COLUMBIA BANKING SYSTEM, INC. (COLB) FY 2023 MD&A

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.

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•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.

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•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.

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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

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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.

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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:

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.

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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:

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.

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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.

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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:

(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.

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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.

(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.

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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:

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.

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The following table presents our residential mortgage banking revenues for the years ended December 31, 2023 and 2022:

(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:

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.

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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.

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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:

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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:

(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.

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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:

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:

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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:

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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:

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.

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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:

(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.

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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:

(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.

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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:

The following table shows the change in the ACL from December 31, 2022 to December 31, 2023:

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:

(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.

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Information related to our serviced loan portfolio as of December 31, 2023 and 2022 were as follows:

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.

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The following table presents the deposit balances by major category as of December 31, 2023 and 2022:

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:

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.

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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.

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The following table presents total off-balance sheet liquidity as of the date presented:

The following table presents total available liquidity as of the date presented:

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.

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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:

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.

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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:

(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.

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