Columbia Banking System Announces Third Quarter 2014 Earnings

TACOMA, Wash., Oct. 23, 2014 /PRNewswire/ -- Melanie Dressel, President and Chief Executive Officer of Columbia Banking System and Columbia Bank COLB ("Columbia") said today upon the release of Columbia's third quarter 2014 earnings, "I'm very pleased with our loan and deposit production during the third quarter.  By remaining externally focused on organic growth, our bankers continue to deepen existing relationships as well as establish new ones."  Ms. Dressel continued, "Our entire team has also been hard at work preparing for the closing of the Intermountain Community Bancorp acquisition we announced during the third quarter.  I'm pleased to report that we have received FDIC and state regulatory approvals and are proceeding toward a fourth quarter closing date."

Significant Influences on the Quarter Ended September 30, 2014

Balance Sheet

Noncovered loans were $4.58 billion at September 30, 2014, up $126.5 million, or 3% from $4.45 billion at June 30, 2014. The increase in noncovered loans was driven mostly by originations, which were over $250 million during the current quarter. Securities were $1.64 billion at September 30, 2014, a decrease of $21.1 million, or 1% from $1.62 billion at June 30, 2014.

Total deposits at September 30, 2014 were $6.24 billion, an increase of $259.3 million, or 4% from $5.99 billion at June 30, 2014 as balances trend toward seasonal peaks. Compared to year end 2013, total deposits have increased $284.9 million. Core deposits comprised 96% of total deposits and were $5.99 billion at September 30, 2014. The average rate on interest bearing deposits for the quarter was 0.09% compared to 0.10% for the second quarter of 2014.

Asset Quality

At September 30, 2014, nonperforming assets to noncovered assets were 0.53% or $38.4 million, down from 0.65%, or $45.8 million, at June 30, 2014. Nonaccrual loans decreased $2.6 million during the third quarter driven by payments of $4.3 million, the return of $2.0 million of nonaccrual loans to accrual status, charge-offs of $1.0 million, and $512 thousand of loans transferred to other real estate owned ("OREO"), partially offset by $5.2 million of new nonaccrual loans. Noncovered OREO and other personal property owned ("OPPO") decreased by $4.9 million during the third quarter, primarily due to $4.7 million in sales and $630 thousand in write-downs, partially offset by the previously mentioned $512 thousand transferred from loans. 

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 ("ALLL") at the dates and the periods indicated:

 

Columbia's allowance for loan losses to nonperforming, noncovered loans ratio was 178% at September 30, 2014, up from 162% at June 30, 2014. The increase in this ratio was caused by a decrease in nonperforming, noncovered loans. The allowance for noncovered loan losses to period end loans was 1.09% at September 30, 2014 compared to 1.11% at June 30, 2014. Excluding acquired loans, the allowance at September 30, 2014 represented 1.27% of noncovered loans, compared to 1.58% of noncovered loans at December 31, 2013. The allowance to noncovered loans, excluding acquired loans is a non-GAAP financial measure. See section titled "Non-GAAP Financial Measures" on the last pages of this earnings release for the reconciliation of the allowance to noncovered loans, excluding acquired loans. The decline reflects strong organic loan growth as well as continued improvement in the Company's asset quality metrics.

For the third quarter of 2014, Columbia had a provision of $1.5 million for noncovered loans. For the comparable quarter last year the company had a provision of $4.3 million. The provision recorded during the current quarter was driven by the combination of growth in the noncovered loan portfolio and $1.1 million in net loan charge-offs experienced in the quarter.

Net Interest Margin ("NIM")

Columbia's net interest margin (tax equivalent) of 4.85% for the third quarter of 2014 was consistent with the linked quarter margin of 4.86%. Compared to the third quarter of 2013, Columbia's net interest margin decreased 52 basis points from 5.37%, primarily due to lower incremental accretion on acquired loans, which was $17.4 million for the prior year quarter, and only $9.4 million for the current quarter. Columbia's net interest margin for the current quarter and year-to-date period was favorably impacted by the correction of an immaterial error related to premium amortization on mortgage-backed securities. For more information on this correction, see paragraph titled "Correction of Immaterial Error Related to Prior Periods" within the section titled "Net Interest Income."

Columbia's operating net interest margin (tax equivalent)⁽¹⁾, which excludes the correction noted above, decreased to 4.22% for the third quarter of 2014, compared to 4.27% for the second quarter of 2014. The decrease from the second quarter of 2014 was primarily due to the current quarter having a higher average balance in lower yielding overnight funds. Compared to the third quarter of 2013, the operating net interest margin decreased 19 basis points from 4.41% primarily due to the continuing low interest rate environment.

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

 

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 on FDIC acquired impaired loans 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 September 30, 2014, the accretable yield on acquired impaired loans was $80.5 million. The accretable yield represents 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 remeasured by Columbia on a quarterly basis. 

The $520 thousand net recapture of provision for losses on covered loans in the current period is substantially offset by an 80%, or $416 thousand, expense to the change in the FDIC loss-sharing asset, resulting in a positive net pre-tax earnings impact of $104 thousand. The provision for losses on covered loans was primarily due to improving credit quality on covered loans resulting in increased expected future cash flows as remeasured during the current quarter when compared to the prior quarter's remeasurement.  

The $4.8 million change in the FDIC loss-sharing asset in the current quarter negatively affected noninterest income and consists of $4.0 million of amortization expense, the $416 thousand adjustment described above and $408 thousand of other expense primarily related to covered other real estate owned. With the expiration of our two most significant loss-share agreements subsequent to the first quarter of 2015, the amortization of our loss-sharing asset will continue to decline.

Third Quarter 2014 Results

Net Interest Income

Net interest income for the third quarter of 2014 was $76.2 million, an increase of $1.1 million compared to the second quarter of 2014. This increase was primarily due to the correction noted above, partially offset by lower interest income on loans. Compared to the third quarter of 2013, net interest income decreased by $4.2 million from $80.4 million. The decrease from the prior year period is primarily due to the $7.9 million decrease in incremental accretion on acquired loans, partially offset by the correction noted above. For additional information regarding net interest income, see "Average Balances and Rates" tables.

Correction of Immaterial Error Related to Prior Periods

During the three months ended September 30, 2014, the Company made a $2.6 million adjustment which increased interest income on taxable securities as a result of identifying that the premium amortization related to the Company's mortgage-backed securities, as calculated by a third-party provider, was not being amortized utilizing the preferred method under accounting principles generally accepted in the United States. The adjustment reflects the one-time correction necessary to change the accounting for premium amortization to be in conformity with the interest method. Based upon an evaluation of all relevant factors, management believes the correcting adjustment did not have a material impact on the Company's current quarter, current year-to-date, or previously reported results.

Noninterest Income

Total noninterest income was $15.9 million for the third quarter of 2014, compared to $7.6 million for the third quarter of 2013. The increase from the prior year period was due to the expense recorded for the change in FDIC loss-sharing asset, which was $7.0 million less in the current quarter compared to the third quarter of 2013. In addition, the Company recorded a gain of $565 thousand related to the deposit premium realized on its sale of three branches to Sound Community Bancorp during the current quarter.

Compared to the second quarter of 2014, noninterest income before change in loss-sharing asset increased $1.1 million, due to an increase of $464 thousand in service charges and other fees as well as the gain of $565 thousand related to the branch sale.

The change in the FDIC loss-sharing asset is a significant component of noninterest income. 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 third quarter of 2014 was $60.0 million, a decrease of $4.7 million, or 7% from $64.7 million for the same quarter in 2013. The decrease from the prior year period was primarily due to lower acquisition-related expenses of $3.2 million for the current quarter compared to $7.6 million for the prior year period. In addition to the reduction in acquisition-related cost, an increase in OREO benefit from $777 thousand in the third quarter of 2013 to $1.3 million in the current quarter also contributed to lower noninterest expense for the current quarter. Of the $3.2 million in acquisition-related expenses recorded during the current quarter, $2.8 million related to the West Coast Bancorp acquisition and the remaining $459 thousand related to the recently announced Intermountain Community Bancorp transaction. The majority of the West Coast acquisition-related expenses recorded in the current quarter stemmed from the resolution of contract terminations. Compared to the second quarter of 2014, noninterest expense increased $2.2 million, primarily due to a $2.6 million increase in acquisition-related expenses.

Organizational Update

Melanie Dressel commented, "We are pleased with the successful integration of West Coast, and are well prepared for the addition of Intermountain to the Columbia family, thanks to the diligent efforts of both teams of employees. We continue to emphasize efficiencies designed to improve our financial performance, always keeping in mind our core value of customer service. During the quarter, we sold three Olympic Peninsula branches to Sound Community Bank, and consolidated and relocated our Clackamas, Oregon branches to a more convenient new location."

Most Powerful Women in Banking 2014

For the sixth time, Melanie Dressel was named one of the Most Powerful Women in Banking  by American Banker Magazine.  She ranked 15th on the annual list, which evaluates each candidate on her impact at her company, on the industry and in the community,  leadership skills in the face of professional challenges, and qualities such as innovation.

Conference Call Information

Columbia's management will discuss the third quarter 2014 results on a conference call scheduled for Thursday, October 23, 2014 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 #19405351.

A conference call replay will be available from approximately 4:00 p.m. PDT on October 23, 2014 through midnight PDT on October 30, 2014. The conference call replay can be accessed by dialing 1-855-859-2056 and entering Conference ID code #19405351.

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, with 76 branches in Washington and 59 in Oregon. For the eighth consecutive year, the bank was named in 2014 as one of Puget Sound Business Journal's "Washington's Best Workplaces."

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 five most recent quarters:

 

 

 

 

 

 

 

Non-GAAP Financial Measures

The Company considers its operating net interest margin and operating efficiency ratios to be important measurements as they more closely reflect the ongoing operating performance of the Company. Despite the importance of the operating net interest margin and operating efficiency ratio to the Company, there are no standardized definitions for them and, as a result, the Company's calculations may not be comparable with other organizations. Also, there may be limits in the usefulness of these measure to investors. As a result, the Company encourages readers to consider its consolidated financial statements in their entirety and not to rely on any single financial measure.

The following tables reconcile the Company's calculation of the operating net interest margin and operating efficiency ratio:

 

Non-GAAP Financial Measures - Continued

The Company considers its ratio of allowance for loan and lease losses to period-end noncovered loans, excluding acquired loans to be an important measurement it more closely reflects the ongoing allowance coverage and provides a ratio that is more comparable to other bank holding companies that have not had similar acquisitions. Despite the importance of this ratio to the Company, there are no standardized definitions for it and, as a result, the Company's calculations may not be comparable with other organizations. Also, there may be limits in the usefulness of this measure to investors. As a result, the Company encourages readers to consider its consolidated financial statements in their entirety and not to rely on any single financial measure.

The following table reconciles the Company's calculation of the allowance for loan and lease losses to period-end noncovered loans, excluding acquired loans:

 

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SOURCE Columbia Banking System, Inc.