an extrapolated rate methodology.
Management believes that the ACL was adequate as of December 31, 2023. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ACL and could possibly result in additional charges to the provision for credit losses.
Collateral-Dependent Loans -A loan or lease is considered collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The Company's classification of CDLs includes: non-homogeneous non-accrual loans and leases; non-homogeneous loans determined by individual credit review; homogeneous non-accrual leases and equipment finance agreements; and homogeneous real estate secured loans that have been charged down to net realizable value or the government guaranteed balance. Except for homogeneous leases and equipment finance agreements, the expected credit losses for CDLs will be measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. The Company may also use the loan's observable market price, if available. If the value of the CDL is determined to be less than the recorded amount of the loan, a charge-off will be taken. To determine the expected credit loss for homogeneous leases or equipment finance agreements, the LGD calculated by the CECL model will be utilized. When a homogeneous lease or equipment finance agreement becomes 181 days past due, it is fully charged-off.
Reserve for Unfunded Commitments-A RUC is maintained at a level that, in the opinion of management, is adequate to absorb expected losses associated with the Bank's commitment to lend funds under existing agreements, such as letters or lines of credit. The RUC calculation utilizes the ACLLL rates by segment, and utilization rates based on the economic expectations over the contractual life of the commitment adjusted for qualitative considerations if necessary. The reserve is based on estimates and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and adjustments are reported in earnings in the periods in which they become known. Draws on unfunded commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for credit losses on loans and leases. Provisions for unfunded commitment losses are added to the RUC, which is included in the other liabilities section of the Consolidated Balance Sheets.
Loan and Lease Fees and Direct Loan Origination Costs-Origination and commitment fees and direct loan origination costs for loans and leases held for investment are deferred and recognized as an adjustment to the yield over the life of the loans and leases. The recognition of these net deferred fees is accelerated at loan payoff, if earlier than the life of the loan.
Restricted Equity Securities-Restricted equity securities consists mostly of the Bank's investment in Federal Home Loan Bank of Des Moines stock that is carried at par value, which reasonably approximates its fair value.
As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on a specific percentage of total assets, with additional stock requirements based on use of FHLB products. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.
Premises and Equipment-Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful life of equipment, generally three to ten years, on a straight-line or accelerated basis. Depreciation is provided over the estimated useful life of premises, up to 39 years, on a straight-line or accelerated basis. Generally, leasehold improvements are amortized or accreted over the life of the related lease, or the life of the related asset, whichever is shorter. Expenditures for major renovations and betterments of the Company's premises and equipment are capitalized. The Company purchases, as well as internally develops and customizes, certain software to enhance or perform internal business functions. Software development costs incurred in the preliminary project stages are charged to non-interest expense. Costs associated with designing software configuration, installation, coding programs and testing systems are capitalized and amortized using the straight-line method over three to seven years. Implementation costs incurred for software that is part of a hosting arrangement are capitalized in other assets and amortized on a straight-line basis over the life of the contract. In addition to annual impairment reviews, management reviews long-lived assets anytime a change in circumstance indicates the carrying amount of these assets may not be recoverable.
Operating Leases-The Company leases branch locations, corporate office space, and equipment under non-cancelable leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at management's sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain real estate to third parties. The Company's sublease portfolio consists of operating leases of mainly former branch locations or excess space in branch or corporate facilities. In addition to annual impairment reviews, management reviews right of use assets anytime a change in circumstances indicates the carrying amount of these assets may not be recoverable.
Goodwill and Other Intangibles-Intangible assets are comprised of goodwill and other intangibles acquired in business combinations. Goodwill is not amortized but instead is periodically tested for impairment. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and also reviewed for impairment. Amortization of intangible assets is included in non-interest expense on the consolidated statement of operations.
The Company performs a goodwill impairment analysis on an annual basis as of October 31. Goodwill is assessed for impairment at the reporting unit level either qualitatively or quantitatively. Additionally, goodwill is evaluated on an interim basis when events or circumstances indicate impairment potentially exists. A significant amount of judgment is involved in determining if an indicator of impairment has occurred.
Mortgage Servicing Rights (MSR)-The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value servicing assets. Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are separately disclosed. Under the fair value method, the MSR is carried in the balance sheet at fair value and the changes in fair value are reported in earnings under the caption residential mortgage banking revenue, net in the period in which the change occurs.
The expected life of the loans underlying the MSR can vary from management's estimates due to prepayments by borrowers, especially when rates change significantly. Prepayments outside of management's estimates would impact the recorded value of the residential MSR. The value of the MSR is also dependent upon the discount rate used in the model, which management reviews on an ongoing basis. An increase in the discount rate would reduce the value of the MSR.
SBA/USDA Loans Sales, Servicing, and Commercial Servicing Asset-The Bank, on a limited basis, sells or transfers loans, including the guaranteed portion of SBA and USDA loans (with servicing retained) for cash proceeds. The Bank records a servicing asset when it sells a loan and retains the servicing rights. The servicing asset is recorded at fair value upon sale, and the fair value is estimated by discounting estimated net future cash flows from servicing using discount rates that approximate current market rates and using estimated prepayment rates. Subsequent to initial recognition, the servicing rights are carried at the lower of amortized cost or fair value and are amortized in proportion to, and over the period of, the estimated net servicing income.
Revenue Recognition-The Company's revenue within the contracts with customers guidance are presented within non-interest income and include service charges on deposits, card-based fees, merchant fee income, and financial services, brokerage revenue and trust revenue. These revenues are recognized when obligations under the terms of a contract with customers are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. When the amount of consideration is variable, the Company will only recognize revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in the future. Substantially all of the Company's contracts with customers have expected durations of one year or less and payments are typically due when or as the services are rendered or shortly thereafter. When third parties are involved in providing services to customers, the Company recognizes revenue on a gross basis when it has control over those services being provided to the customer; otherwise, revenue is recognized for the net amount of any fee or commission.
Revenue is segregated based on the nature of product and services offered as part of contractual arrangements. Revenue from contracts with customers is broadly segregated as follows:
•Service charges on deposits consist primarily of fees earned from deposit customers for account maintenance and transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied, and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
•Card-based fees are comprised of debit and credit card income, ATM fees, and merchant services income. Debit and credit card income is primarily comprised of interchange fees earned when the Bank's customers' debit and credit cards are processed through card payment networks. The performance obligation is satisfied, and the fees are earned when the cost of the transaction is charged to the cardholders' debit or credit card. Certain expenses and rebates directly related to the credit and debit card interchange contract are recorded on a net basis with the interchange income.
•Financial services and trust revenue consists of brokerage revenue related to third-party revenue share agreements for commissions on brokerage services and trust revenue from trust administration and investment management services. Brokerage revenue is recognized when cash payment is received by the third party based on the net revenues earned on the products and services purchased in the month prior. Trust revenue is recognized monthly and based on the portfolio values at the end of the prior month.
•Other non-interest income includes a variety of other revenue streams including residential mortgage banking, net revenue, security gains and losses, loan sales gain and losses, BOLI income revenue, swap revenue, treasury management, and miscellaneous consumer fees. These revenue streams are not in the scope of revenue from contracts with customers guidance. Revenue is recognized when, or as, the performance obligation is satisfied. Inherent variability in the transaction price is not recognized until the uncertainty affecting the variability is resolved.
Income Taxes-Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized.
Deferred tax assets are recognized subject to management's judgment that realization is "more likely than not." Uncertain tax positions that meet the "more likely than not" recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the DTA will or will not be realized. The Company's ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.
The Company earns Investment Tax Credits on certain equipment leases and uses the deferral method to account for these tax credits. Under this method, the Investment Tax Credits are recognized as a reduction of depreciation expense over the life of the asset.
Derivatives-The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities 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 loan commitments. The commitments to originate mortgage loans held for sale and the related forward delivery contracts are considered derivatives. The Bank also executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are hedged by simultaneously entering into an offsetting interest rate swap that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. The Bank also uses certain derivative financial instruments to offset changes in the value of its MSR. These derivatives consist primarily of interest rate futures and forward settling mortgage-backed securities. The Company considers all free-standing derivatives as economic hedges and recognizes these derivatives as either assets or liabilities in the balance sheet, and the Company requires measurement of those instruments at fair value through adjustments to current earnings. None of the Company's derivatives are designated as hedging instruments.
The fair value of the derivative residential mortgage loan commitments is estimated using the net present value of expected future cash flows. Assumptions used include pull-through rate assumption based on historical information, current mortgage interest rates, the stage of completion of the underlying application and underwriting process, direct origination costs yet to be incurred, the time remaining until the expiration of the derivative loan commitment, and the expected net future cash flows related to the associated servicing of the loan.
Stock-Based Compensation-The Company recognizes expense in its statement of operations for the grant-date fair value of RSUs and RSAs issued over the requisite service period (generally the vesting period). An estimate of expected forfeitures is included in the calculation of stock-based compensation expense, and actual forfeitures are recognized when they occur.
The Company issues RSAs and RSUs which generally vest ratably over three years and are recognized as compensation expense over that same period of time. Certain performance-based awards are subject to performance-based and market-based vesting criteria in addition to a requisite service period and cliff vest based on those conditions at the end of three years and compensation expense is recognized over the service period to the extent the RSUs are expected to vest. Recipients of RSAs have voting rights while recipients of RSUs do not. Unvested RSUs and RSAs accrue dividends, which are paid out when the awards vest and the common shares are issued. The fair value of time-based and performance-based RSAs and RSUs are equal to the fair market value of the Company’s common stock on the grant date. The fair value of market-based performance RSUs is estimated on the date of grant using the Monte Carlo simulation model.
Earnings per Common Share-Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. For all periods presented, unvested RSUs and RSAs are potentially dilutive instruments issued by the Company. Undistributed losses are not allocated to the unvested stock-based payment awards as the holders are not contractually obligated to share in the losses of the Company.
Fair Value Measurements-Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy for disclosure of assets and liabilities measured or disclosed at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect estimates about market data. In general, fair values determined by Level 1 inputs utilize quoted prices for identical assets or liabilities traded in active markets that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Application of new accounting guidance
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this ASU improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The ASU specifies for all acquired revenue contracts regardless of their timing of payment (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The Company adopted the guidance on January 1, 2023, and it did not have a material impact on the Company's consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the guidance on January 1, 2023, using a prospective methodology, noting that the updates pertain to disclosures but did not have a material impact on the Company's consolidated financial statements. Refer to Note 6 - Allowance for Credit Losses for additional information.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU was issued to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-Bank Offered Rate or another reference rate expected to be discontinued. The last expedient is a one-time election to sell or transfer debt securities classified as held to maturity. The Company fully adopted ASU 2020-04 in July of 2023, and it did not have a material impact on the Company's consolidated financial statements.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this Update are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments clarify certain optional expedients and exceptions in Topic 848 for contract modifications apply to derivatives that are affected by the discounting transition. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendment deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Company fully adopted ASU 2021-01 in July of 2023, and it did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also update the disclosures for equity securities subject to contractual restrictions. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The amendment will be applied prospectively. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2023, the FASB issued ASU No. 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force). The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit). The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The amendments in the ASU can be applied either on a modified retrospective or a retrospective basis. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements. The amendments in this ASU modify the disclosure or presentation requirements of a variety of Topics in the Codification. The amendments align the requirements in the Codification with the SEC’s regulations. Each amendment is effective on the date on which the SEC removes the related disclosure requirement from Regulation S-X or Regulation S-K. For all entities within the scope of the affected Codification subtopics, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the associated amendment will be removed from the Codification and will not become effective for any entities. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280). The amendments improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The ASU requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require entities disclose on an annual basis the following information: (1) specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold, if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income by the applicable statutory income tax rate. The amendments in this ASU are effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.
Note 2 – Business Combination
On February 28, 2023, UHC merged with and into Columbia, with Columbia continuing as the surviving legal corporation. Promptly following the Merger, Columbia’s wholly-owned bank subsidiary, Columbia State Bank, merged with and into UHC’s wholly-owned bank subsidiary, Umpqua Bank, with Umpqua Bank surviving such merger. Refer to Note 1 - Summary of Significant Accounting Policies under the Basis of Financial Statement Presentation for more information pertaining to the completed Merger.
The Merger was accounted for as a reverse merger using the acquisition method of accounting; therefore, UHC was deemed the acquirer for financial reporting purposes, even though Columbia was the legal acquirer. The Merger was an all-stock transaction and has been accounted for as a business combination. Pursuant to the Merger Agreement, on the Merger Date, each holder of UHC common stock received 0.5958 of a share (the "Exchange Ratio") of Columbia's common stock for each share of UHC common stock held. Each outstanding share of common stock of Columbia remained outstanding and was unaffected by the Merger. As of the Merger Date and following the exchange of UHC common stock for Columbia common stock, Columbia had approximately 208.2 million shares of common stock outstanding. On the Merger Date, the shares of UHC common stock, which previously traded under the ticker symbol "UMPQ" on Nasdaq, ceased trading on, and were delisted from, Nasdaq. Following the Merger, Columbia common stock continues to trade on Nasdaq with the ticker symbol of "COLB".
As the legal acquirer, Columbia issued approximately 129.4 million shares of Columbia common stock in connection with the Merger, which represented approximately 62.1% of the voting interests in Columbia upon completion of the Merger. The purchase price in a reverse acquisition is determined based on the number of equity interests the legal acquiree would have had to issue to give the owners of the legal acquirer the same percentage equity interest in the combined entity that results from the reverse acquisition. Therefore, the first step in calculating the purchase price in the Merger is to determine the ownership of the combined company following the Merger.
The table below summarizes the ownership of the combined company, Columbia, following the Merger, as well as the market capitalization of the combined company using shares of Columbia and UHC common stock outstanding at February 28, 2023 and Columbia’s closing price of $29.73 on February 28, 2023.
| | | | | | | | | | | | | | | | | |
| Columbia Ownership and Market Value Table (Pro Forma) |
(in thousands) | Number of Columbia Outstanding Shares | | Percentage Ownership | | Market Value |
Columbia shareholders | 78,863 | | | 37.9 | % | | $ | 2,344,600 | |
UHC shareholders | 129,378 | | | 62.1 | % | | 3,846,408 | |
Total | 208,241 | | | 100.0 | % | | $ | 6,191,008 | |
Next, the hypothetical number of shares UHC would have to issue to give Columbia shareholders the same percentage ownership in the combined company is calculated in the table below (based on shares of UHC common stock outstanding at February 28, 2023):
| | | | | | | | | | | |
| Hypothetical UHC Ownership |
(in thousands) | Number of UHC Outstanding Shares | | Percentage Ownership |
Columbia shareholders | 132,365 | | | 37.9 | % |
UHC shareholders | 217,150 | | | 62.1 | % |
Total | 349,515 | | | 100.0 | % |
Finally, the purchase price for purposes of the transaction accounting adjustments is calculated based on the number of hypothetical shares of UHC common stock issued to Columbia shareholders, multiplied by the share price as demonstrated in the table below (amounts in thousands except per share data): | | | | | |
Number of hypothetical UHC common shares issued to Columbia shareholders | 132,365 | |
UHC market price per share as of February 28, 2023 | $ | 17.66 | |
Purchase price determination of hypothetical UHC shares issued to Columbia shareholders | $ | 2,337,567 | |
Value of Columbia RSUs hypothetically converted to shares | 1,646 | |
Cash in lieu of fractional shares | 65 | |
Purchase price consideration | $ | 2,339,278 | |
The following table provides the purchase price allocation as of the Merger Date and the assets acquired and liabilities assumed at their estimated fair value as of the Merger Date as recorded by the Company. The estimates of fair value were recorded based on initial valuations available at the Merger Date and further adjusted in the second quarter based on additional information. In many cases, the determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are highly subjective in nature. As of December 31, 2023, the Company completed its review of information relating to events or circumstances existing at the acquisition date.
| | | | | | | | | | | | | | |
(in thousands) | February 28, 2023 |
Purchase price consideration | | | |
| | | | |
| | | | |
| Total merger consideration | | | $ | 2,339,278 | |
Fair value of assets acquired: | | | |
| Cash and due from banks | $ | 274,587 | | | |
| | | | |
| Investment securities | 6,226,102 | | | |
| Loans held for sale | 2,358 | | | |
| Loans and leases | 10,884,218 | | | |
| Restricted equity securities | 101,760 | | | |
| Premises and equipment | 203,270 | | | |
| | | | |
| Other intangible assets | 710,230 | | | |
| | | | |
| Deferred tax asset | 256,288 | | | |
| Other assets | 571,773 | | | |
| Total assets acquired | $ | 19,230,586 | | | |
Fair value of liabilities assumed: | | | |
| Deposits | $ | 15,193,474 | | | |
| Securities sold under agreements to repurchase | 70,025 | | | |
| Borrowings | 2,294,360 | | | |
| Junior and other subordinated debentures | 20,310 | | | |
| | | | |
| Other liabilities | 342,373 | | | |
| Total liabilities assumed | $ | 17,920,542 | | | |
Net assets acquired | | | $ | 1,310,044 | |
Goodwill | | | $ | 1,029,234 | |
| | | | |
In connection with the Merger, the Company recorded approximately $1.0 billion of goodwill. Goodwill represents the excess of the purchase price over the fair value of the assets acquired, net of fair value of liabilities assumed. Information regarding the allocation of goodwill recorded as a result of the acquisition, as well as the carrying amounts and amortization of core deposit and other intangible assets, are provided in Note 10 - Goodwill and Other Intangible Assets of the Notes to Consolidated Financial Statements. None of the goodwill recognized is expected to be deductible for income tax purposes.
The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.
Cash and due from banks: The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
Investment Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.
Loans held for sale: The loans held for sale portfolio was recorded at fair value based on quotes or bids from third-party investors.
Loans and leases: A valuation of the loans held for investment portfolio was performed by a third party as of the Merger Date to assess the fair value. The loans held for investment portfolio was segmented into three groups, including performing PCD loans, non-performing PCD loans and non-PCD loans. The loans were further pooled based on loan type and risk rating bands. The loans were valued at the loan level using a discounted cash flow analysis. The analysis included projecting cash flows based on the contractual terms of the loans and the cash flows were adjusted to reflect credit loss expectations along with prepayments. Discount rates were developed based on the relative risk of the cash flows, taking into consideration the loan type, market rates as of the valuation date, recent originations in the portfolio, credit loss expectations, and liquidity expectations. Lastly, cash flows adjusted for credit loss expectations were discounted to present value and summed to arrive at the fair value of the loans.
The Company is required to record PCD assets, defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the ACL expected at the time of acquisition. Under this method, there is no credit loss expense affecting net income on acquisition of PCD assets. Changes in estimates of expected credit losses after acquisition are recognized in subsequent periods as provision for credit losses (or recapture of credit losses) arises. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration is allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis is allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-credit discount or premium, after the adjustment for the ACL, is accreted to interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.
Of the $10.9 billion net loans acquired, $402.8 million were identified as PCD assets on the Merger Date. The following table provides a summary of these PCD loans at acquisition:
| | | | | |
(in thousands) | February 28, 2023 |
Principal of PCD loans acquired | $ | 478,648 | |
PCD ACL at acquisition | (26,492) | |
Non-credit discount on PCD loans | (49,337) | |
Fair value of PCD loans | $ | 402,819 | |
Premises and equipment: The fair values of premises are based on a market approach, by obtaining third-party appraisals and broker opinions of value for land, office, and branch space.
Core deposit intangibles: Core deposit intangibles is a measure of certain core deposit products that are acquired in a business combination. The fair value of the core deposit intangibles stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. The fair value was estimated based on a discounted cash flow methodology that gave consideration to expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds, and the interest costs associated with customer deposits. The intangible assets are being amortized over 10 years using the sum-of-years-digits, based upon the period over which estimated economic benefits are estimated to be received.
Deposits: The fair values used for the demand and savings deposits equal the amount payable on demand at the Merger Date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Borrowings: The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental
borrowing rates for similar types of instruments. The Company's operating results for the year ended December 31, 2023 include the operating results of the acquired assets and assumed liabilities of historical Columbia subsequent to the Merger Date. Disclosure of the amount of historical Columbia’s revenue and net income (excluding integration costs) included in the Consolidated Statements of Operations is impracticable due to the integration of the operations and accounting for the Merger.
The following table shows the impact of the merger-related expenses for the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
(in thousands) | | | | | | December 31, 2023 | | December 31, 2022 |
Legal and professional | | | | | | $ | 61,857 | | | $ | 6,202 | |
Personnel | | | | | | 38,265 | | | 1,124 | |
| | | | | | | | |
Premises and equipment | | | | | | 45,374 | | | 9,374 | |
Charitable contributions | | | | | | 20,000 | | | — | |
| | | | | | | | |
| | | | | | | | |
Other | | | | | | 6,163 | | | 656 | |
Total merger-related expenses | | | | | | $ | 171,659 | | | $ | 17,356 | |
The following table presents unaudited pro forma information as if the Merger had occurred on January 1, 2022. The pro forma adjustments give effect to any change in interest income due to the accretion of the discount (premium) associated with the fair value adjustments to acquired loans and leases, any change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustment to acquired interest-bearing deposits and long-term debt and the amortization of the core deposit intangible that would have resulted had the deposits been acquired as of January 1, 2022. The pro forma information is not indicative of what would have occurred had the Merger occurred as of the beginning of the year prior to the Merger Date. The pro forma amounts below do not reflect the Company's expectations as of the date of the pro forma information of further operating cost savings and other business synergies expected to be achieved, including revenue growth and further cost savings as a result of the Merger. As a result, actual amounts differed from the unaudited pro forma information presented.
| | | | | | | | | | | |
| Unaudited Pro Forma for the |
| Year Ended |
(in thousands) | December 31, 2023 | | December 31, 2022 |
Net interest income | $ | 1,951,561 | | | $ | 2,056,167 | |
Non-interest income | $ | 237,764 | | | $ | 288,417 | |
Net income (1) | $ | 633,719 | | | $ | 550,727 | |
| | | |
| | | |
(1) The 2023 pro forma net income was adjusted to exclude $199.7 million of merger-related costs, inclusive of historical Columbia merger-related costs, incurred in 2023 and the 2022 pro forma net income was adjusted to include these costs.
Branch divestitures: Prior to the Merger Date, historical Columbia was required to divest certain branches to satisfy regulatory requirements in connection with the Merger. In January 2023, Columbia completed the divestiture of three branches and certain related assets and deposit liabilities to First Northern Bank of Dixon, a wholly-owned subsidiary of First Northern Community Bancorp. In February 2023, Columbia completed the divestiture of another seven branches and certain related assets and deposit liabilities to 1st Security Bank of Washington, a wholly-owned subsidiary of FS Bancorp, Inc. The income and expense associated with the operation of these branches prior to being divested have been excluded from the unaudited pro forma information presented above.
Note 3 – Cash and Cash Equivalents
The Company had restricted cash included in cash and due from banks on the Consolidated Balance Sheets of $4.2 million and $5.8 million as of December 31, 2023 and 2022, respectively, relating mostly to collateral required on interest rate swaps as discussed in Note 19 - Derivatives. As of December 31, 2023 and 2022, there was $900,000 and $4.7 million, respectively, in restricted cash included in interest-bearing cash and temporary investments on the Consolidated Balance Sheets, relating to collateral requirements for derivatives for mortgage banking activities.
Note 4 – Investment Securities
The following tables present the amortized cost, unrealized gains, unrealized losses, and approximate fair values of debt securities as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
(in thousands) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Available for sale: | | | | | | | |
U.S. Treasury and agencies | $ | 1,551,074 | | | $ | 6,192 | | | $ | (78,874) | | | $ | 1,478,392 | |
Obligations of states and political subdivisions | 1,073,264 | | | 20,451 | | | (21,610) | | | 1,072,105 | |
Mortgage-backed securities and collateralized mortgage obligations | 6,638,439 | | | 28,558 | | | (387,624) | | | 6,279,373 | |
Total available for sale securities | $ | 9,262,777 | | | $ | 55,201 | | | $ | (488,108) | | | $ | 8,829,870 | |
| | | | | | | |
Held to maturity: | | | | | | | |
| | | | | | | |
Mortgage-backed securities and collateralized mortgage obligations | $ | 2,300 | | | $ | 725 | | | $ | — | | | $ | 3,025 | |
Total held to maturity securities | $ | 2,300 | | | $ | 725 | | | $ | — | | | $ | 3,025 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(in thousands) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Available for sale: | | | | | | | |
U.S. Treasury and agencies | $ | 1,035,532 | | | $ | — | | | $ | (99,358) | | | $ | 936,174 | |
Obligations of states and political subdivisions | 297,610 | | | 231 | | | (28,041) | | | 269,800 | |
Mortgage-backed securities and collateralized mortgage obligations | 2,405,139 | | | 3 | | | (414,950) | | | 1,990,192 | |
Total available for sale securities | $ | 3,738,281 | | | $ | 234 | | | $ | (542,349) | | | $ | 3,196,166 | |
| | | | | | | |
Held to maturity: | | | | | | | |
| | | | | | | |
Mortgage-backed securities and collateralized mortgage obligations | $ | 2,476 | | | $ | 721 | | | $ | — | | | $ | 3,197 | |
Total held to maturity securities | $ | 2,476 | | | $ | 721 | | | $ | — | | | $ | 3,197 | |
The Company elected to exclude accrued interest receivable from the amortized cost basis of debt securities disclosed throughout this note. Interest accrued on investment securities totaled $34.1 million and $10.6 million as of December 31, 2023 and 2022, respectively, and is included in other assets on the Consolidated Balance Sheets.
Debt securities that were in an unrealized loss position as of December 31, 2023 and 2022 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Less than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale: | | | | | | | | | | | |
U.S. Treasury and agencies | $ | 99,898 | | | $ | (1,074) | | | $ | 822,245 | | | $ | (77,800) | | | $ | 922,143 | | | $ | (78,874) | |
Obligations of states and political subdivisions | 103,256 | | | (580) | | | 169,231 | | | (21,030) | | | 272,487 | | | (21,610) | |
Mortgage-backed securities and collateralized mortgage obligations | 1,089,640 | | | (10,355) | | | 1,817,768 | | | (377,269) | | | 2,907,408 | | | (387,624) | |
Total temporarily impaired securities | $ | 1,292,794 | | | $ | (12,009) | | | $ | 2,809,244 | | | $ | (476,099) | | | $ | 4,102,038 | | | $ | (488,108) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale: | | | | | | | | | | | |
U.S. Treasury and agencies | $ | 734,473 | | | $ | (71,967) | | | $ | 201,701 | | | $ | (27,391) | | | $ | 936,174 | | | $ | (99,358) | |
Obligations of states and political subdivisions | 160,078 | | | (10,037) | | | 60,381 | | | (18,004) | | | 220,459 | | | (28,041) | |
Mortgage-backed securities and collateralized mortgage obligations | 592,032 | | | (61,813) | | | 1,398,061 | | | (353,137) | | | 1,990,093 | | | (414,950) | |
Total temporarily impaired securities | $ | 1,486,583 | | | $ | (143,817) | | | $ | 1,660,143 | | | $ | (398,532) | | | $ | 3,146,726 | | | $ | (542,349) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The number of individual debt securities in an unrealized loss position in the tables above increased to 600 as of December 31, 2023, as compared to 473 as of December 31, 2022. These unrealized losses on the debt securities held by the Company were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not due to the underlying credit of the issuers. Management monitors the published credit ratings of the issuers of the debt securities for material rating or outlook changes. As the decline in fair value of the debt securities is attributable to changes in interest rates or widening market spreads and not credit quality, these investments do not have an ACL as of December 31, 2023.
The following table presents the contractual maturities of debt securities as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Available For Sale | | Held To Maturity |
(in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due within one year | $ | 71,438 | | | $ | 70,451 | | | $ | — | | | $ | — | |
Due after one year through five years | 2,127,299 | | | 2,106,753 | | | 2 | | | 2 | |
Due after five years through ten years | 2,388,442 | | | 2,323,581 | | | 3 | | | 67 | |
Due after ten years | 4,675,598 | | | 4,329,085 | | | 2,295 | | | 2,956 | |
Total debt securities | $ | 9,262,777 | | | $ | 8,829,870 | | | $ | 2,300 | | | $ | 3,025 | |
The following table presents, as of December 31, 2023, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law:
| | | | | | | | | | | |
(in thousands) | Amortized Cost | | Fair Value |
| | | |
To state and local governments to secure public deposits | $ | 1,796,582 | | | $ | 1,657,160 | |
To secure repurchase agreements | 386,989 | | | 358,162 | |
Other securities pledged | 1,863,025 | | | 1,766,958 | |
Total pledged securities | $ | 4,046,596 | | | $ | 3,782,280 | |
Note 5 – Loans and Leases
The following table presents the major types of loans and leases, net of deferred fees and costs, as of December 31, 2023 and 2022: | | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 |
Commercial real estate | | | |
Non-owner occupied term, net | $ | 6,482,940 | | | $ | 3,894,840 | |
Owner occupied term, net | 5,195,605 | | | 2,567,761 | |
Multifamily, net | 5,704,734 | | | 5,285,791 | |
Construction & development, net | 1,747,302 | | | 1,077,346 | |
Residential development, net | 323,899 | | | 200,838 | |
Commercial | | | |
Term, net | 5,536,765 | | | 3,029,547 | |
Lines of credit & other, net | 2,430,127 | | | 960,054 | |
Leases & equipment finance, net | 1,729,512 | | | 1,706,172 | |
Residential | | | |
Mortgage, net | 6,157,166 | | | 5,647,035 | |
Home equity loans & lines, net | 1,938,166 | | | 1,631,965 | |
Consumer & other, net | 195,735 | | | 154,632 | |
Total loans and leases, net of deferred fees and costs | $ | 37,441,951 | | | $ | 26,155,981 | |
The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. Interest accrued on loans totaled $154.9 million and $86.8 million as of December 31, 2023 and December 31, 2022, respectively, and is included in other assets on the Consolidated Balance Sheets. As of December 31, 2023, loans totaling $21.2 billion were pledged to secure borrowings and available lines of credit.
Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs, and any partial charge-offs recorded. Purchased loans are recorded at fair value at the date of purchase. As of December 31, 2023 and 2022, the net deferred fees and costs were $71.8 million and $84.7 million, respectively.
The Company evaluates purchased loans for more-than-insignificant deterioration at the date of purchase. Purchased loans that have experienced more-than-insignificant deterioration from origination are considered PCD loans. All other purchased loans are considered non-PCD loans. Total discounts on acquired loans were $552.5 million and $6.1 million as of December 31, 2023 and 2022, respectively. The outstanding contractual unpaid principal balance of PCD loans, excluding acquisition accounting adjustments, was $331.9 million as of December 31, 2023. The carrying balance of PCD loans was $300.2 million as of December 31, 2023.
The Bank, through its commercial equipment leasing subsidiary, FinPac, is a provider of commercial equipment leasing and financing. Direct finance leases are included within the lease and equipment finance segment within the loans and leases, net line item. These direct financing leases typically have terms of three to five years. Interest income recognized on these leases was $18.8 million at both December 31, 2023 and 2022.
Residual values on leases are established at the time equipment is leased based on an estimate of the value of the leased equipment when the Company expects to dispose of the equipment, typically at the termination of the lease. An annual evaluation is also performed each fiscal year by an independent valuation specialist and equipment residuals are confirmed or adjusted in conjunction with such evaluation.
The following table presents the net investment in direct financing leases as of December 31, 2023 and 2022:
| | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 |
Minimum lease payments receivable | $ | 362,152 | | | $ | 316,823 | |
Estimated guaranteed and unguaranteed residual values | 74,880 | | | 98,175 | |
Initial direct costs - net of accumulated amortization | 5,373 | | | 6,033 | |
Unearned income | (48,433) | | | (41,571) | |
Net investment in direct financing leases | $ | 393,972 | | | $ | 379,460 | |
The following table presents the scheduled minimum lease payments receivable as of December 31, 2023: | | | | | |
(in thousands) | |
Year | Amount |
2024 | $ | 112,497 | |
2025 | 90,557 | |
2026 | 68,639 | |
2027 | 47,308 | |
2028 | 27,955 | |
Thereafter | 15,196 | |
Total minimum lease payments receivable | $ | 362,152 | |
In the course of managing the loan and lease portfolio, at certain times, management may decide to sell pools of loans and leases. For the year ended December 31, 2023, the Bank sold a total of $743.9 million loans from its portfolio, of which $666.3 million were transactional, non-relationship jumbo residential mortgage, commercial, and commercial real estate loans. For the year ended December 31, 2022, the Bank sold a total of $142.3 million loans and leases. For the years ended December 31, 2023 and 2022, the above loan sales include SBA loan sales of $77.6 million and $105.3 million, respectively.
Note 6 – Allowance for Credit Losses
Allowance for Credit Losses Methodology
The ACL represents management's estimate of lifetime credit losses for assets within its scope, specifically loans and leases and unfunded commitments. To calculate the ACL, management uses models to estimate the PD and LGD for loans utilizing inputs that include forecasted future economic conditions and that are dependent upon specific macroeconomic variables relevant to each of the Bank's loan and lease portfolios. Moody's Analytics, a third party, provided the historical and forward-looking macroeconomic data utilized in the models used to calculate the ACL.
In calculating ACL, the Bank considered the financial and economic environment at the time of assessment and economic scenarios that differed in the levels of severity and sensitivity to the ACL results. At each measurement date, the Bank selects the scenario that reflects its view of future economic conditions and is determined to be the most probable outcome.
All forecasts are updated for each variable where applicable and incorporated as relevant into the ACL calculation. Actual credit loss results and the timing thereof will differ from the estimate of credit losses, either in a strong economy or a recession, as the portfolio will change through time due to growth, risk mitigation actions and other factors. In addition, the scenarios used will differ and change through time as economic conditions change. Economic scenarios might not capture deterioration or improvement in the economy timely enough for the Bank to be able to adequately address the impact to the ACL.
Select macroeconomic variables are projected over the forecast period, and they could have a material impact in determining the ACL. As the length of the forecast period increases, information about the future becomes less readily available and projections are inherently less certain.
The following is a discussion of the changes in the factors that influenced management's current estimate of expected credit losses. The changes in the ACL estimate for all portfolio segments, during the year ended December 31, 2023, reflect portfolio mix changes and credit migration trends. Because of the uncertain economic environment, the Bank opted to use Moody's Analytics' November 2023 baseline economic forecast for estimating the ACL as of December 31, 2023.
In the baseline scenario selected, the probability that the economy will perform better than this baseline is equal to the probability that it will perform worse and included the following factors:
•U.S. real GDP average annualized growth of 1.7% in 2024, 1.7% in 2025, 2.3% in 2026, and 2.4% in 2027;
•U.S. unemployment rate average of 4.0% in 2024, 4.1% in 2025, 4.0% in 2026, and 3.9% in 2027; and
•The average federal funds rate is expected to be 5.1% in 2024, 4.2% in 2025, 3.2% in 2026, and 2.9% in 2027.
The Bank uses an additional scenario that differs in terms of severity within the variables, both favorable and unfavorable, to assess the sensitivity in the ACL results and to inform qualitative adjustments. The Bank selected the Moody's Analytics November 2023 S2 scenario for this analysis. In the scenario selected, there is a 75% probability that the economy will perform better, broadly speaking, and a 25% probability that it will perform worse; and the scenario includes the following factors:
•Because the Federal Reserve remains concerned about inflation, it keeps the federal funds rate elevated in the first quarter of 2024 despite the weakening economy;
•The combination of the risk of a federal shutdown, rising political tensions, still-elevated inflation, still-elevated interest rates, and reduced credit availability causes the economy to fall into a mild recession starting in the first quarter of 2024. The decline lasts for three quarters and the peak-to-trough decline is 1%. The unemployment rate rises to a peak of 6.5% in the fourth quarter of 2024;
•The stock market falls by 20% from the fourth quarter of 2023 through the third quarter of 2024;
•Declines in European economies hurt U.S. exports and also corporate earnings from European subsidiaries;
•U.S. real GDP average annualized growth of 0.2% in 2024, 1.5% in 2025, 2.9% in 2026, and 2.8% in 2027;
•U.S. unemployment rate average of 5.7% in 2024, 5.3% in 2025, 4.0% in 2026, and 4.0% in 2027; and
•The average federal funds rate is expected to be 4.6% in 2024, 2.5% in 2025, 2.4% in 2026, and 2.9% in 2027.
The results using the comparison scenario in addition to changes to the macroeconomic variables subsequent to selected scenarios for sensitivity analysis were reviewed by management and were considered when evaluating the qualitative factor adjustments.
The ACL is measured on a collective (pool) basis when similar characteristics exist. The Company has selected models at the portfolio level using a risk-based approach, with larger, more complex portfolios having more complex models. Except as noted below, the macroeconomic variables that are inputs to the models are reasonable and supportable over the life of the loans in that they reasonably project the key economic variables in the near term and then converge to a long-run equilibrium trend. These models produce reasonable and supportable estimates of loss over the life of the loans as the projected credit losses will also converge to a steady state in line with the variables applied. The Company measures the ACL using the following methods:
Commercial Real Estate: Non-owner occupied commercial real estate, multifamily, and construction loans are analyzed using a model that uses four primary property variables: net operating income, property value, property type, and location. For PD estimation, the model simulates potential future paths of net operating income given commercial real estate market factors determined from macroeconomic and regional commercial real estate forecasts. Using the resulting expected debt service coverage ratios, together with predicted loan-to-values and other variables, the model estimates PD from the range of conditional possibilities. In addition, the model estimates maturity PD capturing refinance default risk to produce a total PD for the loan. The model estimates LGD, inclusive of principal loss and liquidation expenses, empirically using predicted loan-to-value as well as certain market and other factors. The LGD calculation also includes a separate maturity risk component. The primary economic drivers in the model are GDP growth, U.S. unemployment rate, and 10-Year Treasury yield. These economic drivers are translated into a forecast provided by Moody's Analytics' REIS of real estate metrics, such as rental rates, vacancies, and cap rates. The model produces PD and LGD on a quarter-by-quarter basis for the life of loan.
The owner occupied commercial real-estate portfolio utilizes a top-down macroeconomic model using linear regression. This model produces portfolio level quarterly net charge-off rates for 10 years and carries forward the last quarter's expected loss percentage projection to remaining periods. The primary economic drivers for this model are commercial real estate price index and a five-state average unemployment rate.
Commercial: Non-homogeneous commercial loans and leases and residential development loans are analyzed in a multi-step process. An initial PD is estimated using a model driven by an obligor's selected financial statement ratios, together with cycle-adjusting information based on the obligor's state and industry. An initial LGD is derived separately based on collateral type using collateral value and a haircut to reflect the loss in liquidation. Another model then applies an auto-regression technique to the initial PD and LGD metrics to estimate the PD and LGD curves according to the macroeconomic scenario over a one-year reasonable and supportable forecast. The primary economic drivers in the model are the S&P 500 Stock Price Index, S&P 500 Market Volatility Index, U.S. unemployment rate, as well as appropriate yield curves and credit spreads. This model utilizes output reversion methodology, which, after one year, reverts on a straight-line basis over two years to long-term PD estimated using financial statement ratios of each obligor.
The model for the homogeneous lease and equipment finance agreement portfolio uses lease and equipment finance agreement information, such as origination and performance, as well as macroeconomic variables to calculate PD and LGD values. The PD calculation is based on survival analysis while LGD is calculated using a two-step regression. The model calculates LGD using an estimate of the probability that a defaulted lease or equipment finance agreement will have a loss, and an estimate of the loss amount. The primary economic drivers for the model are GDP, U.S. unemployment rate, and a home price growth index. The model produces PD and LGD curves at the lease or equipment finance agreement level for each month in the forecast horizon.
Residential: The models for residential real estate and HELOCs utilize loan level variables, such as origination and performance, as well as macroeconomic variables to calculate PD and LGD. The U.S. unemployment rate and home price growth rate indexes are primary economic drivers in both the residential real estate and HELOC models. In addition, the prime rate is also a primary driver in the HELOC model. The models focus on establishing an empirical relationship between default probabilities and a set of loan-level, borrower, and macroeconomic credit risk drivers. The LGD calculation for residential real estate is based on an estimate of the probability that a defaulted loan will have a loss, and then an estimate of the loss amount. HELOCs utilize the same model using residential real estate LGD values to assign loans to cohorts based on FICO scores and loan age. The model produces PD and LGD curves at the loan level for each quarter in the forecast horizon.
Consumer: Historical net charge-off information as well as economic forecast assumptions are used to project loss rates for the Consumer segment.
All loans and leases that have not been modeled receive a loss rate via an extrapolated rate methodology. The loans and leases receiving an extrapolated rate include loans acquired through the Merger, newly originated loans and leases, and loans and leases without the granularity of data necessary to be modeled. Based on the vintage year, credit classification, and reporting category of the modeled loans and leases, a loss factor is calculated and applied to the non-modeled loans and leases. The results are evaluated qualitatively to ensure reasonability and compliance with CECL.
Along with the quantitative factors produced by the above models, management also considers prepayment speeds and qualitative factors when determining the ACL. The Company uses a prepayment model that forecasts the constant prepayment rates based on institution specific data for the commercial real estate, commercial and industrial and consumer portfolios and a forward curve approach that changes with macro-economic input variables for the residential and leases portfolios. Below are the nine qualitative factors considered where applicable:
•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
•Changes in national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
•Changes in the nature and volume of the portfolio and in the terms of loans and leases.
•Changes in the experience, ability, and depth of lending management and other relevant staff.
•Changes in the volume and severity of past due loans and leases, the volume of non-accrual loans and leases, and the volume and severity of adversely classified or graded loans and leases.
•Changes in the quality of the Bank's credit review system.
•Changes in the value of the underlying collateral for collateral-dependent loans and leases.
•The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Bank's existing portfolio.
The Company evaluated each qualitative factor as of December 31, 2023 and concluded that the models adequately reflected the significant changes in credit conditions and overall portfolio risk. The qualitative adjustments in the ACL during 2023 were primarily related to loans acquired through the Merger. As of December 31, 2023, the ACL was $464.1 million, compared to the December 31, 2022 balance of $315.4 million. The increase in the ACL was primarily driven by loan portfolio growth, largely reflective of loans acquired through the Merger, and changes in the economic forecasts used in credit models. As a result of the Merger, the ACL increased, which reflects a $32.3 million upward adjustment due to acquired PCD loans and acquired unfunded commitments, in addition to an $88.4 million provision expense due to acquired non-PCD loans.
Loss factors from the models, prepayment speeds, and qualitative factors are input into the Company's CECL accounting application, which aggregates the information. The Company then uses two methods to calculate the current expected credit loss: 1) the DCF method, which is used for all loans except lines of credit and 2) the non-DCF method, which is used for lines of credit due to the difficulty of calculating an effective interest rate when lines have yet to be drawn on. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses adjusted for prepayments. The difference in the net present value and the amortized cost of the asset will result in the required allowance. The non-DCF method uses the exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance.
The following tables summarize activity related to the ACL by portfolio segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2023 |
(in thousands) | | Commercial Real Estate | | Commercial | | Residential | | Consumer & Other | | Total |
Allowance for credit losses on loans and leases | | | | | | | | | | |
Balance, beginning of period | | $ | 77,813 | | | $ | 167,135 | | | $ | 50,329 | | | $ | 5,858 | | | $ | 301,135 | |
Initial ACL on PCD loans acquired during the period | | 8,736 | | | 17,204 | | | 454 | | | 98 | | | 26,492 | |
Provision for credit losses for loans and leases (1) | | 39,809 | | | 153,460 | | | 10,645 | | | 6,065 | | | 209,979 | |
Charge-offs | | (803) | | | (109,862) | | | (547) | | | (5,762) | | | (116,974) | |
Recoveries | | 333 | | | 16,884 | | | 1,123 | | | 1,899 | | | 20,239 | |
Net (charge-offs) recoveries | | (470) | | | (92,978) | | | 576 | | | (3,863) | | | (96,735) | |
Balance, end of period | | $ | 125,888 | | | $ | 244,821 | | | $ | 62,004 | | | $ | 8,158 | | | $ | 440,871 | |
Reserve for unfunded commitments | | | | | | | | | | |
Balance, beginning of period | | $ | 7,207 | | | $ | 3,049 | | | $ | 3,196 | | | $ | 769 | | | $ | 14,221 | |
Initial ACL recorded for unfunded commitments acquired during the period | | 2,257 | | | 3,066 | | | 268 | | | 176 | | | 5,767 | |
Provision (recapture) for credit losses on unfunded commitments | | 1,706 | | | 1,726 | | | (524) | | | 312 | | | 3,220 | |
Balance, end of period | | 11,170 | | | 7,841 | | | 2,940 | | | 1,257 | | | 23,208 | |
Total allowance for credit losses | | $ | 137,058 | | | $ | 252,662 | | | $ | 64,944 | | | $ | 9,415 | | | $ | 464,079 | |
(1) Includes $88.4 million initial provision related to non-PCD loans acquired during the first quarter of 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
(in thousands) | | Commercial Real Estate | | Commercial | | Residential | | Consumer & Other | | Total |
Allowance for credit losses on loans and leases | | | | | | | | | | |
Balance, beginning of period | | $ | 99,075 | | | $ | 117,573 | | | $ | 29,068 | | | $ | 2,696 | | | $ | 248,412 | |
(Recapture) provision for credit losses for loans and leases | | (21,510) | | | 79,606 | | | 20,823 | | | 4,686 | | | 83,605 | |
Charge-offs | | (136) | | | (41,073) | | | (224) | | | (3,556) | | | (44,989) | |
Recoveries | | 384 | | | 11,029 | | | 662 | | | 2,032 | | | 14,107 | |
Net recoveries (charge-offs) | | 248 | | | (30,044) | | | 438 | | | (1,524) | | | (30,882) | |
Balance, end of period | | $ | 77,813 | | | $ | 167,135 | | | $ | 50,329 | | | $ | 5,858 | | | $ | 301,135 | |
Reserve for unfunded commitments | | | | | | | | | | |
Balance, beginning of period | | $ | 8,461 | | | $ | 2,028 | | | $ | 1,957 | | | $ | 321 | | | $ | 12,767 | |
(Recapture) provision for credit losses on unfunded commitments | | (1,254) | | | 1,021 | | | 1,239 | | | 448 | | | 1,454 | |
Balance, end of period | | 7,207 | | | 3,049 | | | 3,196 | | | 769 | | | 14,221 | |
Total allowance for credit losses | | $ | 85,020 | | | $ | 170,184 | | | $ | 53,525 | | | $ | 6,627 | | | $ | 315,356 | |
Asset Quality and Non-Performing Loans and Leases
The Bank manages asset quality and controls credit risk through diversification of the loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality Administration department is charged with monitoring asset quality, establishing credit policies and procedures, and enforcing the consistent application of these policies and procedures across the Bank. Reviews of non-performing, past due loans and leases and larger credits, designed to identify potential charges to the ACL, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions, and other factors.
Loans and Leases Past Due and Non-Accrual Loans and Leases
Typically, loans in a non-accrual status will not have an ACL as they will be written down to their net realizable value or charged-off. However, the net realizable value for homogeneous leases and equipment finance agreements is determined by the LGD calculated by the CECL model and therefore leases and equipment finance agreements on non-accrual will have an ACL until they become 181 days past due, at which time they are charged-off. The Company recognized no interest income on non-accrual loans and leases during the years ended December 31, 2023 and 2022.
The following tables present the carrying value of the loans and leases past due, by loan and lease class, as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
(in thousands) | Greater than 30 to 59 Days Past Due | | 60 to 89 Days Past Due | | 90 Days or More and Accruing | | Total Past Due | | Non-Accrual | | Current and Other | | Total Loans and Leases |
Commercial real estate | | | | | | | | | | | | | |
Non-owner occupied term, net | $ | 1,270 | | | $ | 3,312 | | | $ | 437 | | | $ | 5,019 | | | $ | 4,359 | | | $ | 6,473,562 | | | $ | 6,482,940 | |
Owner occupied term, net | 3,078 | | | 2,191 | | | 433 | | | 5,702 | | | 24,330 | | | 5,165,573 | | | 5,195,605 | |
Multifamily, net | — | | | — | | | — | | | — | | | — | | | 5,704,734 | | | 5,704,734 | |
Construction & development, net | — | | | — | | | — | | | — | | | — | | | 1,747,302 | | | 1,747,302 | |
Residential development, net | — | | | — | | | — | | | — | | | — | | | 323,899 | | | 323,899 | |
Commercial | | | | | | | | | | | | | |
Term, net | 6,341 | | | 2,101 | | | 202 | | | 8,644 | | | 14,519 | | | 5,513,602 | | | 5,536,765 | |
Lines of credit & other, net | 1,647 | | | 1,137 | | | 66 | | | 2,850 | | | 2,760 | | | 2,424,517 | | | 2,430,127 | |
Leases & equipment finance, net | 22,217 | | | 24,178 | | | 7,965 | | | 54,360 | | | 28,403 | | | 1,646,749 | | | 1,729,512 | |
Residential | | | | | | | | | | | | | |
Mortgage, net (1) | 282 | | | 9,410 | | | 26,331 | | | 36,023 | | | — | | | 6,121,143 | | | 6,157,166 | |
Home equity loans & lines, net | 4,401 | | | 2,373 | | | 3,782 | | | 10,556 | | | — | | | 1,927,610 | | | 1,938,166 | |
Consumer & other, net | 778 | | | 519 | | | 326 | | | 1,623 | | | — | | | 194,112 | | | 195,735 | |
Total, net of deferred fees and costs | $ | 40,014 | | | $ | 45,221 | | | $ | 39,542 | | | $ | 124,777 | | | $ | 74,371 | | | $ | 37,242,803 | | | $ | 37,441,951 | |
(1) Includes government guaranteed mortgage loans that the Bank has the right but not the obligation to repurchase that are past due 90 days or more, totaling $1.0 million as of December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(in thousands) | Greater than 30 to 59 Days Past Due | | 60 to 89 Days Past Due | | 90 Days or More and Accruing | | Total Past Due | | Non-Accrual | | Current and Other | | Total Loans and Leases |
Commercial real estate | | | | | | | | | | | | | |
Non-owner occupied term, net | $ | 811 | | | $ | 538 | | | $ | — | | | $ | 1,349 | | | $ | 2,963 | | | $ | 3,890,528 | | | $ | 3,894,840 | |
Owner occupied term, net | 168 | | | 50 | | | 1 | | | 219 | | | 2,048 | | | 2,565,494 | | | 2,567,761 | |
Multifamily, net | — | | | — | | | — | | | — | | | — | | | 5,285,791 | | | 5,285,791 | |
Construction & development, net | — | | | — | | | — | | | — | | | — | | | 1,077,346 | | | 1,077,346 | |
Residential development, net | — | | | — | | | — | | | — | | | — | | | 200,838 | | | 200,838 | |
Commercial | | | | | | | | | | | | | |
Term, net | 1,241 | | | 1,489 | | | 19 | | | 2,749 | | | 5,303 | | | 3,021,495 | | | 3,029,547 | |
Lines of credit & other, net | 514 | | | 419 | | | 4 | | | 937 | | | — | | | 959,117 | | | 960,054 | |
Leases & equipment finance, net | 19,929 | | | 23,288 | | | 7,886 | | | 51,103 | | | 20,388 | | | 1,634,681 | | | 1,706,172 | |
Residential | | | | | | | | | | | | | |
Mortgage, net (1) | 847 | | | 10,619 | | | 24,943 | | | 36,409 | | | — | | | 5,610,626 | | | 5,647,035 | |
Home equity loans & lines, net | 2,808 | | | 1,526 | | | 1,569 | | | 5,903 | | | — | | | 1,626,062 | | | 1,631,965 | |
Consumer & other, net | 446 | | | 200 | | | 134 | | | 780 | | | — | | | 153,852 | | | 154,632 | |
Total, net of deferred fees and costs | $ | 26,764 | | | $ | 38,129 | | | $ | 34,556 | | | $ | 99,449 | | | $ | 30,702 | | | $ | 26,025,830 | | | $ | 26,155,981 | |
(1) Includes government guaranteed mortgage loans that the Bank has the right but not the obligation to repurchase that are past due 90 days or more, totaling $6.6 million as of December 31, 2022.
The following table summarizes the amortized cost of non-accrual loans for which there was no related ACL as of December 31, 2023 and 2022:
| | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 |
Commercial real estate | | | |
Non-owner occupied term, net | $ | 52 | | | $ | — | |
Owner occupied term, net | 1,352 | | | 279 | |
Commercial | | | |
Term, net | 3,497 | | | — | |
| | | |
| | | |
Total non-accrual loans with no related ACL | $ | 4,901 | | | $ | 279 | |
Collateral-Dependent Loans and Leases
Loans are classified as collateral-dependent when it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes the amortized cost basis of the collateral-dependent loans and leases by the type of collateral securing the assets as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Residential Real Estate | | Commercial Real Estate | | General Business Assets | | Other | | Total |
Commercial real estate | | | | | | | | | | |
Non-owner occupied term, net | | $ | — | | | $ | 4,250 | | | $ | — | | | $ | — | | | $ | 4,250 | |
Owner occupied term, net | | — | | | 22,076 | | | — | | | — | | | 22,076 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Commercial | | | | | | | | | | |
Term, net | | — | | | 271 | | | 8,602 | | | 301 | | | 9,174 | |
Line of credit & other, net | | — | | | 1,566 | | | — | | | — | | | 1,566 | |
Leases & equipment finance, net | | — | | | — | | | 28,403 | | | — | | | 28,403 | |
Residential | | | | | | | | | | |
Mortgage, net | | 55,381 | | | — | | | — | | | — | | | 55,381 | |
Home equity loans & lines, net | | 2,740 | | | — | | | — | | | — | | | 2,740 | |
| | | | | | | | | | |
Total, net of deferred fees and costs | | $ | 58,121 | | | $ | 28,163 | | | $ | 37,005 | | | $ | 301 | | | $ | 123,590 | |
Loan and Lease Modifications Made to Borrowers Experiencing Financial Difficulty
In January 2023, the Company adopted ASU 2022-02, which eliminated the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance. Loans associated with borrowers experiencing financial difficulty can be classified as either accrual or non-accrual loans.
Modifications to borrowers in financial difficulty may include term extensions, interest rate reductions, principal or interest forgiveness, or an other-than-insignificant payment delay. In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans and leases included in the "combination" columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: term extension, principal forgiveness, an other-than-insignificant payment delay, or an interest rate reduction.
The following table presents the amortized cost basis of loans and leases as of December 31, 2023 that were both experiencing financial difficulty and modified during the year ended December 31, 2023, by class and type of modification. The percentage of the amortized cost basis of loans and leases that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
(in thousands) | | Interest Rate Reduction | | | | Term Extension | | Other -Than-Insignificant Payment Delay | | | | Combination - Term Extension and Other-than-Insignificant Payment Delay | | | | | | Total | | % of total class of financing receivable |
Commercial real estate | | | | | | | | | | | | | | | | | | | | |
Non-owner occupied term, net | | $ | — | | | | | $ | 32,461 | | | $ | — | | | | | $ | — | | | | | | | $ | 32,461 | | | 0.50 | % |
Owner occupied term, net | | 666 | | | | | 507 | | | 568 | | | | | — | | | | | | | 1,741 | | | 0.03 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | |
Term, net | | 377 | | | | | 4,409 | | | — | | | | | — | | | | | | | 4,786 | | | 0.09 | % |
Lines of credit & other, net | | — | | | | | 13,152 | | | 30,804 | | | | | — | | | | | | | 43,956 | | | 1.81 | % |
Leases & equipment finance, net | | — | | | | | 1,495 | | | — | | | | | — | | | | | | | 1,495 | | | 0.09 | % |
Residential | | | | | | | | | | | | | | | | | | | | |
Mortgage, net | | — | | | | | 562 | | | 46,012 | | | | | 7,101 | | | | | | | 53,675 | | | 0.87 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total loans and leases experiencing financial difficulty | | $ | 1,043 | | | | | $ | 52,586 | | | $ | 77,384 | | | | | $ | 7,101 | | | | | | | $ | 138,114 | | | 0.37 | % |
| | | | | | | | | | | | | | | | |
December 31, 2023 |
Loan Type | | Types of Modification | | | | Financial Effect |
Non-owner occupied term, net | | Term extension | | | | Added a weighted average of 17 months to the life of the loans. |
Owner occupied term, net | | Interest rate reduction, term extension, and other-than-insignificant payment delays | | | | Reduced weighted average interest rate by 4.00% from interest rate reductions, added a weighted average of 2 months to the life of the loans from term extensions, and deferred $22,000 of principal payments from other-than-insignificant payment delays. |
Term, net | | Interest rate reduction and term extension | | | | Reduced weighted average interest rate by 4.15% from interest rate reductions and added a weighted average of 3 months to the life of the loans from term extensions. |
Lines of credit & other, net | | Term extension and other-than-insignificant payment delays | | | | Added a weighted average of 11 months to the life of the loans from term extensions and deferred $30.1 million of principal and interest payments from other-than-insignificant payment delays. |
Leases & equipment finance, net | | Term extension | | | | Added a weighted average of 8 months to the life of the leases. |
Mortgage, net | | Term extension, other-than-insignificant payment delays, and combination | | | | Added a weighted average of 7.4 years to the life of the loans from term extensions, deferred $3.0 million of principal and interest payments from other-than-insignificant payment delays.
Added a weighted average of 12.3 years and deferred $357,000 of principal and interest payments from combination modifications. |
The Company closely monitors the performance of loans and leases that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Loans and leases are considered to be in payment default at 90 or more days past due. The following table presents the performance of such loans and leases that have been modified for the year ended December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2023 |
Loan Type | | Current | | Greater than 30 to 59 Days Past Due | | 60 to 89 Days Past Due | | 90 Days or More Past Due | | Non-accrual | | Total |
(in thousands) | | | | | | | | | | | | |
Commercial real estate | | | | | | | | | | | | |
Non-owner occupied term, net | | $ | 30,338 | | | $ | — | | | $ | 2,123 | | | $ | — | | | $ | — | | | $ | 32,461 | |
Owner occupied term, net | | 1,075 | | | — | | | — | | | — | | | 666 | | | 1,741 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial | | | | | | | | | | | | |
Term, net | | 3,784 | | | — | | | — | | | — | | | 1,002 | | | 4,786 | |
Lines of credit & other, net | | 42,263 | | | — | | | — | | | — | | | 1,693 | | | 43,956 | |
Leases & equipment finance, net | | 915 | | | 181 | | | 119 | | | 179 | | | 101 | | | 1,495 | |
Residential | | | | | | | | | | | | |
Mortgage, net | | 50,540 | | | — | | | 1,125 | | | 2,010 | | | — | | | 53,675 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total loans and leases, net of deferred fees and costs | | $ | 128,915 | | | $ | 181 | | | $ | 3,367 | | | $ | 2,189 | | | $ | 3,462 | | | $ | 138,114 | |
The following table presents the amortized cost of loan and lease modifications and type of concession that were modified in the previous twelve months and subsequently had a payment default, as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2023 |
(in thousands) | | | | | | Term Extension | | Other -Than-Insignificant Payment Delay | | | | Combination - Term Extension and Other-than-Insignificant Payment Delay |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial | | | | | | | | | | | | |
| | | | | | | | | | | | |
Lines of credit & other, net | | | | | | $ | 1,422 | | | $ | — | | | | | $ | — | |
Leases & equipment finance, net | | | | | | 280 | | | — | | | | | — | |
Residential | | | | | | | | | | | | |
Mortgage, net | | | | | | — | | | 977 | | | | | 1,033 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total loans and leases experiencing financial difficulty with a subsequent default | | | | | | $ | 1,702 | | | $ | 977 | | | | | $ | 1,033 | |
Troubled Debt Restructuring
Prior to the adoption of ASU 2022-02, loans were accounted for as TDRs if concessions granted in response to borrower financial difficulties, and generally provided for a temporary modification of loan repayment terms. There were no available commitments for troubled debt restructuring outstanding as of December 31, 2022.
The following tables presents TDR loans by accrual versus non-accrual status and by portfolio segment as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(in thousands) | Accrual Status | | Non-Accrual Status | | Total Modification | | # of Contracts |
Commercial real estate, net | $ | 279 | | | $ | 23 | | | $ | 302 | | | 3 | |
Commercial, net | 188 | | | — | | | 188 | | | 1 | |
Residential, net | 6,291 | | | — | | | 6,291 | | | 40 | |
Consumer & other, net | 9 | | | — | | | 9 | | | 2 | |
Total, net of deferred fees and costs | $ | 6,767 | | | $ | 23 | | | $ | 6,790 | | | 46 | |
The following table presents loans that were determined to be TDRs during the year ended December 31, 2022:
| | | | | |
(in thousands) | 2022 |
Commercial real estate, net | $ | 278 | |
Commercial, net | 188 | |
Residential, net | 6,046 | |
| |
Total, net of deferred fees and costs | $ | 6,512 | |
For the period presented in the table above, the outstanding recorded investment was the same pre and post-modification and all modifications were combination modifications.
Credit Quality Indicators
Management regularly reviews loans and leases in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading. In addition, the Company's board of directors reviews and approves the credit quality indicators each year. The Bank differentiates its lending portfolios into homogeneous and non-homogeneous loans and leases. Homogeneous loans and leases are initially risk rated on a single risk rating scale based on the past due status of the loan or lease. Homogeneous loans and leases that have risk-based modifications or forbearances enter into an alternative elevated risk rating scale that freezes the elevated risk rating and requires six consecutive months of scheduled payments without delinquency before the loan or lease can return to the delinquency-based risk rating scale. Homogeneous loans and leases with other defined risk factors such as confirmed bankruptcy, business closure, death of a guarantor or fraud will be set to a floor substandard rating.
The Bank's risk rating methodology for its non-homogeneous loans and leases uses a dual risk rating approach to assess the credit risk. This approach uses two scales to provide a comprehensive assessment of credit default risk and recovery risk. The probability of default scale measures a borrower's credit default risk using risk ratings ranging from 1 to 16, where a higher rating represents higher risk. For non-homogeneous loans and leases, PD ratings of 1 through 9 are "pass" grades, while PD ratings of 10 and 11 are "watch" grades. PD ratings of 12-16 correspond to the regulatory-defined categories of special mention (12), substandard (13-14), doubtful (15), and loss (16). The loss given default scale measures the amount of loss that may not be recovered in the event of a default, using six alphabetic ratings from A-F, where a higher rating represents higher risk. The LGD scale quantifies recovery risk associated with an event of default and predicts the amount of loss that would be incurred on a loan or lease if a borrower were to experience a major default and includes variables that may be external to the borrower, such as industry, geographic location, and credit cycle stage. It could also include variables specific to the loan or lease, including collateral valuation, covenant structure and debt type. The product of the borrower's PD and a loan or lease LGD is the loan or lease expected loss, expressed as a percentage. This provides a common language of credit risk across different loans.
The PD scale estimates the likelihood that a borrower will experience a major default on any of its debt obligations within a specified time period. Examples of major defaults include payments 90 days or more past due, non-accrual classification, bankruptcy filing, or a full or partial charge-off of a loan or lease. As such, the PD scale represents the credit quality indicator for non-homogeneous loans and leases.
The credit quality indicator rating categories follow regulatory classification and can be generally described by the following groupings for loans and leases:
Pass/Watch—A pass loan or lease is a loan or lease with a credit risk level acceptable to the Bank for extending credit and maintaining normal credit monitoring. A watch loan or lease is considered pass rated but has a heightened level of unacceptable default risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower risk rating would be appropriate within a short period of time.
Special Mention—A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. These borrowers have an elevated PD but not to the point of a substandard classification.
Substandard—A substandard loan or lease is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans and leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful—Loans or leases classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable.
Loss—Loans or leases classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
The following tables represent the amortized costs basis of the loans and leases by credit classification and vintage year by loan and lease class of financing receivable as of December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving to Non-Revolving Loans Amortized Cost | | |
| December 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | | |
Non-owner occupied term, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 582,178 | | | $ | 1,307,143 | | | $ | 1,182,485 | | | $ | 615,021 | | | $ | 764,821 | | | $ | 1,832,231 | | | $ | 41,194 | | | $ | — | | | $ | 6,325,073 | |
| Special mention | — | | | 317 | | | 3,478 | | | 1,337 | | | 2,480 | | | 16,352 | | | — | | | — | | | 23,964 | |
| Substandard | 32,461 | | | 749 | | | — | | | 1,090 | | | 35,214 | | | 64,304 | | | — | | | — | | | 133,818 | |
| | | | | | | | | | | | | | | | | | |
| Loss | — | | | — | | | — | | | — | | | — | | | 85 | | | — | | | — | | | 85 | |
Total non-owner occupied term, net | $ | 614,639 | | | $ | 1,308,209 | | | $ | 1,185,963 | | | $ | 617,448 | | | $ | 802,515 | | | $ | 1,912,972 | | | $ | 41,194 | | | $ | — | | | $ | 6,482,940 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Owner occupied term, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 532,482 | | | $ | 1,067,388 | | | $ | 972,130 | | | $ | 448,569 | | | $ | 581,616 | | | $ | 1,351,172 | | | $ | 67,063 | | | $ | — | | | $ | 5,020,420 | |
| Special mention | 1,575 | | | 5,950 | | | 6,175 | | | 4,945 | | | 14,610 | | | 15,513 | | | 1,932 | | | — | | | 50,700 | |
| Substandard | 4,034 | | | 7,707 | | | 48,281 | | | 17,275 | | | 10,513 | | | 35,216 | | | — | | | — | | | 123,026 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | 90 | | | — | | | — | | | 90 | |
| Loss | — | | | 963 | | | — | | | 404 | | | — | | | 2 | | | — | | | — | | | 1,369 | |
Total owner occupied term, net | $ | 538,091 | | | $ | 1,082,008 | | | $ | 1,026,586 | | | $ | 471,193 | | | $ | 606,739 | | | $ | 1,401,993 | | | $ | 68,995 | | | $ | — | | | $ | 5,195,605 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | 16 | | | $ | — | | | $ | — | | | $ | — | | | $ | 787 | | | $ | — | | | $ | — | | | $ | 803 | |
Multifamily, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 272,084 | | | $ | 1,982,075 | | | $ | 1,660,492 | | | $ | 400,280 | | | $ | 590,379 | | | $ | 745,705 | | | $ | 51,480 | | | $ | — | | | $ | 5,702,495 | |
| Special mention | — | | | — | | | 1,278 | | | — | | | 961 | | | — | | | — | | | — | | | 2,239 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total multifamily, net | $ | 272,084 | | | $ | 1,982,075 | | | $ | 1,661,770 | | | $ | 400,280 | | | $ | 591,340 | | | $ | 745,705 | | | $ | 51,480 | | | $ | — | | | $ | 5,704,734 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Construction & development, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 248,623 | | | $ | 716,207 | | | $ | 530,305 | | | $ | 186,680 | | | $ | 21,990 | | | $ | 10,738 | | | $ | 31,289 | | | $ | — | | | $ | 1,745,832 | |
| Special mention | — | | | 1,470 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,470 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total construction & development, net | $ | 248,623 | | | $ | 717,677 | | | $ | 530,305 | | | $ | 186,680 | | | $ | 21,990 | | | $ | 10,738 | | | $ | 31,289 | | | $ | — | | | $ | 1,747,302 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Residential development, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 90,241 | | | $ | 86,078 | | | $ | 22,271 | | | $ | — | | | $ | — | | | $ | 1,329 | | | $ | 116,490 | | | $ | 6,149 | | | $ | 322,558 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | 1,341 | | | — | | | 1,341 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total residential development, net | $ | 90,241 | | | $ | 86,078 | | | $ | 22,271 | | | $ | — | | | $ | — | | | $ | 1,329 | | | $ | 117,831 | | | $ | 6,149 | | | $ | 323,899 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Total commercial real estate | $ | 1,763,678 | | | $ | 5,176,047 | | | $ | 4,426,895 | | | $ | 1,675,601 | | | $ | 2,022,584 | | | $ | 4,072,737 | | | $ | 310,789 | | | $ | 6,149 | | | $ | 19,454,480 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving to Non-Revolving Loans Amortized Cost | | |
| December 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | Total |
Commercial: | | | | | | | | | | | | | | | | | |
Term, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 835,662 | | | $ | 1,215,539 | | | $ | 933,970 | | | $ | 391,735 | | | $ | 271,974 | | | $ | 560,595 | | | $ | 1,097,630 | | | $ | 50,874 | | | $ | 5,357,979 | |
| Special mention | 23,250 | | | 14,875 | | | 29,128 | | | 109 | | | 3,340 | | | 16,476 | | | — | | | — | | | 87,178 | |
| Substandard | 2,911 | | | 13,862 | | | 13,981 | | | 3,068 | | | 7,385 | | | 7,859 | | | 31,399 | | | 4,139 | | | 84,604 | |
| Doubtful | — | | | 1,329 | | | 335 | | | 796 | | | 197 | | | 699 | | | — | | | — | | | 3,356 | |
| Loss | — | | | 415 | | | — | | | 648 | | | 51 | | | 2,534 | | | — | | | — | | | 3,648 | |
Total term, net | $ | 861,823 | | | $ | 1,246,020 | | | $ | 977,414 | | | $ | 396,356 | | | $ | 282,947 | | | $ | 588,163 | | | $ | 1,129,029 | | | $ | 55,013 | | | $ | 5,536,765 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | 3,000 | | | $ | 1,418 | | | $ | — | | | $ | 415 | | | $ | 389 | | | $ | 886 | | | $ | 44 | | | $ | 808 | | | $ | 6,960 | |
Lines of credit & other, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 105,360 | | | $ | 105,791 | | | $ | 58,441 | | | $ | 12,266 | | | $ | 10,927 | | | $ | 16,108 | | | $ | 1,922,115 | | | $ | 5,676 | | | $ | 2,236,684 | |
| Special mention | 476 | | | 635 | | | 394 | | | — | | | — | | | 80 | | | 61,927 | | | 403 | | | 63,915 | |
| Substandard | 7,807 | | | 4,161 | | | — | | | — | | | — | | | 593 | | | 83,304 | | | 32,509 | | | 128,374 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | 48 | | | 211 | | | 259 | |
| Loss | — | | | 693 | | | 200 | | | — | | | 1 | | | 1 | | | — | | | — | | | 895 | |
Total lines of credit & other, net | $ | 113,643 | | | $ | 111,280 | | | $ | 59,035 | | | $ | 12,266 | | | $ | 10,928 | | | $ | 16,782 | | | $ | 2,067,394 | | | $ | 38,799 | | | $ | 2,430,127 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | 30 | | | $ | 168 | | | $ | — | | | $ | 47 | | | $ | 144 | | | $ | 45 | | | $ | 1,058 | | | $ | 1,809 | | | $ | 3,301 | |
Leases & equipment finance, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 682,866 | | | $ | 501,867 | | | $ | 200,499 | | | $ | 92,402 | | | $ | 61,065 | | | $ | 33,908 | | | $ | — | | | $ | — | | | $ | 1,572,607 | |
| Special mention | 46,806 | | | 15,962 | | | 6,182 | | | 1,688 | | | 7,224 | | | 77 | | | — | | | — | | | 77,939 | |
| Substandard | 7,094 | | | 15,274 | | | 6,704 | | | 2,163 | | | 1,246 | | | 1,161 | | | — | | | — | | | 33,642 | |
| Doubtful | 5,833 | | | 22,566 | | | 9,036 | | | 3,161 | | | 1,700 | | | 208 | | | — | | | — | | | 42,504 | |
| Loss | 395 | | | 1,485 | | | 581 | | | 292 | | | 58 | | | 9 | | | — | | | — | | | 2,820 | |
Total leases & equipment finance, net | $ | 742,994 | | | $ | 557,154 | | | $ | 223,002 | | | $ | 99,706 | | | $ | 71,293 | | | $ | 35,363 | | | $ | — | | | $ | — | | | $ | 1,729,512 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | 2,324 | | | $ | 47,116 | | | $ | 31,569 | | | $ | 9,111 | | | $ | 6,394 | | | $ | 3,087 | | | $ | — | | | $ | — | | | $ | 99,601 | |
| | | | | | | | | | | | | | | | | |
Total commercial | $ | 1,718,460 | | | $ | 1,914,454 | | | $ | 1,259,451 | | | $ | 508,328 | | | $ | 365,168 | | | $ | 640,308 | | | $ | 3,196,423 | | | $ | 93,812 | | | $ | 9,696,404 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving to Non-Revolving Loans Amortized Cost | | |
| December 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | Total |
Residential: | | | | | | | | | | | | | | | | | |
Mortgage, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 221,207 | | | $ | 1,845,395 | | | $ | 2,355,420 | | | $ | 521,177 | | | $ | 443,152 | | | $ | 735,801 | | | $ | — | | | $ | — | | | $ | 6,122,152 | |
| Special mention | 1,125 | | | 916 | | | 1,737 | | | 651 | | | 1,156 | | | 4,109 | | | — | | | — | | | 9,694 | |
| Substandard | 1,851 | | | 2,617 | | | 2,826 | | | 787 | | | 1,759 | | | 8,746 | | | — | | | — | | | 18,586 | |
| | | | | | | | | | | | | | | | | | |
| Loss | 159 | | | 2,724 | | | 970 | | | 851 | | | 220 | | | 1,810 | | | — | | | — | | | 6,734 | |
Total mortgage, net | $ | 224,342 | | | $ | 1,851,652 | | | $ | 2,360,953 | | | $ | 523,466 | | | $ | 446,287 | | | $ | 750,466 | | | $ | — | | | $ | — | | | $ | 6,157,166 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | | | $ | 6 | |
Home equity loans & lines, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 562 | | | $ | 1,242 | | | $ | 1,056 | | | $ | 100 | | | $ | 896 | | | $ | 35,677 | | | $ | 1,870,270 | | | $ | 17,807 | | | $ | 1,927,610 | |
| Special mention | — | | | — | | | — | | | — | | | 114 | | | 378 | | | 5,052 | | | 1,230 | | | 6,774 | |
| Substandard | — | | | — | | | — | | | — | | | 137 | | | 190 | | | 1,278 | | | 174 | | | 1,779 | |
| | | | | | | | | | | | | | | | | | |
| Loss | 14 | | | — | | | — | | | — | | | — | | | 85 | | | 1,286 | | | 618 | | | 2,003 | |
Total home equity loans & lines, net | $ | 576 | | | $ | 1,242 | | | $ | 1,056 | | | $ | 100 | | | $ | 1,147 | | | $ | 36,330 | | | $ | 1,877,886 | | | $ | 19,829 | | | $ | 1,938,166 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | — | | | $ | — | | | $ | 12 | | | $ | 29 | | | $ | — | | | $ | 52 | | | $ | 448 | | | $ | — | | | $ | 541 | |
| | | | | | | | | | | | | | | | | |
Total residential | $ | 224,918 | | | $ | 1,852,894 | | | $ | 2,362,009 | | | $ | 523,566 | | | $ | 447,434 | | | $ | 786,796 | | | $ | 1,877,886 | | | $ | 19,829 | | | $ | 8,095,332 | |
| | | | | | | | | | | | | | | | | | |
Consumer & other, net: | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 39,977 | | | $ | 14,919 | | | $ | 7,132 | | | $ | 4,953 | | | $ | 3,441 | | | $ | 5,022 | | | $ | 118,125 | | | $ | 543 | | | $ | 194,112 | |
| Special mention | 138 | | | 52 | | | 5 | | | 13 | | | 52 | | | 122 | | | 779 | | | 135 | | | 1,296 | |
| Substandard | — | | | — | | | — | | | — | | | 3 | | | 1 | | | 251 | | | 63 | | | 318 | |
| | | | | | | | | | | | | | | | | | |
| Loss | — | | | — | | | — | | | — | | | — | | | 7 | | | 2 | | | — | | | 9 | |
Total consumer & other, net | $ | 40,115 | | | $ | 14,971 | | | $ | 7,137 | | | $ | 4,966 | | | $ | 3,496 | | | $ | 5,152 | | | $ | 119,157 | | | $ | 741 | | | $ | 195,735 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
| Gross charge-offs | $ | 3,313 | | | $ | 132 | | | $ | 23 | | | $ | 20 | | | $ | 29 | | | $ | 288 | | | $ | 1,485 | | | $ | 472 | | | $ | 5,762 | |
| | | | | | | | | | | | | | | | | | |
Grand total | $ | 3,747,171 | | | $ | 8,958,366 | | | $ | 8,055,492 | | | $ | 2,712,461 | | | $ | 2,838,682 | | | $ | 5,504,993 | | | $ | 5,504,255 | | | $ | 120,531 | | | $ | 37,441,951 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving to Non-Revolving Loans Amortized Cost | | |
| December 31, 2022 | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | | Total |
Commercial real estate: | | | | | | | | | | | | | | | | | |
Non-owner occupied term, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 726,865 | | | $ | 746,833 | | | $ | 389,476 | | | $ | 590,571 | | | $ | 404,905 | | | $ | 968,254 | | | $ | 4,327 | | | $ | 4,442 | | | $ | 3,835,673 | |
| Special mention | 1,185 | | | — | | | 1,482 | | | 4,597 | | | 4,002 | | | 4,603 | | | — | | | — | | | 15,869 | |
| Substandard | 452 | | | — | | | — | | | 311 | | | 34,393 | | | 8,129 | | | — | | | — | | | 43,285 | |
| | | | | | | | | | | | | | | | | | |
| Loss | — | | | — | | | — | | | — | | | — | | | 13 | | | — | | | — | | | 13 | |
Total non-owner occupied term, net | $ | 728,502 | | | $ | 746,833 | | | $ | 390,958 | | | $ | 595,479 | | | $ | 443,300 | | | $ | 980,999 | | | $ | 4,327 | | | $ | 4,442 | | | $ | 3,894,840 | |
Owner occupied term, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 660,479 | | | $ | 544,011 | | | $ | 183,996 | | | $ | 307,944 | | | $ | 211,539 | | | $ | 585,740 | | | $ | 4,552 | | | $ | 117 | | | $ | 2,498,378 | |
| Special mention | 2,091 | | | 20,328 | | | 239 | | | 3,279 | | | 9,527 | | | 19,562 | | | — | | | — | | | 55,026 | |
| Substandard | — | | | — | | | 404 | | | 660 | | | 1,356 | | | 11,833 | | | — | | | — | | | 14,253 | |
| | | | | | | | | | | | | | | | | | |
| Loss | — | | | — | | | — | | | — | | | — | | | 104 | | | — | | | — | | | 104 | |
Total owner occupied term, net | $ | 662,570 | | | $ | 564,339 | | | $ | 184,639 | | | $ | 311,883 | | | $ | 222,422 | | | $ | 617,239 | | | $ | 4,552 | | | $ | 117 | | | $ | 2,567,761 | |
Multifamily, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 1,944,714 | | | $ | 1,556,986 | | | $ | 364,306 | | | $ | 618,523 | | | $ | 219,260 | | | $ | 496,628 | | | $ | 82,467 | | | $ | 2,907 | | | $ | 5,285,791 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total multifamily, net | $ | 1,944,714 | | | $ | 1,556,986 | | | $ | 364,306 | | | $ | 618,523 | | | $ | 219,260 | | | $ | 496,628 | | | $ | 82,467 | | | $ | 2,907 | | | $ | 5,285,791 | |
Construction & development, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 248,437 | | | $ | 505,680 | | | $ | 205,577 | | | $ | 83,808 | | | $ | — | | | $ | 18,183 | | | $ | 2,393 | | | $ | — | | | $ | 1,064,078 | |
| Special mention | — | | | 13,268 | | | — | | | — | | | — | | | — | | | — | | | — | | | 13,268 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total construction & development, net | $ | 248,437 | | | $ | 518,948 | | | $ | 205,577 | | | $ | 83,808 | | | $ | — | | | $ | 18,183 | | | $ | 2,393 | | | $ | — | | | $ | 1,077,346 | |
Residential development, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 38,662 | | | $ | 20,609 | | | $ | 417 | | | $ | — | | | $ | — | | | $ | — | | | $ | 141,150 | | | $ | — | | | $ | 200,838 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total residential development, net | $ | 38,662 | | | $ | 20,609 | | | $ | 417 | | | $ | — | | | $ | — | | | $ | — | | | $ | 141,150 | | | $ | — | | | $ | 200,838 | |
| | | | | | | | | | | | | | | | | | |
Total commercial real estate | $ | 3,622,885 | | | $ | 3,407,715 | | | $ | 1,145,897 | | | $ | 1,609,693 | | | $ | 884,982 | | | $ | 2,113,049 | | | $ | 234,889 | | | $ | 7,466 | | | $ | 13,026,576 | |
Commercial: | | | | | | | | | | | | | | | | | |
Term, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 792,764 | | | $ | 643,930 | | | $ | 174,188 | | | $ | 156,068 | | | $ | 130,309 | | | $ | 278,695 | | | $ | 744,193 | | | $ | 44,033 | | | $ | 2,964,180 | |
| Special mention | — | | | 1,138 | | | 3 | | | 100 | | | 1,488 | | | 935 | | | — | | | 411 | | | 4,075 | |
| Substandard | 16,424 | | | 1,403 | | | 1,362 | | | 1,358 | | | 10,619 | | | 2,211 | | | 27,240 | | | — | | | 60,617 | |
| Doubtful | — | | | — | | | 675 | | | — | | | — | | | — | | | — | | | — | | | 675 | |
| | | | | | | | | | | | | | | | | | |
Total term, net | $ | 809,188 | | | $ | 646,471 | | | $ | 176,228 | | | $ | 157,526 | | | $ | 142,416 | | | $ | 281,841 | | | $ | 771,433 | | | $ | 44,444 | | | $ | 3,029,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving to Non-Revolving Loans Amortized Cost | | |
| December 31, 2022 | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | | Total |
Lines of credit & other, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 57,715 | | | $ | 6,271 | | | $ | 4,660 | | | $ | 13,304 | | | $ | 8,653 | | | $ | 1,257 | | | $ | 813,110 | | | $ | 36,573 | | | $ | 941,543 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | — | | | 5,833 | | | 1,933 | | | 7,766 | |
| Substandard | — | | | 314 | | | — | | | — | | | — | | | 1,102 | | | 6,031 | | | 3,294 | | | 10,741 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
Total lines of credit & other, net | $ | 57,715 | | | $ | 6,585 | | | $ | 4,660 | | | $ | 13,304 | | | $ | 8,653 | | | $ | 2,359 | | | $ | 824,977 | | | $ | 41,801 | | | $ | 960,054 | |
Leases & equipment finance, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 812,537 | | | $ | 362,612 | | | $ | 190,507 | | | $ | 149,667 | | | $ | 62,292 | | | $ | 40,328 | | | $ | — | | | $ | — | | | $ | 1,617,943 | |
| Special mention | 9,840 | | | 8,403 | | | 2,902 | | | 2,423 | | | 665 | | | 182 | | | — | | | — | | | 24,415 | |
| Substandard | 11,531 | | | 8,165 | | | 3,452 | | | 2,697 | | | 1,477 | | | 177 | | | — | | | — | | | 27,499 | |
| Doubtful | 11,822 | | | 13,034 | | | 4,326 | | | 3,419 | | | 1,211 | | | 197 | | | — | | | — | | | 34,009 | |
| Loss | 1,243 | | | 505 | | | 275 | | | 236 | | | 28 | | | 19 | | | — | | | — | | | 2,306 | |
Total leases & equipment finance, net | $ | 846,973 | | | $ | 392,719 | | | $ | 201,462 | | | $ | 158,442 | | | $ | 65,673 | | | $ | 40,903 | | | $ | — | | | $ | — | | | $ | 1,706,172 | |
| | | | | | | | | | | | | | | | | |
Total commercial | $ | 1,713,876 | | | $ | 1,045,775 | | | $ | 382,350 | | | $ | 329,272 | | | $ | 216,742 | | | $ | 325,103 | | | $ | 1,596,410 | | | $ | 86,245 | | | $ | 5,695,773 | |
| | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | |
Mortgage, net | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 1,465,067 | | | $ | 2,389,861 | | | $ | 485,576 | | | $ | 471,416 | | | $ | 143,611 | | | $ | 661,715 | | | $ | — | | | $ | — | | | $ | 5,617,246 | |
| Special mention | 307 | | | 1,351 | | | 1,203 | | | 2,365 | | | 752 | | | 5,487 | | | — | | | — | | | 11,465 | |
| Substandard | — | | | 1,664 | | | 1,041 | | | 2,693 | | | 2,015 | | | 9,907 | | | — | | | — | | | 17,320 | |
| | | | | | | | | | | | | | | | | | |
| Loss | — | | | 561 | | | — | | | 193 | | | 193 | | | 57 | | | — | | | — | | | 1,004 | |
Total mortgage, net | $ | 1,465,374 | | | $ | 2,393,437 | | | $ | 487,820 | | | $ | 476,667 | | | $ | 146,571 | | | $ | 677,166 | | | $ | — | | | $ | — | | | $ | 5,647,035 | |
Home equity loans & lines, net | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 1,117 | | | $ | 630 | | | $ | — | | | $ | — | | | $ | 16 | | | $ | 7,320 | | | $ | 1,584,200 | | | $ | 32,778 | | | $ | 1,626,061 | |
| Special mention | — | | | — | | | — | | | — | | | — | | | 79 | | | 3,208 | | | 1,047 | | | 4,334 | |
| Substandard | — | | | — | | | — | | | — | | | — | | | 53 | | | 557 | | | 154 | | | 764 | |
| | | | | | | | | | | | | | | | | | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | 357 | | | 449 | | | 806 | |
Total home equity loans & lines, net | $ | 1,117 | | | $ | 630 | | | $ | — | | | $ | — | | | $ | 16 | | | $ | 7,452 | | | $ | 1,588,322 | | | $ | 34,428 | | | $ | 1,631,965 | |
| | | | | | | | | | | | | | | | | |
Total residential | $ | 1,466,491 | | | $ | 2,394,067 | | | $ | 487,820 | | | $ | 476,667 | | | $ | 146,587 | | | $ | 684,618 | | | $ | 1,588,322 | | | $ | 34,428 | | | $ | 7,279,000 | |
Consumer & other, net: | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | |
| Pass/Watch | $ | 22,959 | | | $ | 7,990 | | | $ | 6,701 | | | $ | 6,232 | | | $ | 2,626 | | | $ | 4,436 | | | $ | 102,465 | | | $ | 442 | | | $ | 153,851 | |
| Special mention | 6 | | | — | | | 27 | | | 14 | | | 42 | | | 66 | | | 371 | | | 122 | | | 648 | |
| Substandard | — | | | 9 | | | 1 | | | 9 | | | — | | | 32 | | | 47 | | | 25 | | | 123 | |
| | | | | | | | | | | | | | | | | | |
| Loss | — | | | — | | | — | | | — | | | — | | | 7 | | | 3 | | | — | | | 10 | |
Total consumer & other, net | $ | 22,965 | | | $ | 7,999 | | | $ | 6,729 | | | $ | 6,255 | | | $ | 2,668 | | | $ | 4,541 | | | $ | 102,886 | | | $ | 589 | | | $ | 154,632 | |
| | | | | | | | | | | | | | | | | | |
Grand total | $ | 6,826,217 | | | $ | 6,855,556 | | | $ | 2,022,796 | | | $ | 2,421,887 | | | $ | 1,250,979 | | | $ | 3,127,311 | | | $ | 3,522,507 | | | $ | 128,728 | | | $ | 26,155,981 | |
| | | | | | | | | | | | | | | | | | |
Note 7 – Premises and Equipment
The following table presents the major components of premises and equipment as of December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 | | Estimated useful life |
Land | $ | 91,072 | | | $ | 33,031 | | | |
Buildings and improvements | 288,189 | | | 203,519 | | | 7 - 39 years |
Furniture, fixtures, and equipment | 140,241 | | | 142,209 | | | 4 - 20 years |
Software | 110,726 | | | 105,355 | | | 3 - 7 years |
Construction in progress and other | 24,094 | | | 16,878 | | | |
Total premises and equipment | 654,322 | | | 500,992 | | | |
Less: Accumulated depreciation and amortization | (315,352) | | | (324,976) | | | |
Premises and equipment, net | $ | 338,970 | | | $ | 176,016 | | | |
During 2023, the Company recorded $203.3 million of premises and equipment associated with the Merger. Refer to Note 2 - Business Combination for more information pertaining to the completed Merger.
Depreciation and amortization expense totaled $29.3 million, $22.9 million, and $25.7 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Note 8 – Leases
The Company leases branch locations, corporate office space, and equipment under non-cancelable operating leases. The following table presents the balance sheet information related to leases as of December 31, 2023 and 2022: | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2023 | | December 31, 2022 |
Leases | | |
Operating lease right-of-use assets | | $ | 115,811 | | | $ | 78,598 | |
Operating lease liabilities | | $ | 130,576 | | | $ | 91,694 | |
The following table presents the weighted-average operating lease term and weighted-average discount rate as of December 31, 2023 and 2022: | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
Weighted-average remaining lease term (years) | | 6.1 | | 5.7 |
Weighted-average discount rate | | 4.08 | % | | 2.86 | % |
The following table presents the components of lease expense for the years ended December 31, 2023, 2022, and 2021: | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | |
Lease Costs | | 2023 | | 2022 | | 2021 |
Operating lease costs | | $ | 36,378 | | | $ | 30,383 | | | $ | 29,694 | |
Short-term lease costs | | 1,367 | | | 421 | | | 609 | |
Variable lease costs | | 13 | | | 26 | | | 22 | |
Sublease income | | (3,173) | | | (2,504) | | | (2,626) | |
Net lease costs | | $ | 34,585 | | | $ | 28,326 | | | $ | 27,699 | |
The Company performs impairment assessments for ROU assets when events or changes in circumstances indicate that their carrying values may not be recoverable. For the years ended December 31, 2023 and 2022, there were $2.6 million and $1.8 million, respectively, in ROU asset impairments recorded in other expenses. The impairments were due to the closures or consolidations of leased locations.
The following table presents the supplemental cash flow information related to leases for the year ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | |
Cash Flows | | 2023 | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 38,384 | | | $ | 30,420 | | | $ | 31,697 | |
Right of use assets obtained in exchange for new operating lease liabilities | | $ | 73,252 | | | $ | 24,954 | | | $ | 15,033 | |
The following table presents the maturities of lease liabilities as of December 31, 2023: | | | | | |
(in thousands) | Operating |
Year | Leases |
2024 | $ | 33,857 | |
2025 | 28,574 | |
2026 | 23,394 | |
2027 | 16,988 | |
2028 | 13,457 | |
Thereafter | 33,367 | |
Total lease payments | 149,637 | |
Less: imputed interest | (19,061) | |
Total lease liabilities | $ | 130,576 | |
Note 9 – Residential Mortgage Servicing Rights
The Company measures its MSR asset at fair value with changes in fair value reported in residential mortgage banking revenue, net. The following table presents the changes in the Company's residential MSR for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
Balance, beginning of period | $ | 185,017 | | | $ | 123,615 | | | $ | 92,907 | |
Additions for new MSR capitalized | 5,347 | | | 24,137 | | | 38,522 | |
Sale of MSR assets | (57,305) | | | — | | | — | |
Changes in fair value: | | | | | |
Changes due to collection/realization of expected cash flows over time | (17,694) | | | (20,272) | | | (18,903) | |
Changes due to valuation inputs or assumptions (1) | (6,122) | | | 57,537 | | | 11,089 | |
Balance, end of period | $ | 109,243 | | | $ | 185,017 | | | $ | 123,615 | |
(1) The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.
Information related to the serviced loan portfolio as of December 31, 2023, 2022, and 2021 is as follows:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
Balance of loans serviced for others | $ | 8,175,664 | | | $ | 13,020,189 | | | $ | 12,755,671 | |
MSR as a percentage of serviced loans | 1.34 | % | | 1.42 | % | | 0.97 | % |
The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in residential mortgage banking revenue, were $33.4 million, $37.4 million, and $36.8 million for the years ended December 31, 2023, 2022, and 2021, respectively.
During the year, the Company closed the sale of $57.3 million in residential mortgage servicing rights associated with $4.3 billion of residential mortgage loans serviced for others, which relates to the non-relationship component of the serviced loan portfolio.
Key assumptions used in measuring the fair value of MSR as of December 31, 2023, 2022, and 2021 were as follows: | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
Constant prepayment rate | 6.78 | % | | 6.39 | % | | 12.75 | % |
Discount rate | 10.25 | % | | 10.06 | % | | 9.57 | % |
Weighted average life (years) | 8.3 | | 8.7 | | 5.9 |
A sensitivity analysis of the current fair value to changes in discount and prepayment speed assumptions as of December 31, 2023 and 2022 is as follows: | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
Constant prepayment rate | | | |
Effect on fair value of a 10% adverse change | $ | (2,858) | | | $ | (4,870) | |
Effect on fair value of a 20% adverse change | $ | (5,575) | | | $ | (9,518) | |
| | | |
Discount rate | | | |
Effect on fair value of a 100 basis point adverse change | $ | (4,620) | | | $ | (8,229) | |
Effect on fair value of a 200 basis point adverse change | $ | (8,888) | | | $ | (15,807) | |
The sensitivity analysis presents the hypothetical effect on fair value of the MSR, due to the change in assumptions. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair value is not linear. Additionally, in the analysis, the impact of an adverse change in one assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption. The Company has entered into a fair value hedge by purchasing interest rate futures and forward settling mortgage-backed securities to hedge the interest rate risk of MSRs. Refer to Note 19 - Derivatives for further information.
Note 10 – Goodwill and Other Intangible Assets
As of December 31, 2023, there was $1.0 billion in goodwill, as compared to no goodwill as of December 31, 2022. Goodwill represents the excess of the total acquisition price paid over the fair value of the assets acquired, net of fair value of liabilities assumed. Additional information on the Merger and purchase price allocations is provided in Note 2 - Business Combinations. Goodwill is not amortized but is evaluated for potential impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performed its annual impairment assessment as of October 31, 2023 and concluded that there was no impairment. As of December 31, 2023, it was determined there were no events or circumstances which would more likely than not reduce the fair value of our reporting unit below its carrying amount.
During 2023, the Company recorded $710.2 million of core deposit intangibles associated with the Merger. Core deposit intangible asset values were determined based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. The fair value was estimated based on a discounted cash flow methodology that gave consideration to expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds, and the interest costs associated with customer deposits. The intangible assets are being amortized on an accelerated basis over a period of 10 years. No impairment losses separate from the scheduled amortization have been recognized in the periods presented.
The following table summarizes the changes in the Company's other intangible assets as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
As of December 31, 2023 | $ | 764,791 | | | $ | (161,112) | | | $ | 603,679 | |
As of December 31, 2022 | $ | 54,561 | | | $ | (49,816) | | | $ | 4,745 | |
As of December 31, 2023, all of the Company's intangible assets were being amortized. Amortization expense recognized on intangible assets was $111.3 million, $4.1 million, and $4.5 million for the years ended December 31, 2023, 2022, and 2021, respectively.
The table below presents the forecasted amortization expense for intangible assets as of December 31, 2023: | | | | | |
(in thousands) | |
Year | Expected Amortization |
2024 | $ | 119,431 | |
2025 | 105,458 | |
2026 | 92,545 | |
2027 | 79,632 | |
2028 | 66,719 | |
Thereafter | 139,894 | |
Total intangible assets | $ | 603,679 | |
Note 11 - Investment Tax Credits
The Company's tax credit investments promote qualified affordable housing projects, some of which also support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal income tax credits and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction to income tax expense.
The Company records the investments in affordable housing partnerships as a component of other assets on the Consolidated Balance Sheets and uses the proportional amortization method to account for the investments. Amortization related to these investments is recorded as a component of the provision for income taxes on the Consolidated Statements of Operations. The Company's unfunded capital commitments to these investments is included in other liabilities on the Consolidated Balance Sheets.
The Company recorded $47.2 million of affordable housing investments and $40.9 million of related unfunded capital commitments associated with the Merger.
The following table presents the Company's tax credit investments, which consisted entirely of affordable housing tax credit investments and related unfunded capital commitments as of December 31, 2023 and 2022: | | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 |
Other Assets: | | | |
Affordable housing tax credit investments | $ | 210,873 | | | $ | 143,719 | |
Other Liabilities: | | | |
Unfunded affordable housing tax credit commitments | $ | 114,082 | | | $ | 81,632 | |
The following table presents other information relating to the Company's affordable housing tax credit investments for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
Proportional amortization | 16,777 | | | 12,026 | | | 10,003 | |
Tax credit investment credits and tax benefits | 20,932 | | | 14,553 | | | 12,253 | |
There was no impairment recognized for the years ended December 31, 2023, 2022, and 2021.
Note 12 – Income Taxes
The following table presents the components of income tax provision for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| |
(in thousands) | 2023 | | 2022 | | 2021 |
Current Expense: | | | | | |
Federal | $ | 72,224 | | | $ | 70,982 | | | $ | 71,969 | |
State | 37,365 | | | 28,461 | | | 25,086 | |
Total current tax expense | $ | 109,589 | | | $ | 99,443 | | | $ | 97,055 | |
Deferred tax expense: | | | | | |
Federal | $ | 6,794 | | | $ | 11,636 | | | $ | 32,099 | |
State | 6,101 | | | 2,747 | | | 8,706 | |
Total deferred tax expense | 12,895 | | | 14,383 | | | 40,805 | |
Total | $ | 122,484 | | | $ | 113,826 | | | $ | 137,860 | |
The following table presents a reconciliation of income taxes computed at the Federal statutory rate to the actual effective rate for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Statutory Federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State tax, net of Federal benefit | 6.2 | % | | 5.8 | % | | 5.6 | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Non-deductible FDIC Premiums | 1.7 | % | | 0.4 | % | | 0.2 | % |
Net tax-exempt interest income | (2.2) | % | | (1.5) | % | | (0.9) | % |
| | | | | |
Other | (0.7) | % | | (0.4) | % | | (1.2) | % |
Effective income tax rate | 26.0 | % | | 25.3 | % | | 24.7 | % |
The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax asset as of December 31, 2023 and 2022: | | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 |
Deferred tax assets: | | | |
Net unrealized losses on investment securities | $ | 303,465 | | | $ | 140,227 | |
Acquired loans | 146,315 | | | 4,644 | |
Allowance for credit losses | 115,777 | | | 79,312 | |
Accrued severance and deferred compensation | 39,904 | | | 16,523 | |
Operating lease liabilities | 33,956 | | | 23,603 | |
Other | 54,181 | | | 35,459 | |
Total gross deferred tax assets | 693,598 | | | 299,768 | |
Deferred tax liabilities: | | | |
Other intangible assets | 155,642 | | | 156 | |
Direct financing leases | 42,825 | | | 41,120 | |
Deferred loan fees and costs | 34,402 | | | 25,676 | |
Residential mortgage servicing rights | 31,259 | | | 49,681 | |
Operating lease right-of-use asset | 30,117 | | | 20,235 | |
Premises and equipment | 20,579 | | | 1,575 | |
Fair market value adjustment on junior subordinated debentures | 17,287 | | | 15,081 | |
| | | |
| | | |
| | | |
Other | 14,284 | | | 13,421 | |
Total gross deferred tax liabilities | 346,395 | | | 166,945 | |
| | | |
Net deferred tax asset | $ | 347,203 | | | $ | 132,823 | |
As of December 31, 2023 and 2022, the Company's gross deferred tax assets included $2.4 million and $689,000, respectively, of NOL carryforwards expiring in tax years 2024-2032. As of December 31, 2023, the Company has determined there is sufficient positive evidence to conclude that it is more likely than not that the benefit from certain of its federal and state NOL and tax carryforwards will be realized. The Company has determined that no valuation allowance for the deferred tax assets is required as management believes it is more likely than not that future taxable income will be sufficient to realize the remaining gross deferred tax assets of $693.6 million and $299.8 million at December 31, 2023 and 2022, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as the majority of states. The Company no longer files income tax returns in Canada. The Company is no longer subject to U.S. and Canadian income tax examinations for years before 2020, and is no longer subject to state income tax examinations for years prior to 2019.
The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities' examinations of the Company's tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.
The Company had no gross unrecognized tax benefits as of December 31, 2023 and December 31, 2022. Interest on unrecognized tax benefits is reported by the Company as a component of tax expense. There were no amounts related to interest and penalties recognized for the years ended December 31, 2023 and December 31, 2022.
Note 13 – Interest-Bearing Deposits
The following table presents the major types of interest-bearing deposits as of December 31, 2023 and 2022: | | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 |
Interest-bearing demand | $ | 8,044,432 | | | $ | 4,080,469 | |
Money market | 10,324,454 | | | 7,721,011 | |
Savings | 2,754,113 | | | 2,265,052 | |
Time, greater than $250,000 | 1,034,094 | | | 582,838 | |
Time, $250,000 or less | 5,193,475 | | | 2,127,393 | |
Total interest-bearing deposits | $ | 27,350,568 | | | $ | 16,776,763 | |
Approximately $6.0 billion in time deposits are scheduled to mature in 2024, including $2.6 billion in brokered time deposits. As of December 31, 2023, brokered time deposits had a weighted average interest rate of 5.53% compared to the weighted average interest rate on all other time deposits that mature in 2024 and thereafter of 3.93%. The following table presents the scheduled maturities of all time deposits as of December 31, 2023: | | | | | | | | | | | | |
(in thousands) | | | Weighted Average Interest Rate | |
Year | Amount | | |
2024 | $ | 6,049,079 | | | 4.66 | % | |
2025 | 110,413 | | | 1.09 | % | |
2026 | 43,357 | | | 0.42 | % | |
2027 | 16,651 | | | 0.12 | % | |
2028 | 5,789 | | | 0.12 | % | |
Thereafter | 2,280 | | | 1.05 | % | |
Total time deposits | $ | 6,227,569 | | | 4.55 | % | |
Note 14 – Securities Sold Under Agreements to Repurchase
The following table presents information regarding securities sold under agreements to repurchase as of December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Repurchase Amount | | Weighted Average Interest Rate | | Carrying Value of Underlying Assets | | Market Value of Underlying Assets |
December 31, 2023 | $ | 252,119 | | | 2.38 | % | | $ | 358,162 | | | $ | 358,162 | |
December 31, 2022 | $ | 308,769 | | | 0.19 | % | | $ | 456,922 | | | $ | 456,922 | |
The securities underlying agreements to repurchase entered into by the Bank are for the same securities originally sold, which are U.S. agencies, obligations of states and political subdivisions, mortgage-backed securities, and collateralized mortgage obligations, with a one-day maturity. In all cases, the Bank maintains control over the securities. Investment securities are pledged as collateral in an amount equal to or greater than the repurchase agreements.
The following table presents the average and maximum balances for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 2023 | | 2022 | | 2021 |
Average balance during the period | | $ | 267,688 | | | $ | 451,612 | | | $ | 454,992 | |
Maximum month end balance during period | | $ | 304,605 | | | $ | 532,449 | | | $ | 537,581 | |
Note 15 – Borrowings
The Bank had outstanding FHLB advances and FRB borrowings as of December 31, 2023 and 2022 with carrying values of $4.0 billion and $906.2 million, respectively.
The Bank's FHLB advances, excluding acquisition accounting adjustments, were $3.8 billion as of December 31, 2023, all of which mature within one year. The weighted average rate of these FHLB advances was 5.6% as of December 31, 2023. As of December 31, 2023, the Company had FRB BTFP borrowings of $200.0 million that carried a rate of 4.8%, which matures within one year.
The following table presents the average outstanding, maximum, and year end balances and average interest rates on FHLB advances for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Average balance during period | | $ | 4,458,463 | | | $ | 225,411 | | | $ | 194,575 | |
Maximum month end balance during period | | $ | 6,400,000 | | | $ | 905,000 | | | $ | 645,000 | |
Weighted average rate during period | | 5.3 | % | | 4.1 | % | | 1.6 | % |
Weighted average rate at December 31 | | 5.6 | % | | 4.7 | % | | 7.1 | % |
The FHLB requires the Bank to maintain a required level of investment in FHLB and sufficient collateral to qualify for secured advances. The Bank has pledged as collateral for these secured advances all FHLB stock, all funds on deposit with the FHLB, investment and commercial real estate portfolios, accounts, general intangibles, equipment and other property in which a security interest can be granted by the Bank to the FHLB. Total value of loans and securities pledged to the FHLB were $19.1 billion as of December 31, 2023.
The Bank also has access to the FRB BTFP, subject to certain collateral requirements, namely the amount of pledged investment securities. Total value of securities pledged to the BTFP were $1.4 billion as of December 31, 2023. The average FRB borrowings outstanding during 2023 was $31.9 million. The ability to take new advances under this program ends in March 2024.
At December 31, 2023 and 2022, the Company had no outstanding federal funds purchased balances. The Bank had available lines of credit with the FHLB totaling $8.2 billion as of December 31, 2023, subject to certain collateral requirements. The Bank had available lines of credit with the Federal Reserve including the BTFP with an available line of credit of $1.3 billion and Discount Window line of credit totaling $1.6 billion subject to certain collateral requirements, namely the amount of certain pledged loans as of December 31, 2023. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling $600.0 million as of December 31, 2023. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility and are reviewed and renewed periodically throughout the year. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.
Note 16 – Junior and Other Subordinated Debentures
Following is information about the Company's wholly-owned Trusts as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | | | | | | | | | | | |
Trust Name | | Issue Date | | Issued Amount | | Carrying Value (1) | | Rate (2) | | Effective Rate (3) | | Maturity Date |
AT FAIR VALUE: | | | | | | | | | | | | |
Umpqua Statutory Trust II | | October 2002 | | $ | 20,619 | | | $ | 19,401 | | | Floating rate, SOFR + 0.26161% plus 3.35%, adjusted quarterly | | 9.57 | % | | October 2032 |
Umpqua Statutory Trust III | | October 2002 | | 30,928 | | | 29,203 | | | Floating rate, SOFR + 0.26161% plus 3.45%, adjusted quarterly | | 9.63 | % | | November 2032 |
Umpqua Statutory Trust IV | | December 2003 | | 10,310 | | | 9,319 | | | Floating rate, SOFR + 0.26161% plus 2.85%, adjusted quarterly | | 9.41 | % | | January 2034 |
Umpqua Statutory Trust V | | December 2003 | | 10,310 | | | 9,146 | | | Floating rate, SOFR + 0.26161% plus 2.85%, adjusted quarterly | | 9.57 | % | | March 2034 |
Umpqua Master Trust I | | August 2007 | | 41,238 | | | 30,557 | | | Floating rate, SOFR + 0.26161% plus 1.35%, adjusted quarterly | | 9.44 | % | | September 2037 |
Umpqua Master Trust IB | | September 2007 | | 20,619 | | | 17,644 | | | Floating rate, SOFR + 0.26161% plus 2.75%, adjusted quarterly | | 9.81 | % | | December 2037 |
Sterling Capital Trust III | | April 2003 | | 14,433 | | | 13,506 | | | Floating rate, SOFR + 0.26161% plus 3.25%, adjusted quarterly | | 9.5 | % | | April 2033 |
Sterling Capital Trust IV | | May 2003 | | 10,310 | | | 9,489 | | | Floating rate, SOFR + 0.26161% plus 3.15%, adjusted quarterly | | 9.55 | % | | May 2033 |
Sterling Capital Statutory Trust V | | May 2003 | | 20,619 | | | 18,955 | | | Floating rate, SOFR + 0.26161% plus 3.25%, adjusted quarterly | | 9.65 | % | | June 2033 |
Sterling Capital Trust VI | | June 2003 | | 10,310 | | | 9,397 | | | Floating rate, SOFR + 0.26161% plus 3.20%, adjusted quarterly | | 9.71 | % | | September 2033 |
Sterling Capital Trust VII | | June 2006 | | 56,702 | | | 43,599 | | | Floating rate, SOFR + 0.26161% plus 1.53%, adjusted quarterly | | 9.33 | % | | June 2036 |
Sterling Capital Trust VIII | | September 2006 | | 51,547 | | | 39,773 | | | Floating rate, SOFR + 0.26161% plus 1.63%, adjusted quarterly | | 9.43 | % | | December 2036 |
Sterling Capital Trust IX | | July 2007 | | 46,392 | | | 35,166 | | | Floating rate, SOFR + 0.26161% plus 1.40%, adjusted quarterly | | 9.31 | % | | October 2037 |
Lynnwood Financial Statutory Trust I | | March 2003 | | 9,279 | | | 8,464 | | | Floating rate, SOFR + 0.26161% plus 3.15%, adjusted quarterly | | 9.62 | % | | March 2033 |
Lynnwood Financial Statutory Trust II | | June 2005 | | 10,310 | | | 8,253 | | | Floating rate, SOFR + 0.26161% plus 1.80%, adjusted quarterly | | 9.30 | % | | June 2035 |
Klamath First Capital Trust I | | July 2001 | | 15,464 | | | 14,568 | | | Floating rate, SOFR + 0.42826% plus 3.75%, adjusted semiannually | | 10.22 | % | | July 2031 |
Total junior subordinated debentures at fair value | | 379,390 | | | 316,440 | | | | | | | |
AT AMORTIZED COST: | | | | | | | | | | | | |
Humboldt Bancorp Statutory Trust II | | December 2001 | | 10,310 | | | 10,735 | | | Floating rate, SOFR + 0.26161% plus 3.60%, adjusted quarterly | | 8.37 | % | | December 2031 |
Humboldt Bancorp Statutory Trust III | | September 2003 | | 27,836 | | | 29,041 | | | Floating rate, SOFR + 0.26161% plus 2.95%, adjusted quarterly | | 7.79 | % | | September 2033 |
CIB Capital Trust | | November 2002 | | 10,310 | | | 10,693 | | | Floating rate, SOFR + 0.26161% plus 3.45%, adjusted quarterly | | 8.35 | % | | November 2032 |
Western Sierra Statutory Trust I | | July 2001 | | 6,186 | | | 6,186 | | | Floating rate, SOFR + 0.26161% plus 3.58%, adjusted quarterly | | 9.22 | % | | July 2031 |
Western Sierra Statutory Trust II | | December 2001 | | 10,310 | | | 10,310 | | | Floating rate, SOFR + 0.26161% plus 3.60%, adjusted quarterly | | 9.24 | % | | December 2031 |
Western Sierra Statutory Trust III | | September 2003 | | 10,310 | | | 10,310 | | | Floating rate, SOFR + 0.26161% plus 2.90%, adjusted quarterly | | 8.56 | % | | October 2033 |
Western Sierra Statutory Trust IV | | September 2003 | | 10,310 | | | 10,310 | | | Floating rate, SOFR + 0.26161% plus 2.90%, adjusted quarterly | | 8.56 | % | | September 2033 |
Bank of Commerce Holdings Trust II | | July 2005 | | 10,310 | | | 10,310 | | | Floating rate, SOFR + 0.26161% plus 1.58%, adjusted quarterly | | 7.23 | % | | September 2035 |
Total junior subordinated debentures at amortized cost | | 95,882 | | | 97,895 | | | | | | | |
Total junior subordinated debentures | | | | $ | 475,272 | | | $ | 414,335 | | | | | | | |
(1)Includes acquisition accounting adjustments, net of accumulated amortization, for junior subordinated debentures assumed in connection with previous mergers as well as fair value adjustments related to trusts recorded at fair value.
(2)Contractual interest rate of junior subordinated debentures.
(3)Effective interest rate based upon the carrying value as of December 31, 2023.
Through the Merger, the Company assumed $10.0 million in aggregate principal amount of fixed-to-floating rate subordinated debentures. Interest on the subordinated debentures will be paid at a variable rate equal to the sum of forward term SOFR, the statutorily prescribed tenor spread adjustment plus 5.26%, payable quarterly until the maturity date of December 10, 2025.
The Company also assumed $10.3 million of trust preferred obligations, which is included in the table above.
The Trusts are reflected as junior subordinated debentures, either at fair value or at amortized cost. The common stock issued by the Trusts is recorded in other assets and totaled $14.3 million and $14.0 million as of December 31, 2023 and 2022, respectively. As of December 31, 2023, all of the junior subordinated debentures were redeemable at par, at their applicable quarterly or semiannual interest payment dates.
The Company selected the fair value measurement option for junior subordinated debentures originally issued by UHC prior to the Merger (the Umpqua Statutory Trusts) and for junior subordinated debentures acquired by UHC from Sterling Financial Corporation prior to the Merger. Based on a decrease in the implied forward curve and the spot curve shifting higher, partially offset by a decrease in credit spread, the fair value of the junior subordinated debentures decreased during the year. A gain of $7.9 million for the year ended December 31, 2023, as compared to the loss of $28.8 million for the year ended December 31, 2022, was recorded in other comprehensive income.
Note 17 – Employee Benefit Plans
Employee Savings Plan
Substantially all of the Company's employees are eligible to participate in the Umpqua Bank 401(k) and Profit Sharing Plan, a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company's Board of Directors, the Company may elect to make matching and/or profit sharing contributions to the Umpqua Bank 401(k) and Profit Sharing Plan based on profits of the Bank. The Company's contributions charged to expense including the match and profit sharing amounted to $20.9 million, $10.6 million, and $10.9 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Employee Stock Purchase Plan
The Company maintains an ESP Plan in which substantially all employees of historical Columbia were eligible to participate, prior to the Merger. The ESP Plan provided participants the opportunity to purchase common stock of the Company at a discounted price. Under the ESP Plan, participants purchased common stock of the Company for 90% of the lowest price on either the first or last day in the look-back period of six months from January 1st through June 30th of 2023. A 10% discount was recognized by the Company as compensation expense and did not have a material impact on net income or earnings per common share. Participants of the ESP Plan purchased 58,440 shares for $1.2 million in 2023. At December 31, 2023, there were 27,206 shares available for purchase under the ESP Plan.
Supplemental Retirement/Deferred Compensation Plans
The Company has established a Supplemental Retirement & Deferred Compensation Plan, a nonqualified deferred compensation plan to help supplement the retirement income of certain highly compensated executives selected by resolution of the Board. The SRP/DCP has two components, a supplemental retirement plan and a deferred compensation plan. The Company may make discretionary contributions to the SRP. The SRP balances as of December 31, 2023 and 2022 were $517,000 and $568,000, respectively, and are recorded in other liabilities on the Consolidated Balance Sheets. Under the DCP, eligible officers may elect to defer up to 50% of their salary into a plan account. The DCP balance was $13.1 million and $9.7 million at December 31, 2023 and 2022, respectively. In addition, the Company has established a supplemental retirement plan for the former Executive Chairman of the Board of Directors. The balance for this plan was $16.7 million and $8.7 million as of December 31, 2023 and 2022, respectively.
Supplemental Executive Retirement Plan
In connection with the Merger, the Company assumed a SERP, which is unsecured and unfunded and there are no program assets. The SERP projected benefit obligation, which represents the vested net present value of future payments to individuals under the plan, is accrued over the estimated remaining term of employment of the participants and has been determined by actuarial valuation using a discount rate of 5.02% for 2023. Additional assumptions and features of the plan are a normal retirement age of 65 and a 2% annual cost of living benefit adjustment. The projected benefit obligation of $18.8 million is included in other liabilities on the Consolidated Balance Sheets.
Acquired Plans
In connection with prior acquisitions, the Bank assumed liability for certain salary continuation, supplemental retirement, and deferred compensation plans for key employees, retired employees, and directors of acquired institutions. Subsequent to the effective date of these acquisitions, no additional contributions were made to these plans. These plans are unfunded and provide for the payment of a specified amount on a monthly basis for a specified period (generally 10 to 20 years) after retirement. In the event of a participant employee's death prior to or during retirement, the Bank, in certain cases, is obligated to pay to the designated beneficiary the benefits set forth under the plans. As of December 31, 2023 and 2022, liabilities recorded for the estimated present value of future plan benefits totaled $49.0 million and $25.6 million, respectively, and are recorded in other liabilities on the Consolidated Balance Sheets. For the years ended December 31, 2023, 2022, and 2021, expense recorded for these benefits totaled $4.8 million, $1.5 million, and $2.2 million, respectively.
Rabbi Trusts
The Bank has established, for the SRP/DCP plan noted above, and sponsors, for some deferred compensation plans assumed in connection with prior mergers, irrevocable trusts commonly referred to as rabbi trusts. The trust assets (generally trading assets) are consolidated in the Company's balance sheets and the associated liability (which equals the related asset balances) is included in other liabilities on the Consolidated Balance Sheets. The asset and liability balances related to these trusts as of December 31, 2023 and 2022 were $13.7 million and $11.4 million, respectively.
Bank-Owned Life Insurance
The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank's intent to hold these policies as a long-term investment. However, there will be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. As of December 31, 2023 and 2022, the cash surrender value of these policies was $680.9 million and $331.8 million, respectively. As of December 31, 2023 and 2022, the Bank also had liabilities for post-retirement benefits payable to other partial beneficiaries under some of these life insurance policies of $6.3 million and $4.0 million, respectively. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Bank uses a variety of insurance companies and regularly monitors their financial condition.
Note 18 – Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk — The Company's financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank's business and involve elements of credit, liquidity, and interest rate risk.
The following table presents a summary of the Bank's commitments and contingent liabilities:
| | | | | |
(in thousands) | December 31, 2023 |
Commitments to extend credit | $ | 11,278,324 | |
Forward sales commitments | $ | 39,500 | |
Commitments to originate residential mortgage loans held for sale | $ | 20,588 | |
Standby letters of credit | $ | 212,525 | |
The Bank is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the risk involved in on-balance sheet items. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any covenant or condition established in the applicable contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most standby letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including international trade finance, commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. There were no financial guarantees in connection with standby letters of credit that the Bank was required to perform on for the years ended December 31, 2023 and 2022. As of December 31, 2023, approximately $198.5 million of standby letters of credit expire within one year, and $14.0 million expire thereafter. During the years ended December 31, 2023 and 2022, the Bank recorded approximately $2.5 million and $1.9 million, respectively, in fees associated with standby letters of credit.
Residential mortgage loans sold into the secondary market are sold with limited recourse against the Company, meaning that the Company may be obligated to repurchase or otherwise reimburse the investor for incurred losses on any loans that suffer an early payment default, are not underwritten in accordance with investor guidelines or are determined to have pre-closing borrower misrepresentations. As of December 31, 2023, the Company had a residential mortgage loan repurchase reserve liability of $200,000. For loans sold to GNMA, the Bank has a unilateral right but not the obligation to repurchase loans that are past due 90 days or more. As of December 31, 2023, the Bank has a recorded liability of $1.0 million for the loans subject to this repurchase right.
Legal Proceedings and Regulatory Matters—The Company is subject to litigation in court and arbitral proceedings, as well as proceedings, investigations, examinations, and other actions brought or considered by governmental and self-regulatory agencies. The Company is party to various pending and threatened claims and legal proceedings arising in the normal course of business activities, some of which involve claims for substantial or uncertain amounts.
In August 2020, a class action complaint was filed in the United States District Court (ND Cal) alleging aiding and abetting claims against Umpqua Bank associated with the failure of two commercial real estate investment companies, Professional Financial Investors, Inc. and Professional Investors Security Fund, Inc., allegedly effected through a Ponzi scheme. Both companies maintained their primary deposit account relationship with Umpqua Bank’s Novato, Marin County, California branch office, acquired by Umpqua Bank from Circle Bank. Umpqua Bank's motion to dismiss was denied in January 2021, and its motion for summary judgment was denied in December 2022, and at the same time the District Court certified the plaintiffs’ proposed class. Two other related cases were filed in 2023: one case alleges similar claims by two investors and was filed in May 2023 in Marin County Superior Court; and another case was filed in June 2023 in the United States District Court (ND Cal) alleging claims by ten investors with different investments than the class members. The class plaintiffs most recently estimate that damages from the scheme may amount to between $386.2 million and $429.8 million, which does not consider prior bankruptcy recoveries of $110.0 million to date. The two cases filed in 2023 do not yet have clear estimates of damages. The cases follow an SEC non-public investigation of Professional Financial Investors, Inc. and Professional Investors Security Fund, Inc. on May 28, 2020. Umpqua Bank intends to defend these matters vigorously and believes that it has meritorious defenses.
As previously disclosed, in 2023, the Company's wholly-owned subsidiary Umpqua Bank was informed by one of its technology service providers (the "Vendor") that a widely reported security incident involving MOVEit, a filesharing software used globally by government agencies, enterprise corporations, and financial institutions, resulted in the unauthorized acquisition by a third party of the names and social security numbers or tax identification numbers of certain of Umpqua Bank’s consumer and small business customers (the "Vendor Incident").
Other than the information described above, no Umpqua Bank account information was compromised as a result of the Vendor Incident, and no information from Umpqua Bank’s commercial customers was involved in the Vendor Incident. On June 22, 2023, Umpqua Bank sent an email to potentially affected consumer and small business customers informing them of the Vendor Incident. Between August 11, 2023, and August 15, 2023, the Vendor, on behalf of Umpqua Bank, initiated formal notice via U.S. Mail to the 429,252 Umpqua Bank customers whose information was involved in the Vendor Incident. Umpqua Bank and the Vendor also notified applicable federal and state regulators regarding the Vendor Incident.
Beginning on August 18, 2023, some of the individuals who were notified of the Vendor Incident filed lawsuits against Umpqua Bank seeking monetary recovery and other relief on behalf of themselves and one or more putative classes of other individuals similarly situated. Two such cases have been filed in federal court (the United States District Court for the Western District of Washington), one of which was later voluntarily dismissed without prejudice. Five such cases have been filed in state court in Washington (the Washington Superior Court for Pierce County) and one case in state court in California (the California Superior Court for Contra Costa County). The state court cases have been removed to federal court by Umpqua Bank. On October 4, 2023, the United States Judicial Panel on Multidistrict Litigation, in view of the large number of lawsuits arising out of the MOVEit data incident in federal courts across the United States, initiated a multidistrict litigation (“MDL”) for these cases to allow such cases to be transferred to one court for pre-trial proceedings. The MDL is titled In Re: MOVEit Customer Data Security Breach Litigation, MDL No. 3083 and is pending in the United States District Court for the District of Massachusetts as MDL No. 1:23-md-03083-ADB-PGL. All seven cases against Umpqua Bank have been transferred to the MDL as of January 29, 2024. The cases collectively allege claims for negligence, negligence per se, breach of contract, breach of implied contract, breach of third-party beneficiary contract, breach of fiduciary duty, invasion of privacy, breach of the covenant of good faith and fair dealing, unjust enrichment and violation of certain statutes, namely the Washington Consumer Protection Act, the California Consumer Legal Remedies Act, the California Consumer Privacy Act, and the California Unfair Competition Law. Umpqua Bank has also received claims by or on behalf of individuals in connection with the Vendor Incident. Such claims have the potential to give rise to additional litigation. Umpqua Bank has engaged defense counsel and intends to vigorously defend against these suits and any similar or related suits or claims. Umpqua Bank has notified relevant insurance carriers and business counterparties and continues to reserve all of its relevant rights to indemnity, defense, contribution, and other relief in connection with these matters.
At least quarterly, liabilities and contingencies are assessed in connection with all outstanding or new legal matters, utilizing the most recent information available. If it is determined that a loss from a matter is probable and that the amount of the loss can be reasonably estimated, an accrual for the loss is established. Once established, each accrual is adjusted as appropriate to reflect any subsequent developments in the specific legal matter. It is inherently difficult to determine whether any loss is probable or even possible. It is also inherently difficult to estimate the amount of any loss and there may be matters for which a loss is probable or reasonably possible but not currently estimable. Actual losses may be in excess of any established accrual or the range of reasonably possible loss. Management's estimate will change from time to time. For matters where a loss is not probable, or the amount of the loss cannot be estimated, no accrual is established. The Company has $5.7 million accrued related to legal matters as of December 31, 2023.
The resolution and the outcome of legal claims are unpredictable, exacerbated by factors including the following: damages sought are unsubstantiated or indeterminate; it is unclear whether a case brought as a class action will be allowed to proceed on that basis; discovery or motion practice is not complete; the proceeding is not yet in its final stages; the matters present legal uncertainties; there are significant facts in dispute; there are a large number of parties, including multiple defendants; or there is a wide range of potential results. Any estimate or determination relating to the future resolution of legal and regulatory matters is uncertain and involves significant judgment. The Company is usually unable to determine whether a favorable or unfavorable outcome is remote, reasonably likely or probable, or to estimate the amount or range of a probable or reasonably likely loss until relatively late in the process.
Although there can be no assurance as to the ultimate outcome of a specific legal matter, the Company believes it has meritorious defenses to the claims asserted against us in our currently outstanding legal matters, and the Company intends to continue to vigorously defend ourselves. The Company will consider settlement of legal matters when, in management's judgment, it is in the best interests of the Company and its shareholders.
Based on information currently available, advice of counsel, available insurance coverage, and established reserves, the Company believes that the eventual outcome of the actions against us will not have a material adverse effect on the Company's consolidated financial statements. However, it is possible that the ultimate resolution of a matter, if unfavorable, may be material to the Company's results of operations for any particular reporting period.
Concentrations of Credit Risk— The Bank grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington, California, Idaho, Nevada, Arizona, Colorado, and Utah. In management's judgment, a concentration exists in real estate-related loans, which represented approximately 75% and 78% of the Bank's loan and lease portfolio for December 31, 2023 and 2022, respectively. Commercial real estate concentrations are managed to ensure geographic and business diversity, primarily in our footprint. As of December 31, 2023, the multifamily portfolio, including construction, and commercial office portfolio represented approximately 19% and 8% of the total loan portfolio, respectively. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Bank's primary market areas in particular, could have an adverse impact on the repayment of these loans. Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing represent the primary sources of repayment for a majority of these loans.
The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondent banks as well as internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.
Note 19 – Derivatives
The Bank may use derivatives to hedge the risk of changes in the fair values of interest rate lock commitments, residential mortgage loans held for sale, and MSRs. None of the Company's derivatives are 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 utilizes forward interest rate contracts in its derivative risk management strategy.
The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities 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 in 2023, 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. As of December 31, 2023 and 2022, the Bank had commitments to originate mortgage loans held for sale totaling $20.6 million and $56.1 million, respectively, and forward sales commitments of $39.5 million and $104.0 million, respectively, which are used to hedge both on-balance sheet and off-balance sheet exposures.
The Bank purchases interest rate futures and forward settling mortgage-backed securities to hedge the interest rate risk of MSRs. As of December 31, 2023, the Bank had $150.0 million notional of interest rate futures contracts and $36.0 million of mortgage-backed securities related to this program. As of December 31, 2022, the Bank had $152.0 million notional of interest rate futures contracts and $10.0 million of mortgage-backed securities related to this program. The Bank had cash collateral posting requirements for margins with its futures and mortgage-back securities counterparties and was required to post collateral against its obligations under these agreements of $815,000 and $3.8 million as of December 31, 2023 and 2022, respectively.
The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. As of December 31, 2023, the Bank had 1,292 interest rate swaps with an aggregate notional amount of $9.1 billion related to this program. As of December 31, 2022, the Bank had 922 interest rate swaps with an aggregate notional amount of $7.3 billion related to this program.
As of December 31, 2023 and 2022, the termination value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $260.1 million and $270.0 million, respectively. As of December 31, 2023 and 2022, the Bank has collateral posting requirements for initial margins with its clearing members and clearing houses and has been required to post collateral against its obligations under these agreements of $88.3 million and $89.5 million, respectively.
The Bank's clearable interest rate swap derivatives are cleared through the Chicago Mercantile Exchange and London Clearing House. These clearing houses characterize the variation margin payments, for certain derivative contracts that are referred to as settled-to-market, as settlements of the derivative's mark-to-market exposure and not collateral. The Company accounts for the variation margin as an adjustment to cash collateral, as well as a corresponding adjustment to the derivative asset and liability. As of December 31, 2023 and 2022, the variation margin adjustments consisted of positive adjustments of $166.3 million and $209.5 million, respectively.
Since the end of 2021, the Bank has solely executed swaps indexed to Term SOFR, which are not clearable. As such, at December 31, 2023 and December 31, 2022, there were 252 and 71 customer swaps, respectively, that were each offset via a swap executed on a bilateral basis with a counterparty bank. There is no initial margin posted for bilateral swaps, but cash collateral equivalent to variation margin is exchanged to cover the mark-to-market exposure on a daily basis. As of December 31, 2023 and December 31, 2022, the Bank held a total of $61.6 million and $51.9 million, respectively, of counterparty bank cash as collateral on these bilateral positions.
The Bank also executes foreign currency hedges as a service for customers. These foreign currency hedges are then offset with hedges with other third-party banks to limit the Bank's risk exposure.
The Bank's derivative assets are included in other assets on the Consolidated Balance Sheets, while the derivative liabilities are included in other liabilities on the Consolidated Balance Sheets. The following table summarizes the types of derivatives, separately by assets and liabilities, and the fair values of such derivatives as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Asset Derivatives | | Liability Derivatives |
Derivatives not designated as hedging instrument | | December 31, 2023 | | December 31, 2022 | | December 31, 2023 | | December 31, 2022 |
Interest rate lock commitments | | $ | — | | | $ | 50 | | | $ | 137 | | | $ | 18 | |
Interest rate futures | | 3,745 | | | — | | | — | | | 392 | |
Interest rate forward sales commitments | | 9 | | | 512 | | | 535 | | | 601 | |
Interest rate swaps | | 33,874 | | | 14,657 | | | 260,064 | | | 270,009 | |
Foreign currency derivatives | | 457 | | | 225 | | | 355 | | | 185 | |
Total derivative assets and liabilities | | $ | 38,085 | | | $ | 15,444 | | | $ | 261,091 | | | $ | 271,205 | |
The gains and losses on the Company's mortgage banking derivatives are included in residential mortgage banking revenue on the Consolidated Statements of Operations. The gains and losses on the Company's interest rate swaps and foreign currency derivatives are included in other income on the Consolidated Statements of Operations. The following table summarizes the types of derivatives and the gains (losses) recorded during the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | |
Derivatives not designated as hedging instrument | | 2023 | | 2022 | | 2021 |
Interest rate lock commitments | | $ | (169) | | | $ | (4,609) | | | $ | (23,503) | |
Interest rate futures | | (4,693) | | | (14,476) | | | — | |
Interest rate forward sales commitments | | 33 | | | 47,689 | | | 17,608 | |
Interest rate swaps | | (4,597) | | | 16,249 | | | 8,395 | |
Foreign currency derivatives | | 141 | | | 126 | | | 2,856 | |
Total derivative (losses) gains | | $ | (9,285) | | | $ | 44,979 | | | $ | 5,356 | |
Note 20 – Stock Compensation and Share Repurchase Plan
In connection with the Merger, all outstanding restricted equity units granted under UHC’s equity plans were legally assumed by Columbia and adjusted so that its holder was entitled to receive shares of Columbia's common stock equal to the product of (a) the number of shares of UHC common stock subject to such award multiplied by (b) the Exchange Ratio and (c) rounded to the nearest whole share of Columbia common stock, as applicable, and was otherwise subject to the same terms and conditions (including, without limitation, with respect to vesting conditions (taking into account any vesting that occurred at the Merger Date) and cash dividend equivalent rights). For any outstanding UHC restricted equity units that were subject to performance-based vesting at multiple achievement levels, the number of shares of UHC common stock underlying such units was calculated and fixed as of the Merger Date assuming achievement of the applicable performance conditions at the greater of target (100%) performance level or the actual level of achievement of UHC’s performance results through the latest practicable date before the Merger Date, and such units converted into service-based vesting awards with the applicable vesting date to be the last day of the original performance period.
In connection with the Merger, all outstanding and unvested performance-based restricted stock units and time-vesting restricted stock units and awards, granted under Columbia's equity plans, that were outstanding immediately before the Merger Date continued to be units or awards in respect of Columbia common stock following the Merger, subject to the same terms and conditions that were applicable to such awards before the Merger Date, except with respect to performance-based restricted stock units. Because the Merger constituted a change in control for purposes of the Columbia equity awards, the performance-based restricted stock units for which performance results had not been measured were measured as of the latest practicable date before the Merger Date and the number of performance-based restricted stock units was fixed at the greater of the target (100%) performance level or the actual level of achievement of Columbia's performance results, and such awards converted into service-based vesting awards with the applicable vesting date to be the last day of the original performance period. Columbia's outstanding time-vested RSUs and RSAs will continue to vest based on the executives' continued service through the end of the original service period. The fair value of share-based units and awards are recognized as compensation expense over the requisite service or performance period.
The total compensation cost related to restricted shares of Company stock granted to employees and included in salaries and employee benefits on the Consolidated Statements of Operations was $13.7 million, $9.3 million, and $9.5 million for the years ended December 31, 2023, 2022, and 2021, respectively.
For the years ended December 31, 2023, 2022, and 2021, the Company received income tax benefits of $3.7 million, $3.3 million, and $2.4 million, respectively, related to the vesting of RSUs and RSAs. The tax deficiency or benefit is recorded as income tax expense or benefit in the period the shares are vested.
Restricted Stock Units
The Company grants RSUs periodically to employees and directors. RSUs provide for an interest in Company common stock to the recipient, with such units held in escrow until certain conditions are met. RSUs provide for vesting requirements that include time-based, performance-based, or market-based conditions. RSUs generally vest over three years, subject to time or time plus performance vesting conditions. Recipients of RSUs do not pay any cash consideration to the Company for the units and the holders of the restricted units do not have voting rights; however, the holder accrues dividends, which are paid out when the shares vest. The fair value of time-based and performance-based units is equal to the fair market value of the Company’s common stock on the grant date. The fair value of market-based units is estimated on the grant date using the Monte Carlo simulation model, which incorporates assumptions as to stock price volatility, the expected life of awards, a risk-free interest rate and dividend yield.
The following table summarizes information about nonvested RSU activity for the year ended December 31, 2023:
| | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | |
(shares in thousands) | RSUs Outstanding | | Weighted Average Grant Date Fair Value | | | | | | | | |
Balance, beginning of period (1) | 730 | | | $ | 31.98 | | | | | | | | | |
Assumed | 290 | | | $ | 30.17 | | | | | | | | | |
Granted | 640 | | | $ | 30.14 | | | | | | | | | |
Vested/released | (457) | | | $ | 30.32 | | | | | | | | | |
Forfeited/expired | (26) | | | $ | 32.31 | | | | | | | | | |
Balance, end of period | 1,177 | | | $ | 31.19 | | | | | | | | | |
(1) Periods prior to February 28, 2023 have been restated based on the exchange ratio from the Merger of 0.5958.
The compensation cost related to RSUs in Company stock granted to employees and included in salaries and employee benefits on the Consolidated Statements of Operations was $13.5 million, $9.3 million, and $9.5 million for the years ended December 31, 2023, 2022, and 2021, respectively.
The total fair value of RSUs vested and released was $13.9 million, $11.0 million, and $9.5 million, for the years ended December 31, 2023, 2022, and 2021, respectively.
As of December 31, 2023, there was $20.7 million of total unrecognized compensation cost related to nonvested RSUs which is expected to be recognized over a weighted-average period of 1.81 years, assuming expected performance conditions are met for certain units.
Restricted Stock Awards
Restricted stock awards provide for the immediate issuance of shares of Company common stock to the recipient, with such shares held in escrow until certain conditions are met. RSAs provide for vesting requirements that include time-based, generally vesting over three years, performance-based, or market-based conditions. Recipients of RSAs do not pay any cash consideration to the Company for the shares and the holders of the restricted shares have voting rights and the holder accrues dividends, which are paid out when the shares vest. The fair value of time-based and performance-based share awards is equal to the fair market value of the Company’s common stock on the grant date.
The following table summarizes information about unvested RSA activity for the year ended December 31, 2023:
| | | | | | | | | | | |
| December 31, 2023 |
(shares in thousands) | RSAs Outstanding | | Weighted Average Grant Date Fair Value |
Balance, beginning of period | — | | | $ | — | |
Assumed | 508 | | | $ | 29.73 | |
Granted | 114 | | | $ | 23.15 | |
Vested/released | (95) | | | $ | 29.68 | |
Forfeited/expired | (28) | | | $ | 29.71 | |
Balance, end of period | 499 | | | $ | 28.24 | |
The compensation cost related to RSAs in Company stock granted to employees and included in salaries and employee benefits on the Consolidated Statements of Operations was $194,000 for the year ended December 31, 2023.
The total fair value of RSAs vested and released was $2.8 million for the year ended December 31, 2023.
As of December 31, 2023, there was $1.6 million of total unrecognized compensation cost related to nonvested RSAs which is expected to be recognized over a weighted-average period of 2.08 years, assuming expected performance conditions are met.
Share Repurchase Plan
As of December 31, 2023, the Company does not have a current share repurchase authorization from the Board of Directors. In 2021, the Company approved a share repurchase program, which authorized the Company to repurchase up to $400 million of common stock; the share repurchase program expired on July 31, 2022. During the years ended December 31, 2023 and 2022, there were no shares repurchased under share repurchase plans, as compared to 2.4 million shares, as adjusted for the Merger exchange ratio, repurchased under a previous share repurchase plan, in the year ended December 31, 2021.
The Company also has restricted stock plans which provide for the payment of withholding taxes by tendering previously owned or recently vested shares. Restricted shares cancelled to pay withholding taxes totaled 261,000, 120,000, and 89,000 shares during the years ended December 31, 2023, 2022, and 2021, respectively.
Note 21 – Regulatory Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's operations and financial statements. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about risk components, asset risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital, and Tier 1 common to risk-weighted assets (as defined in the applicable regulations), and of Tier 1 capital to average assets (as defined in the applicable regulations). Basel III also requires banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. The capital conservation buffer is fully phased-in at 2.5%, such that the common equity Tier 1, Tier 1, and total capital ratio minimums inclusive of the capital conservation buffers were 7%, 8.5%, and 10.5%. Management believes, as of December 31, 2023, that the Company meets all capital adequacy requirements to which it is subject.
The following table shows the Company's consolidated and the Bank's capital adequacy ratios compared to the regulatory minimum capital ratio and the regulatory minimum capital ratio needed to qualify as a "well-capitalized" institution, as calculated under regulatory guidelines of Basel III as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes | | To be Well Capitalized |
(dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
December 31, 2023 | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 4,770,335 | | | 11.86 | % | | $ | 3,218,301 | | | 8.00 | % | | $ | 4,022,876 | | | 10.00 | % |
Umpqua Bank | $ | 4,653,920 | | | 11.57 | % | | $ | 3,217,821 | | | 8.00 | % | | $ | 4,022,276 | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 3,876,985 | | | 9.64 | % | | $ | 2,413,726 | | | 6.00 | % | | $ | 3,218,301 | | | 8.00 | % |
Umpqua Bank | $ | 4,231,569 | | | 10.52 | % | | $ | 2,413,366 | | | 6.00 | % | | $ | 3,217,821 | | | 8.00 | % |
Tier 1 Common (to Risk Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 3,876,985 | | | 9.64 | % | | $ | 1,810,294 | | | 4.50 | % | | $ | 2,614,869 | | | 6.50 | % |
Umpqua Bank | $ | 4,231,569 | | | 10.52 | % | | $ | 1,810,024 | | | 4.50 | % | | $ | 2,614,479 | | | 6.50 | % |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | |
Consolidated | $ | 3,876,985 | | | 7.60 | % | | $ | 2,040,344 | | | 4.00 | % | | $ | 2,550,431 | | | 5.00 | % |
Umpqua Bank | $ | 4,231,569 | | | 8.30 | % | | $ | 2,040,489 | | | 4.00 | % | | $ | 2,550,611 | | | 5.00 | % |
December 31, 2022 | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 3,651,382 | | | 13.71 | % | | $ | 2,130,565 | | | 8.00 | % | | $ | 2,663,207 | | | 10.00 | % |
Umpqua Bank | $ | 3,440,574 | | | 12.92 | % | | $ | 2,130,240 | | | 8.00 | % | | $ | 2,662,799 | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 2,934,708 | | | 11.02 | % | | $ | 1,597,924 | | | 6.00 | % | | $ | 2,130,565 | | | 8.00 | % |
Umpqua Bank | $ | 3,174,899 | | | 11.92 | % | | $ | 1,597,680 | | | 6.00 | % | | $ | 2,130,240 | | | 8.00 | % |
Tier 1 Common (to Risk Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 2,934,708 | | | 11.02 | % | | $ | 1,198,443 | | | 4.50 | % | | $ | 1,731,084 | | | 6.50 | % |
Umpqua Bank | $ | 3,174,899 | | | 11.92 | % | | $ | 1,198,260 | | | 4.50 | % | | $ | 1,730,820 | | | 6.50 | % |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | |
Consolidated | $ | 2,934,708 | | | 9.14 | % | | $ | 1,283,669 | | | 4.00 | % | | $ | 1,604,586 | | | 5.00 | % |
Umpqua Bank | $ | 3,174,899 | | | 9.89 | % | | $ | 1,283,610 | | | 4.00 | % | | $ | 1,604,513 | | | 5.00 | % |
In 2020, the federal bank regulatory authorities finalized a rule to provide banking organizations that implemented CECL in 2020 the option to delay the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. The Company elected this capital relief to delay the estimated regulatory capital impact of adopting CECL, relative to the incurred loss methodology's effect on regulatory capital. Currently, the Company is phasing out the cumulative adjustment as calculated at the end of 2021, by adjusting it by 75% through 2022, 50% in 2023, and 25% in 2024.
Note 22 – Fair Value Measurement
The following table presents estimated fair values of the Company's financial instruments as of December 31, 2023 and 2022, whether or not recognized or recorded at fair value on a recurring basis in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2023 | | December 31, 2022 |
(in thousands) | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | 1 | | $ | 2,162,534 | | | $ | 2,162,534 | | | $ | 1,294,643 | | | $ | 1,294,643 | |
Equity and other investment securities | 1,2 | | 76,995 | | | 76,995 | | | 72,959 | | | 72,959 | |
Investment securities available for sale | 1,2 | | 8,829,870 | | | 8,829,870 | | | 3,196,166 | | | 3,196,166 | |
Investment securities held to maturity | 3 | | 2,300 | | | 3,025 | | | 2,476 | | | 3,197 | |
Loans held for sale | 2 | | 30,715 | | | 30,715 | | | 71,647 | | | 71,647 | |
Loans and leases, net | 2,3 | | 37,001,080 | | | 35,810,989 | | | 25,854,846 | | | 24,399,370 | |
Restricted equity securities | 1 | | 179,274 | | | 179,274 | | | 47,144 | | | 47,144 | |
Residential mortgage servicing rights | 3 | | 109,243 | | | 109,243 | | | 185,017 | | | 185,017 | |
Bank owned life insurance | 1 | | 680,948 | | | 680,948 | | | 331,759 | | | 331,759 | |
Derivatives | 2,3 | | 38,085 | | | 38,085 | | | 15,444 | | | 15,444 | |
Financial liabilities: | | | | | | | | | |
Demand, money market, and savings deposits | 1 | | $ | 35,379,451 | | | $ | 35,379,451 | | | $ | 24,355,381 | | | $ | 24,355,381 | |
Time deposits | 2 | | 6,227,569 | | | 6,201,519 | | | 2,710,231 | | | 2,667,535 | |
Securities sold under agreements to repurchase | 2 | | 252,119 | | | 252,119 | | | 308,769 | | | 308,769 | |
Borrowings | 2 | | 3,950,000 | | | 3,950,037 | | | 906,175 | | | 905,591 | |
Junior subordinated debentures, at fair value | 3 | | 316,440 | | | 316,440 | | | 323,639 | | | 323,639 | |
Junior and other subordinated debentures, at amortized cost | 3 | | 107,895 | | | 97,695 | | | 87,813 | | | 80,922 | |
Derivatives | 2,3 | | 261,091 | | | 261,091 | | | 271,205 | | | 271,205 | |
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | December 31, 2023 |
Description | Total | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | |
Equity and other investment securities | | | | | | | |
Investments in mutual funds and other securities | $ | 63,298 | | | $ | 44,839 | | | $ | 18,459 | | | $ | — | |
Equity securities held in rabbi trusts | 13,697 | | | 13,697 | | | — | | | — | |
| | | | | | | |
Investment securities available for sale | | | | | | | |
U.S. Treasury and agencies | 1,478,392 | | | 373,664 | | | 1,104,728 | | | — | |
Obligations of states and political subdivisions | 1,072,105 | | | — | | | 1,072,105 | | | — | |
Mortgage-backed securities and collateralized mortgage obligations | 6,279,373 | | | — | | | 6,279,373 | | | — | |
| | | | | | | |
Loans held for sale, at fair value | 30,715 | | | — | | | 30,715 | | | — | |
Loans and leases, at fair value | 275,140 | | | — | | | 275,140 | | | — | |
Residential mortgage servicing rights, at fair value | 109,243 | | | — | | | — | | | 109,243 | |
Derivatives | | | | | | | |
| | | | | | | |
Interest rate futures | 3,745 | | | — | | | 3,745 | | | — | |
Interest rate forward sales commitments | 9 | | | — | | | 9 | | | — | |
Interest rate swaps | 33,874 | | | — | | | 33,874 | | | — | |
Foreign currency derivatives | 457 | | | — | | | 457 | | | — | |
Total assets measured at fair value | $ | 9,360,048 | | | $ | 432,200 | | | $ | 8,818,605 | | | $ | 109,243 | |
Financial liabilities: | | | | | | | |
Junior subordinated debentures, at fair value | $ | 316,440 | | | $ | — | | | $ | — | | | $ | 316,440 | |
Derivatives | | | | | | | |
Interest rate lock commitments | 137 | | | — | | | — | | | 137 | |
| | | | | | | |
Interest rate forward sales commitments | 535 | | | — | | | 535 | | | — | |
Interest rate swaps | 260,064 | | | — | | | 260,064 | | | — | |
Foreign currency derivatives | 355 | | | — | | | 355 | | | — | |
Total liabilities measured at fair value | $ | 577,531 | | | $ | — | | | $ | 260,954 | | | $ | 316,577 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | December 31, 2022 |
Description | Total | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | |
Equity and other investment securities | | | | | | | |
Investments in mutual funds and other securities | $ | 61,593 | | | $ | 44,256 | | | $ | 17,337 | | | $ | — | |
Equity securities held in rabbi trusts | 11,366 | | | 11,366 | | | — | | | — | |
| | | | | | | |
Investment securities available for sale | | | | | | | |
U.S. Treasury and agencies | 936,174 | | | 225,853 | | | 710,321 | | | — | |
Obligations of states and political subdivisions | 269,800 | | | — | | | 269,800 | | | — | |
Mortgage-backed securities and collateralized mortgage obligations | 1,990,192 | | | — | | | 1,990,192 | | | — | |
| | | | | | | |
Loans held for sale, at fair value | 71,647 | | | — | | | 71,647 | | | — | |
Loans and leases, at fair value | 285,581 | | | — | | | 285,581 | | | — | |
Residential mortgage servicing rights, at fair value | 185,017 | | | — | | | — | | | 185,017 | |
Derivatives | | | | | | | |
Interest rate lock commitments | 50 | | | — | | | — | | | 50 | |
| | | | | | | |
Interest rate forward sales commitments | 512 | | | — | | | 512 | | | — | |
Interest rate swaps | 14,657 | | | — | | | 14,657 | | | — | |
Foreign currency derivatives | 225 | | | — | | | 225 | | | — | |
Total assets measured at fair value | $ | 3,826,814 | | | $ | 281,475 | | | $ | 3,360,272 | | | $ | 185,067 | |
Financial liabilities: | | | | | | | |
Junior subordinated debentures, at fair value | $ | 323,639 | | | $ | — | | | $ | — | | | $ | 323,639 | |
Derivatives | | | | | | | |
Interest rate lock commitments | 18 | | | — | | | — | | | 18 | |
Interest rate futures | 392 | | | — | | | 392 | | | — | |
Interest rate forward sales commitments | 601 | | | — | | | 601 | | | — | |
Interest rate swaps | 270,009 | | | — | | | 270,009 | | | — | |
Foreign currency derivatives | 185 | | | — | | | 185 | | | — | |
Total liabilities measured at fair value | $ | 594,844 | | | $ | — | | | $ | 271,187 | | | $ | 323,657 | |
The following methods were used to estimate the fair value of each class of financial instrument that is carried at fair value in the tables above:
Securities—Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available. Management periodically reviews the pricing information received from the third-party pricing service and compares it to a secondary pricing service, evaluating significant price variances between services to determine an appropriate estimate of fair value to report.
Loans Held for Sale—Fair value for residential mortgage loans originated as held for sale is determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights. For loans not originated as held for sale, these loans are accounted for at lower of cost or market, with the fair value estimated based on the expected sales price.
Loans and leases—Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including commercial, real estate and consumer loans. Each loan category is further segregated by fixed and adjustable rate loans. The fair value of loans is calculated by discounting expected cash flows at rates at which similar loans are currently being made. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans. As of December 31, 2023, there were $275.1 million in residential mortgage loans recorded at fair value as they were previously transferred from held for sale to loans held for investment.
Residential Mortgage Servicing Rights—The fair value of MSR is estimated using a DCF model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Management believes the significant inputs utilized are indicative of those that would be used by market participants.
Junior Subordinated Debentures—The fair value of junior subordinated debentures is estimated using an income approach valuation technique. The significant unobservable input utilized in the estimation of fair value of these instruments is the credit risk adjusted spread. The credit risk adjusted spread represents the non-performance risk of the liability, contemplating the inherent risk of the obligation. The Company periodically utilizes a valuation firm to determine or validate the reasonableness of inputs and factors that are used to determine the fair value. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, the Company has classified this as a Level 3 fair value measurement.
Derivative Instruments—The fair value of the interest rate lock commitments, interest rate futures, and forward sales commitments 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. The fair value of the interest rate swaps is determined using a DCF technique incorporating credit valuation adjustments to reflect non-performance risk in the measurement of fair value. Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the CVA associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2023, the Bank has assessed the significance of the impact of the CVA on the overall valuation of its interest rate swap positions and has determined that the CVA are not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap and futures derivative valuations in Level 2 of the fair value hierarchy.
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 as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Instrument | | Fair Value (in thousands) | | Valuation Technique | | Unobservable Input | | Range of Inputs | | Weighted Average |
Assets: | | | | | | | | | | |
Residential mortgage servicing rights | | $ | 109,243 | | | Discounted cash flow | | | | | | |
| | | | | | Constant prepayment rate | | 6.07% - 28.17% | | 6.78% |
| | | | | | Discount rate | | 9.50% - 16.05% | | 10.25% |
Liabilities: | | | | | | | | | | |
Interest rate lock commitments, net | | $ | 137 | | | Internal pricing model | | | | | | |
| | | | | | Pull-through rate | | 67.33% - 100.00% | | 85.53% |
Junior subordinated debentures | | $ | 316,440 | | | Discounted cash flow | | | | | | |
| | | | | | Credit spread | | 2.25% - 4.66% | | 3.39% |
Generally, increases in the constant prepayment rate or the discount rate utilized in the fair value measurement of the residential mortgage servicing rights will result in a decrease in fair value. Conversely, decreases in the constant prepayment rate or the discount rate will result in an increase in fair value.
An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in an increase in the fair value measurement. Conversely, a decrease in the pull-through rate will result in a decrease in the fair value measurement.
Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the non-performance risk premium a willing market participant would require under current market conditions, which is an inactive market. Generally, an increase in the credit spread will result in a decrease in the estimated fair value. Conversely, a decrease in the credit spread will result in an increase in the estimated fair value.
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
(in thousands) | Residential mortgage servicing rights | | Interest rate lock commitments, net | | Junior subordinated debentures, at fair value | | Residential mortgage servicing rights | | Interest rate lock commitments, net | | Junior subordinated debentures, at fair value |
Beginning balance | $ | 185,017 | | | $ | 32 | | | $ | (323,639) | | | $ | 123,615 | | | $ | 4,641 | | | $ | (293,081) | |
| | | | | | | | | | | |
Change included in earnings | (23,816) | | | (234) | | | (29,045) | | | 37,265 | | | (7,342) | | | (15,715) | |
Change in fair values included in comprehensive income/loss | — | | | — | | | 7,866 | | | — | | | — | | | (28,842) | |
Purchases and issuances | 5,347 | | | (1,029) | | | — | | | 24,137 | | | 10,103 | | | — | |
Sales and settlements | (57,305) | | | 1,094 | | | 28,378 | | | — | | | (7,370) | | | 13,999 | |
Ending balance | $ | 109,243 | | | $ | (137) | | | $ | (316,440) | | | $ | 185,017 | | | $ | 32 | | | $ | (323,639) | |
Change in unrealized gains or losses for the period included in earnings for assets and liabilities held at end of period | $ | (6,122) | | | $ | (137) | | | $ | (29,045) | | | $ | 57,537 | | | $ | 32 | | | $ | (15,715) | |
Change in unrealized gains or losses for the period included in other comprehensive income for assets and liabilities held at end of period | $ | — | | | $ | — | | | $ | 7,866 | | | $ | — | | | $ | — | | | $ | (28,842) | |
Changes in residential mortgage servicing rights carried at fair value are recorded in residential mortgage banking revenue within non-interest income. Gains (losses) on interest rate lock commitments carried at fair value are recorded in residential mortgage banking revenue within non-interest income.
The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements related to the junior subordinated debentures represent the payment of accrued interest that is embedded in the fair value of these liabilities. The change in fair value of junior subordinated debentures is attributable to the change in the instrument specific credit risk; accordingly, the unrealized gain on fair value of junior subordinated debentures of $7.9 million, for the year ended December 31, 2023, is recorded net of tax as other comprehensive gain of $5.8 million. Comparatively, the unrealized loss of $28.8 million was recorded net of tax as other comprehensive loss of $21.4 million for the year ended December 31, 2022. The gain recorded for the year ended December 31, 2023 was due to a decrease in the implied forward curve and the spot curve shifting higher, partially offset by a decrease in credit spread, which resulted in a decrease in the liability.
Fair Value of Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
From time to time, certain assets are measured at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment, typically on CDL. The following table presents information about the Company's assets and liabilities measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported upon.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Loans and leases | $ | 5,036 | | | $ | — | | | $ | — | | | $ | 5,036 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total assets measured at fair value on a nonrecurring basis | $ | 5,036 | | | $ | — | | | $ | — | | | $ | 5,036 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Loans and leases | $ | 3,216 | | | $ | — | | | $ | — | | | $ | 3,216 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total assets measured at fair value on a nonrecurring basis | $ | 3,216 | | | $ | — | | | $ | — | | | $ | 3,216 | |
The following table presents the losses resulting from nonrecurring fair value adjustments for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| | | |
| | | |
(in thousands) | 2023 | | 2022 | | 2021 |
| | | | | |
| | | | | |
| | | | | |
Loans and leases | $ | 104,320 | | | $ | 39,422 | | | $ | 53,182 | |
| | | | | |
| | | | | |
| | | | | |
Total losses from nonrecurring measurements | $ | 104,320 | | | $ | 39,422 | | | $ | 53,182 | |
The following provides a description of the valuation technique and inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis. Unobservable inputs and qualitative information about the unobservable inputs are not presented as the fair value is determined by third-party information for loans and leases.
The loans and leases amounts above represent collateral-dependent loans and leases that have been adjusted to fair value. When a loan or non-homogeneous lease is identified as collateral-dependent, the Bank measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan or lease, the fair value of collateral is generally estimated by obtaining external appraisals, but in some cases, the value of the collateral may be estimated as having little to no value. When a homogeneous lease or equipment finance agreement becomes 181 days past due, it is determined that the collateral has little to no value. If it is determined that the value of the collateral-dependent loan or lease is less than its recorded investment, the Bank recognizes this impairment and adjusts the carrying value of the loan or lease to fair value, less costs to sell, through the ACL. The loss represents charge-offs on collateral-dependent loans and leases for fair value adjustments based on the fair value of collateral.
Refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Business Combination for further information about the methods used to determine the fair values of significant assets and liabilities pertaining to the Merger.
Fair Value Option
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale and loans held for investment accounted for under the fair value option as of December 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
(in thousands) | 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 |
Loans held for sale | $ | 30,715 | | | $ | 29,629 | | | $ | 1,086 | | | $ | 71,647 | | | $ | 70,219 | | | $ | 1,428 | |
Loans | $ | 275,140 | | | $ | 320,397 | | | $ | (45,257) | | | $ | 285,581 | | | $ | 333,469 | | | $ | (47,888) | |
The Bank elected to measure certain residential mortgage loans held for sale under the fair value option, with interest income on these loans held for sale reported in interest and fees on loans and leases on the statement of operations. This reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Residential mortgage loans held for sale 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 as a component of residential mortgage banking revenue. For the years ended December 31, 2023, 2022, and 2021, the Company recorded a net decrease in fair value of $342,000, a net decrease of $10.7 million, and a net decrease of $13.2 million, respectively, representing the change in fair value reflected in earnings.
Management’s intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bank's loan portfolio. In such cases, the loans will continue to be measured at fair value. Gains and losses from changes in fair value for these loans are reported in earnings as a component of other income and interest income on these loans are reported in interest and fees on loans and leases on the statement of operations. For the years ended December 31, 2023 and 2022, the Company recorded a net increase in fair value of $2.6 million and a net decrease of $58.5 million, respectively.
The Company selected the fair value measurement option for certain junior subordinated debentures originally issued by UHC prior to the Merger (the Umpqua Statutory Trusts) and for junior subordinated debentures acquired by UHC from Sterling Financial Corporation prior to the Merger, with changes in fair value recognized as a component of other comprehensive income. The remaining junior subordinated debentures were acquired through business combinations and were measured at fair value at the time of acquisition and subsequently measured at amortized cost.
Note 23 – Earnings Per Common Share
The following is a computation of basic and diluted earnings per common share for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
(in thousands, except per share data) | 2023 | | 2022 | | 2021 |
Net income | $ | 348,715 | | | $ | 336,752 | | | $ | 420,300 | |
| | | | | |
Weighted average number of common shares outstanding - basic (1) | 195,304 | | | 129,277 | | | 130,499 | |
Effect of potentially dilutive common shares (1) (2) | 567 | | | 455 | | | 531 | |
Weighted average number of common shares outstanding - diluted (1) | 195,871 | | | 129,732 | | | 131,030 | |
Earnings per common share (1): | | | | | |
Basic | $ | 1.79 | | | $ | 2.60 | | | $ | 3.22 | |
Diluted | $ | 1.78 | | | $ | 2.60 | | | $ | 3.21 | |
(1) Periods prior to February 28, 2023 have been restated as a result of the adjustment to common shares outstanding based on the exchange ratio from the Merger of 0.5958.
(2) Represents the effect of the assumed vesting of non-participating restricted shares based on the treasury stock method.
The following table represents the weighted average outstanding restricted shares that were not included in the computation of diluted earnings per share because their effect would be anti-dilutive for the periods indicated:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
Restricted stock awards and units | 727 | | — | | — |
Note 24 – Related Party Transactions
In the ordinary course of business, the Bank has made loans to its directors and executive officers (and their associated and affiliated companies). All such loans have been made in accordance with regulatory requirements.
The following table presents a summary of aggregate activity involving related party borrowers for the years ended December 31, 2023, 2022, and 2021: | | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
Loans outstanding at beginning of year | $ | 2,410 | | | $ | 7,564 | | | $ | 9,393 | |
New loans and advances | 46,483 | | | 630 | | | 980 | |
Less loan repayments | (45,810) | | | (5,784) | | | (2,809) | |
Reclassification (1) | (2,157) | | | — | | | — | |
Loans outstanding at end of year | $ | 926 | | | $ | 2,410 | | | $ | 7,564 | |
(1) Represents loans that were once considered related party but are no longer considered related party, or loans that were not related party that subsequently became related party loans.
As of December 31, 2023 and 2022, deposits of related parties amounted to $8.4 million and $19.1 million, respectively.
Note 25 – Parent Company Financial Statements
Summary financial information for Columbia Banking System, Inc. on a standalone basis is as follows:
Condensed Balance Sheets
December 31, 2023 and 2022 | | | | | | | | | | | |
(in thousands) | December 31, 2023 | | December 31, 2022 |
ASSETS | | | |
Non-interest-bearing deposits with subsidiary bank | $ | 45,895 | | | $ | 143,130 | |
Investments in: | | | |
Bank subsidiary | 5,367,612 | | | 2,744,195 | |
Non-bank subsidiaries | 18,951 | | | 16,932 | |
Other assets | 7,781 | | | 4,048 | |
Total assets | $ | 5,440,239 | | | $ | 2,908,305 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Payable to bank subsidiary | $ | 444 | | | $ | 128 | |
Other liabilities | 20,426 | | | 16,899 | |
Junior subordinated debentures, at fair value | 316,440 | | | 323,639 | |
Junior and other subordinated debentures, at amortized cost | 107,895 | | | 87,813 | |
Total liabilities | 445,205 | | | 428,479 | |
Shareholders' equity | 4,995,034 | | | 2,479,826 | |
Total liabilities and shareholders' equity | $ | 5,440,239 | | | $ | 2,908,305 | |
Condensed Statements of Operations
Years Ended December 31, 2023, 2022, and 2021 | | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
INCOME | | | | | |
Dividends from bank subsidiary | $ | 353,000 | | | $ | 192,000 | | | $ | 398,000 | |
Dividends from non-bank subsidiaries | 10,115 | | | 2,104 | | | 9,371 | |
Other income | 453 | | | 127 | | | 5,007 | |
Total income | 363,568 | | | 194,231 | | | 412,378 | |
EXPENSE | | | | | |
Management fees paid to subsidiaries | 1,877 | | | 1,434 | | | 1,590 | |
Other expenses | 44,493 | | | 22,396 | | | 17,834 | |
Total expenses | 46,370 | | | 23,830 | | | 19,424 | |
Income before income tax benefit and equity in undistributed earnings of subsidiaries | 317,198 | | | 170,401 | | | 392,954 | |
Income tax benefit | (10,019) | | | (4,677) | | | (3,470) | |
Net income before equity in undistributed earnings of subsidiaries | 327,217 | | | 175,078 | | | 396,424 | |
Equity in undistributed earnings losses of subsidiaries | 21,498 | | | 161,674 | | | 23,876 | |
Net income | $ | 348,715 | | | $ | 336,752 | | | $ | 420,300 | |
Condensed Statements of Cash Flows
Years Ended December 31, 2023, 2022, and 2021 | | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
OPERATING ACTIVITIES: | | | | | |
Net income | $ | 348,715 | | | $ | 336,752 | | | $ | 420,300 | |
Adjustment to reconcile net income to net cash provided by operating activities: | | | | | |
Gain on sale of Umpqua Investments, Inc. | — | | | — | | | (4,444) | |
Equity in undistributed earnings of subsidiaries | (21,498) | | | (161,674) | | | (23,876) | |
Depreciation, amortization, and accretion | (228) | | | (228) | | | (228) | |
| | | | | |
Net increase in other assets | (176) | | | (2,334) | | | (1,001) | |
Net (decrease) increase in other liabilities | (5,472) | | | 2,212 | | | 2,589 | |
Net cash provided by operating activities | 321,341 | | | 174,728 | | | 393,340 | |
INVESTING ACTIVITIES: | | | | | |
Net increase in advances to subsidiaries | (143,535) | | | (121,409) | | | (313) | |
Net cash received from sale of Umpqua Investments, Inc. | — | | | — | | | 10,781 | |
| | | | | |
Net cash (used in) provided by investing activities | (143,535) | | | (121,409) | | | 10,468 | |
FINANCING ACTIVITIES: | | | | | |
Net increase (decrease) in advances from subsidiaries | 317 | | | (379) | | | 409 | |
Dividends paid on common stock | (270,261) | | | (182,273) | | | (183,734) | |
Repurchases and retirement of common stock | (6,282) | | | (4,163) | | | (80,690) | |
| | | | | |
Net proceeds from issuance of common stock | 1,185 | | | 54 | | | 34 | |
Net cash used in financing activities | (275,041) | | | (186,761) | | | (263,981) | |
Net (decrease) increase in cash and cash equivalents | (97,235) | | | (133,442) | | | 139,827 | |
Cash and cash equivalents, beginning of year | 143,130 | | | 276,572 | | | 136,745 | |
Cash and cash equivalents, end of year | $ | 45,895 | | | $ | 143,130 | | | $ | 276,572 | |
Note 26 – Revenue from Contracts with Customers
The Company records revenue when control of the promised products or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those products or services. All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income.
The following table presents the Company's sources of non-interest income for the years ended December 31, 2023, 2022, and 2021: | | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | 2021 |
Non-interest income: | | | | | |
Service charges on deposits | | | | | |
Account maintenance fees | $ | 37,986 | | | $ | 27,274 | | | $ | 24,137 | |
Transaction-based and overdraft service charges | 27,539 | | | 21,091 | | | 17,949 | |
Total service charges on deposits | 65,525 | | | 48,365 | | | 42,086 | |
Card-based fees | 55,263 | | | 37,370 | | | 36,114 | |
Financial services and trust revenue | 13,471 | | | 90 | | | 5,112 | |
Total revenue from contracts with customers | 134,259 | | | 85,825 | | | 83,312 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Non-interest income within the scope of other GAAP topics | 69,668 | | | 113,703 | | | 273,006 | |
Total non-interest income | $ | 203,927 | | | $ | 199,528 | | | $ | 356,318 | |
Note 27 – Shareholders' Equity
Dividends
The following summarizes the dividend activity for the year ended December 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
Declared | | Regular Cash Dividends Per Common Share | | Record Date | | Paid Date |
January 11, 2023 (1) | | $ | 0.35 | | | January 23, 2023 | | February 6, 2023 |
May 15, 2023 | | $ | 0.36 | | | May 31, 2023 | | June 15, 2023 |
August 14, 2023 | | $ | 0.36 | | | August 25, 2023 | | September 11, 2023 |
November 13, 2023 | | $ | 0.36 | | | November 24, 2023 | | December 11, 2023 |
(1) The dividend that was declared and paid prior to the Merger has been restated as a result of the adjustment to common shares outstanding based on the exchange ratio from the Merger of 0.5958.
Subsequent to year end, on February 9, 2024, the Company declared a regular quarterly cash dividend of $0.36 per common share payable on March 11, 2024, to shareholders of record at the close of business on February 23, 2024.
The payment of cash dividends is subject to federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Umpqua Bank to the Company are subject to both federal and state regulatory requirements.