Columbia Banking System Announces Strong Second Quarter 2013 Results and Declares Cash Dividend

TACOMA, Wash., July 25, 2013 /PRNewswire/ -- Melanie Dressel, President and Chief Executive Officer of Columbia Banking System and Columbia Bank (NASDAQ: COLB) ("Columbia") said today upon the release of Columbia's second quarter 2013 earnings, "Taking into account the financial impact associated with closing our acquisition of West Coast, I'm very pleased with our results for the quarter.  Acquisition-related expenses lowered our earnings per share by $0.11, bringing our reported diluted earnings per share to $0.28 during the quarter.  It's also notable that our operating net interest margin increased for the second consecutive quarter and we continued to experience organic loan growth."

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Net income for the current quarter was $14.6 million, a 23% increase compared to net income of $11.9 million for the second quarter 2012.  Earnings were impacted by $9.2 million in pre-tax acquisition-related expenses resulting from the West Coast transaction. Earnings per diluted common share declined 7% to $0.28, as compared to $0.30 per common share for the second quarter 2012.

Significant Influences on the Quarter Ended June 30, 2013

Acquisition of West Coast Bancorp   
Ms. Dressel stated, "The acquisition of West Coast, which we completed on April 1, 2013, had a significant influence on our financial results."  The table below summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:

Related to the acquisition of West Coast, the Company recorded $9.2 million (pre-tax) in acquisition-related expenses during the current quarter and $10.0 million (pre-tax) in acquisition-related expenses for the six months ended June 30, 2013.

Net Interest Margin ("NIM")
Columbia's net interest margin increased to 5.19% for the second quarter of 2013, up from 5.06% for the first quarter of 2013.  Columbia's net interest margin is impacted significantly by the accounting for acquired loans. The increase in the net interest margin for the current quarter compared to the first quarter of 2013 reflects the impact of discount accretion on the West Coast acquired loan portfolio, partially offset by the moderating trend in the incremental accretion income related to the FDIC acquired loans, which was substantially higher during the second quarter of 2012, as shown in the table on the following page.

Columbia's operating net interest margin, which excludes incremental accretion income on acquired loans, premium amortization on acquired securities, interest reversals on nonaccrual loans and prepayment charges on Federal Home Loan Bank advances, increased to 4.34% for the second quarter of 2013, up from 4.21% for the first quarter of 2013.  The operating net interest margin for the current quarter improved due in large part to the lower amount of cash held in overnight funds that were deployed in the acquisition of West Coast.  The operating net interest margin was down a modest 10 basis points from 4.44% for the same period last year.  Compared to the prior year period, the operating net interest margin was negatively impacted by the overall decreasing trend in rates, impacting both the loan and investment portfolios.  The average yield on investments declined as portfolio cash flows were reinvested at lower prevailing rates. 

Ms. Dressel commented, "The relative resiliency of our operating net interest margin continues to underscore the strength of Columbia's balance sheet.  Our diversified loan portfolio and stable core deposit base were important contributors to our ability to increase our operating net interest margin for the second consecutive quarter." 

The following table shows the impact to interest income and the related impact to the operating net interest margin resulting from accretion of income on acquired loan portfolios for the periods presented.

Balance Sheet

Ms. Dressel commented, "We continued to see good organic loan growth of more than $141 million or approximately 5.4% for the quarter.  I'm especially pleased with the growth this quarter because it demonstrates that our bankers have remained focused on sustaining and developing relationships." 

Noncovered loans were $4.18 billion at June 30, 2013, up 60%, or $1.56 billion from March 31, 2013 and up 66%, or $1.66 billion, from $2.53 billion at prior year end due to the acquisition of West Coast. In addition to the increase from the acquisition, noncovered loans had organic growth of $141.3 million during the current quarter.  The organic growth in noncovered loans for the quarter was centered in commercial business and commercial and multifamily residential real estate loans.  At June 30, 2013, Columbia's total assets were $7.07 billion, an increase of $2.17 billion from March 31, 2013 and an increase of $2.16 billion from December 31, 2012, due to the acquisition of West Coast.  Securities, including FHLB stock, were $1.54 billion at June 30, 2013, an increase of $507.3 million from $1.03 billion at March 31, 2013, also reflecting the acquisition of West Coast.

Total deposits at June 30, 2013 were $5.75 billion, an increase of $1.70 billion, or 42% from $4.05 billion at March 31, 2013.  Core deposits comprised 95% of total deposits, and were $5.47 billion at June 30, 2013. Excluding the deposits from the West Coast acquisition, deposits declined $163.2 million, or 4%, from March 31, 2013.  The decline was largely due to a planned decrease in public funds.

Asset Quality

At June 30, 2013, nonperforming assets to noncovered assets were 1.01% or $68.0 million, up slightly from 0.99%, or $44.9 million, at March 31, 2013.  This increase was due to the acquisition of West Coast, which added $18.9 million of nonaccrual loans and $14.7 million of OREO at the beginning of the period.  Subsequent to the West Coast acquisition, nonaccrual loans decreased $8.1 million during the second quarter.  The decrease in nonaccrual loans for the quarter was driven by payments of $5.0 million, charge-offs of $1.8 million, the return of $5.3 million of nonaccrual loans to accrual status, and $2.1 million of loans transferred to other real estate owned ("OREO"), partially offset by $6.1 million of new nonaccrual loans.  Subsequent to the West Coast acquisition, OREO and other personal property owned ("OPPO") decreased by $2.4 million during the second quarter, as a result of $3.8 million in sales and $477 thousand in write-downs, partially offset by loan foreclosures of $2.1 million. 

The following table sets forth, at the dates indicated, information regarding noncovered nonaccrual loans and total noncovered nonperforming assets.

The following table provides an analysis of the Company's allowance for loan and lease losses at the dates and the periods indicated.

Columbia's allowance for loan losses to nonperforming, noncovered loans ratio was 119% for the quarter, down from 155% for the first quarter 2013 and up from 106% for the same period last year. The allowance for noncovered loan losses to period end loans was 1.24% at June 30, 2013 compared to 1.95% at March 31, 2013 and 2.07% at December 31, 2012. The decrease in the allowance percentage resulted from including acquired loans in the ratio, for which no allowance was estimated at quarter-end given management's judgment that net acquisition accounting adjustments adequately address the estimated losses in acquired loans. Excluding acquired loans, the allowance at June 30, 2013 represented 1.87% of noncovered loans. This decrease reflects improvements in core asset quality during the current quarter.

For the second quarter of 2013, Columbia had a provision of $2.0 million for noncovered loan losses.  For the comparable quarter last year the company made a provision of $3.8 million.  The provision for noncovered loan losses during the current quarter was primarily driven by net charge-offs experienced in the quarter and to a lesser extent by the $141.3 million in core noncovered loan growth in the current quarter.

Impact of FDIC Acquired Loan Accounting

The following table illustrates the impact to earnings associated with Columbia's FDIC acquired loan portfolios:

The incremental accretion income in the table above represents the amount of income recorded on acquired loans above the contractual rate stated in the individual loan notes and stems from the discount established at the time these loan portfolios were acquired.  At June 30, 2013, the accretable yield on acquired impaired loans was $140.5 million and the net discount on other FDIC acquired loans was $646 thousand.  The accretable yield and net discount represent income to be recorded by Columbia over the remaining life of the acquired loans.   Accretable yield is subject to change based upon expected future loan cash flows, which are re-measured by Columbia on a quarterly basis. 

The $1.7 million net provision recapture for losses on covered loans in the current period is substantially offset by an 80%, or $1.4 million, charge to the change in the FDIC loss-sharing asset, resulting in a positive net pre-tax earnings impact of $342 thousand. The provision recapture for losses on covered loans was primarily due to increased expected future cash flows as remeasured during the current quarter when compared to the prior quarter's remeasurement. 

The $13.1 million change in the FDIC loss-sharing asset in the current quarter negatively affected noninterest income and consists of $9.8 million of amortization expense, approximately $1.9 million of expense related to covered other real estate owned, and the $1.4 million unfavorable adjustment described above.  Columbia recorded $3.2 million in additional FDIC loss-sharing asset amortization expense during the quarter due to the implementation of new accounting guidance related to indemnification asset accounting, which generally accelerates the amortization of the indemnification asset.

Second Quarter 2013 Operating Results

Quarter ended June 30, 2013

Net Interest Income
Net interest income for the second quarter of 2013 was $80.0 million, an increase of $20.3 million from $59.7 million for the same quarter in 2012, primarily due to the interest income and accretion income recorded during the second quarter of 2013 related to the West Coast acquisition. During the second quarter of 2013, the Company recorded $23.8 million in interest income and $18.1 million in incremental accretion income on acquired loans compared to $9.5 million and $15.0 million, respectively for the second quarter of 2012, a total increase of $17.4 million.

Compared to the first quarter of 2013, net interest income increased $26.5 million from $53.5 million due to $25.4 million in interest income related to our acquired loan portfolios.

Noninterest Income
Total noninterest income was $6.8 million for the second quarter of 2013, compared to $11.8 million for the second quarter of 2012.  The decrease from the prior-year period was due to the change in the FDIC loss-sharing asset, which decreased noninterest income by $13.0 million, partially offset by an increase in service charges and other fees of $6.1 million due to the increased customer base from the West Coast acquisition.

The following table reflects the income statement components of the change in the FDIC loss-sharing asset for the three and six month periods indicated.

Noninterest Expense
Total noninterest expense for the second quarter of 2013 was $64.5 million, an increase of $24.7 million, or 62% from $39.8 million for the same quarter in 2012.  The increase from the prior-year period was primarily due to the acquisition-related expenses of $9.2 million for the current quarter as well as additional ongoing noninterest expense resulting from the West Coast acquisition.

Compared to the first quarter of 2013, noninterest expense increased $26.5 million, or 70%.  The increase was attributable to the current quarter acquisition-related expenses of $9.2 million, which were only $723 thousand in the first quarter of 2013 as well as additional ongoing noninterest expense resulting from the West Coast acquisition.

Ms. Dressel commented "I am pleased with where we are operationally with the integration of West Coast and it is beginning to show in our financial results.  As expected, the West Coast acquisition was immediately accretive to earnings.  The integration is progressing well and we are now just a few short weeks away from the core system conversion."

Dividend
The Board of Directors announced that a quarterly cash dividend of $0.10 per common share, and per common share equivalent for holders of preferred stock, will be paid on August 21, 2013 to shareholders of record as of the close of business on August 7, 2013.  The $0.10 cash dividend represents a payout ratio of 36%.

Conference Call
Columbia's management will discuss the second quarter 2013 results on a conference call scheduled for Thursday, July 25, 2013 at 1:00 p.m. PDT (4:00 pm EDT).   Interested parties may listen to this discussion by calling 1-866-378-3802; Conference ID code #16561845.

A conference call replay will be available from approximately 4:00 p.m. PDT on July 25, 2013 through midnight PDT on August 1, 2013.  The conference call replay can be accessed by dialing 1-855-859-2056 and entering Conference ID code #16561845.

About Columbia
Headquartered in Tacoma, Washington, Columbia Banking System, Inc. is the holding Company of Columbia State Bank, a Washington state-chartered full-service commercial bank.  Columbia recently received a 2013 "Top Places to Work" award from the South Sound Business Examiner and was named for the seventh consecutive year  as one of Puget Sound Business Journal's 2013 "Washington's Best Workplaces."

With the recent acquisition of West Coast Bancorp, Columbia Banking System has 156 banking offices, including 86 branches in Washington State and 70 branches in Oregon. Columbia State Bank does business under the Bank of Astoria name in Astoria, Warrenton, Seaside, Cannon Beach, Manzanita and Tillamook in Oregon. More information about Columbia can be found on its website at www.columbiabank.com.

Note Regarding Forward-Looking Statements
This news release includes forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which management believes are a benefit to shareholders.  These forward looking statements describe Columbia's management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of Columbia's style of banking and the strength of the local economy.  The words "will," "believe," "expect," "intend," "should," and "anticipate" and words of similar construction are intended in part to help identify forward looking statements.   Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely.  In addition to discussions about risks and uncertainties set forth from time to time in Columbia's filings with the Securities and Exchange Commission, available at the SEC's website at www.sec.gov and the Company's website at www.columbiabank.com, including the "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of our annual reports on Form 10-K and quarterly reports on Form 10-Q, factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following:  (1) local, national and international economic conditions may be less favorable than expected or have a more direct and pronounced effect on Columbia than expected and adversely affect Columbia's ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates may reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches may be lower than expected; (4) costs or difficulties related to the integration of acquisitions may be greater than expected; (5) competitive pressure among financial institutions may increase significantly; and (6) legislation or regulatory requirements or changes may adversely affect the businesses in which Columbia is engaged.  We believe the expectations reflected in our forward-looking statements are reasonable, based on information available to us on the date hereof. However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The factors noted above and the risks and uncertainties described in our SEC filings should be considered when reading any forward-looking statements in this release.

The following table shows a summary of FDIC acquired loan accounting for the previous five quarters: