Columbia Banking System Announces Third Quarter 2015 Earnings

TACOMA, Wash., Oct. 29, 2015 /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 2015 earnings, "The balance sheet growth combined with our ongoing efforts to increase noninterest income and curb expenses resulted in record net income for the quarter. The Pacific Northwest economy continues to be favorable for businesses as evidenced by our record loan production and outstanding deposit growth during the third quarter. Our bankers have worked diligently to grow loans and increase core deposits, resulting in a relatively stable operating net interest margin despite the prolonged low interest rate environment."

Balance Sheet

Loans were $5.75 billion at September 30, 2015, up $134.6 million from June 30, 2015 due to record loan originations during the current quarter. Securities were $2.04 billion at September 30, 2015, an increase of $111.4 million, or 6% from $1.93 billion at June 30, 2015 due primarily to purchases of securities resulting from deposits growing in excess of loans. Total deposits at September 30, 2015 were $7.31 billion, an increase of $270.4 million from $7.04 billion at June 30, 2015. Core deposits were $6.99 billion at September 30, 2015, an increase of $248.2 million from June 30, 2015. The average rate on interest-bearing deposits and total deposits for the quarter was 0.08% and 0.04%, respectively, unchanged compared to the second quarter of 2015.

Income Statement

Net Interest Income

Net interest income for the third quarter of 2015 was $81.7 million, an increase of $684 thousand compared to the second quarter of 2015. This increase was primarily due to higher average loan balances in the current quarter. Compared to the third quarter of 2014, net interest income increased by $5.5 million from $76.2 million. The increase from the prior year period is due to the combination of acquired loans and securities from the November 1, 2014 acquisition of Intermountain Community Bancorp ("Intermountain") and organic loan growth, partially offset by a decline in incremental accretion income. For additional information regarding net interest income, see the "Average Balances and Rates" table.

Noninterest Income

Total noninterest income was $22.5 million for the third quarter of 2015, an increase of $1.0 million compared to $21.5 million for the second quarter of 2015. The linked quarter increase was primarily due to an increase in other noninterest income of $1.3 million which resulted from gains on sales of loans in the current quarter of $1.1 million compared to $43 thousand in the second quarter of 2015.

Compared to the third quarter of 2014, noninterest income increased by $6.6 million due to both a $1.6 million increase in service charges and other fees and the change in FDIC loss-sharing asset. The growth in service charges and other fees resulted primarily from the increased customer base from the acquisition of Intermountain. Additional details of the components of the change in the FDIC loss-sharing asset are provided in tabular format below.

The change in the FDIC loss-sharing asset has been a significant component of noninterest income, but over time the significance has diminished. The following table reflects the income statement components of the change in the FDIC loss-sharing asset:

Noninterest Expense

Total noninterest expense for the third quarter of 2015 was $64.1 million, a decrease of $4.4 million compared to $68.5 million for the second quarter of 2015. This decrease was driven by lower acquisition-related expenses in the current quarter of $428 thousand compared to $5.6 million in the prior quarter. After excluding the effect of the acquisition-related expenses, noninterest expense for the current quarter was $811 thousand higher than the second quarter of 2015 on the same basis. This increase was due to OREO costs, which were $240 thousand in the current quarter compared to a benefit of $563 thousand for the second quarter of 2015. In addition, during the third quarter of 2015 Columbia experienced unusually high fraud losses largely attributed to debit card activity. Fraud losses for the third quarter were $834 thousand, up $546 thousand from the second quarter of 2015.

Clint Stein, Columbia's Executive Vice President and Chief Financial Officer, stated, "As we approach the one year anniversary of closing the Intermountain acquisition, we have achieved our post-integration target expense run rate of less than $64 million per quarter. The realization of our expense goal ahead of our anticipated timeframe coupled with the growth in revenue during the quarter resulted in the efficiency ratio improving to below 60%."

Compared to the third quarter of 2014, noninterest expense increased $4.1 million, or 7% from $60.0 million, due to both increased expenses resulting from the Intermountain acquisition as well as additional OREO costs, partially offset by a decrease of $2.8 million in acquisition-related expenses.

Net Interest Margin ("NIM")

Columbia's net interest margin (tax equivalent) of 4.37% for the third quarter of 2015 decreased 4 basis points from 4.41% for the second quarter of 2015. Compared to the third quarter of 2014, Columbia's net interest margin decreased 48 basis points from 4.85%, primarily due to lower incremental accretion on acquired loans, which was $9.4 million for the prior year quarter, compared to $6.4 million for the current quarter. Columbia's operating net interest margin (tax equivalent)⁽¹⁾ was 4.18% for the third quarter of 2015, an increase of 1 basis point from 4.17% for the second quarter of 2015 and down 4 basis points compared to 4.22% for the third quarter of 2014 as a result of 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:

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Asset Quality

At September 30, 2015, nonperforming assets to total assets were 0.44% compared to 0.54% at June 30, 2015. Total nonperforming assets decreased $7.9 million due to a $6.7 million reduction in nonaccrual loans and a $1.2 million decline in other real estate owned due to sales activity during the current quarter. Andy McDonald, Columbia's Executive Vice President and Chief Credit Officer, stated "One of our goals coming out of the great recession was to reduce our level of nonperforming assets below 50 basis points. We are pleased that we have achieved this goal this past quarter as our NPA ratio declined to 44 basis points."

The following table sets forth information regarding nonaccrual loans and total nonperforming assets:

The following table provides an analysis of the Company's allowance for loan and lease losses ("ALLL"):

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The allowance for loan losses to period end loans was 1.20% at September 30, 2015 compared to 1.23% at June 30, 2015. For the third quarter of 2015, Columbia recorded a net provision for loan and lease losses of $2.8 million compared to a net provision of $980 thousand for the comparable quarter last year. The net provision for loan and lease losses recorded during the current quarter was due to organic loan growth, charge-off activity and higher loss rates in the substandard category, partially offset by provision recapture recorded for the purchased credit impaired portfolio.

Impact of FDIC Acquired Loan Accounting

While the significance of the FDIC Acquired Loan Accounting has diminished over time, the following table illustrates the impact to earnings associated with Columbia's FDIC acquired loan portfolios:

The incremental accretion income on FDIC purchased credit impaired loans represents the amount of income recorded above the contractual rate stated in the individual loan notes. At September 30, 2015, the accretable yield on purchased credit impaired loans was $62.8 million. Accretable yield is subject to change based upon expected future loan cash flows, which are remeasured by Columbia on a quarterly basis.

The $1.6 million change in the FDIC loss-sharing asset in the current quarter reduced noninterest income and consisted primarily of $1.4 million in amortization expense. Additional details of the components of the change in the FDIC loss-sharing asset are provided in tabular format in the section titled "Noninterest Income" in the following pages.

Organizational Update

Hadley Robbins, Columbia's Executive Vice President and Chief Operating Officer commented, "As part of our continuing efforts to grow noninterest income while increasing customer satisfaction, we created a Banking Solutions division during the third quarter. Comprised of deposit, payments and digital solutions management functions, including the Cash Management and Merchant Card Services departments and our Customer Care Centers, the division is designed to help us maintain a relevant and contemporary set of products for businesses and individuals."

Mr. Robbins continued, "We continually review our branch system to ensure that we are running effectively and efficiently, while providing the best possible customer service. We recently celebrated a new building for our Mattawa branch in eastern Washington, delivering an enhanced level of service and convenience to our customers in a very busy location. We also announced the closure of two western Washington branches planned for the fourth quarter this year."

Conference Call Information

Columbia's management will discuss the third quarter 2015 results on a conference call scheduled for Thursday, October 29, 2015 at 1:00 p.m. Pacific Daylight Time (4:00 p.m. EDT). Interested parties may listen to this discussion by calling 1-866-378-3802; Conference ID code #51083007.

A conference call replay will be available from approximately 4:00 p.m. PDT on October 29, 2015 through 9:00 p.m. PST on November 5, 2015. The conference call replay can be accessed by dialing 1-855-859-2056 and entering Conference ID code #51083007.

About Columbia

Headquartered in Tacoma, Washington, Columbia Banking System, Inc. is the holding company of Columbia Bank, a Washington state-chartered full-service commercial bank, with over 150 branches throughout Washington, Oregon and Idaho. For the ninth consecutive year, the bank was named in 2015 as one of Puget Sound Business Journal's "Washington's Best Workplaces." Columbia ranked in the top 20 on the 2015 Forbes list of best banks in the country, as well as ranking the best in Washington and second in the Pacific Northwest for the fourth year in a row.

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.

 

 

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 measures 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:

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SOURCE Columbia Banking System, Inc.