Columbia Banking System Announces Third Quarter 2012 Earnings and Quarterly Cash Dividend

TACOMA, Wash., Oct. 25, 2012 /PRNewswire/ -- Melanie Dressel, President and Chief Executive Officer of Columbia Banking System and Columbia Bank (NASDAQ: COLB) ("Columbia") said today upon the release of third quarter 2012 earnings, "Our earnings for the quarter reflected the relative strength of our net interest margin despite ongoing rate challenges in our industry, a rise in our merchant card services and fee income, as well as the continued favorable downward trend in our nonperforming assets.  Our focus on developing and enhancing customer relationships resulted in 5% growth in noncovered loans and an 11% increase in our business loans from the end of last year."

Ms. Dressel also noted, "We were excited to announce our merger agreement with West Coast Bancorp during the quarter. This is an exciting opportunity to unite two community banks who share a long-held commitment to both relationship-based customer service and the communities we serve."   

Columbia's net income was $11.9 million for the quarter ended September 30, 2012 compared to net income of $18.9 million for the same quarter of 2011.  Earnings per diluted common share were $0.30 for the third quarter, compared with earnings of $0.48 per diluted common share a year earlier. The decline in earnings was due to the enhanced benefits realized in the third quarter of 2011 from Columbia's FDIC-assisted transactions.

Significant Influences on the Quarter Ended September 30, 2012

Net Interest Margin

Columbia's net interest margin decreased to 5.52% for the third quarter of 2012, down from 6.53% for the same period last year and down from 5.88% for the second quarter of 2012.  Columbia's net interest margin is impacted significantly by the accounting for acquired loans. The net interest margin for the current quarter reflects a moderating trend in the incremental accretion income related to the acquired loans, which peaked during the last six months of 2011.

Columbia's net interest margin, excluding incremental accretion income, decreased to 4.40% for the third quarter of 2012, down from 4.59% for the same period last year and down from 4.44% for the second quarter of 2012.  The net interest margin, excluding incremental accretion income, was negatively impacted during the third quarter of 2012 by the overall decreasing trend in rates, impacting both the loan and investment portfolios.  Average noncovered loan yields have decreased due to a combination of repricing of existing loans and new loan originations at lower rates.  The average yield on investments declined as portfolio cash flows were reinvested at lower prevailing rates.

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















Three Months Ended


Nine Months Ended



September 30, 2012


September 30, 2011


September 30, 2012


September 30, 2011



(dollars in thousands)

Interest income as recorded


$   21,476


$   31,543


$   78,864


$   70,859

Less: Interest income at stated note rate


9,603


11,843


29,558


29,905

Incremental accretion income


$   11,873


$   19,700


$   49,306


$   40,954

Incremental accretion income due to:









Acquired impaired loans


$   11,260


$   14,604


$   44,455


$   35,858

Other acquired loans


613


5,096


4,851


5,096

Incremental accretion income


$   11,873


$   19,700


$   49,306


$   40,954

Reported net interest margin


5.52%


6.53%


5.99%


5.96%

Net interest margin excluding incremental accretion income


4.40%


4.59%


4.43%


4.52%










Asset Quality

At September 30, 2012, nonperforming noncovered assets were $53.3 million, a decrease of 20% from $67.1 million at June 30, 2012, and 38% from $85.4 million at December 31, 2011.  Nonaccrual loans declined $7.9 million during the third quarter.  The decrease in nonaccrual loans for the quarter was driven by payments of $9.4 million, charge-offs of $2.0 million and the return of $2.0 million of nonaccrual loans to accrual status, partially offset by $5.5 million of new nonaccrual loans.  Noncovered other real estate owned (OREO) and other personal property owned (OPPO) were reduced by $5.9 million, primarily as a result of $5.5 million in sales and $458 thousand in write-downsColumbia's allowance for loan losses to nonperforming, noncovered loans ratio improved to 124% for the quarter, up from 106% for the second quarter 2012 and 91% for the same period last year.

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



September 30, 2012


June 30,  2012


December 31, 2011



(dollars in thousands)

Nonaccrual noncovered loans:







Commercial business


$   12,564


$   13,052


$   10,243

Real estate:







One-to-four family residential


2,220


2,244


2,696

Commercial and multifamily residential


19,459


23,302


19,485

Total real estate


21,679


25,546


22,181

Real estate construction:







One-to-four family residential


5,359


5,223


10,785

Commercial and multifamily residential



3,754


7,067

Total real estate construction


5,359


8,977


17,852

Consumer


1,987


1,890


3,207

Total nonaccrual loans


41,589


49,465


53,483

Noncovered other real estate owned and other personal property owned


11,749


17,608


31,905

Total nonperforming noncovered assets


$   53,338


$   67,073


$   85,388

For the quarter ended September 30, 2012, net loan charge-offs were $3.5 million, compared to $4.1 million for the same period a year ago, and $3.8 million last quarter.  Net charge-offs during the current quarter were primarily centered in commercial business loans.

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



















Three Months Ended
September 30,


Nine Months Ended
September 30,



2012


2011


2012


2011



(in thousands)

Beginning balance


$   52,196


$   54,057


$   53,041


$   60,993

Charge-offs:









Commercial business


(3,775)


(1,946)


(8,178)


(6,151)

One-to-four family residential real estate


(49)


(53)


(499)


(717)

Commercial and multifamily residential real estate


(592)


(443)


(5,108)


(2,362)

One-to-four family residential real estate construction


(325)


(183)


(1,426)


(2,415)

Commercial and multifamily residential real estate construction



(145)


(93)


(1,710)

Consumer


(500)


(2,102)


(1,968)


(3,298)

Total charge-offs


(5,241)


(4,872)


(17,272)


(16,653)

Recoveries:









Commercial business


277


460


1,314


1,157

One-to-four family residential real estate


157


78


202


78

Commercial and multifamily residential real estate


446


10


1,338


96

One-to-four family residential real estate construction


404


119


906


1,923

Commercial and multifamily residential real estate construction


63



64


Consumer


350


70


809


178

Total recoveries


1,697


737


4,633


3,432

Net charge-offs


(3,544)


(4,135)


(12,639)


(13,221)

Provision charged to expense


2,875


500


11,125


2,650

Ending balance


$   51,527


$   50,422


$   51,527


$   50,422

For the third quarter of 2012, Columbia made a provision of $2.9 million for noncovered loan losses.  For the comparable quarter last year the company made a provision of $500 thousand.  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 $40 million in noncovered loan growth experienced during the quarter, partially offset by improved credit quality in the noncovered portfolio. The growth in noncovered loans was centered in commercial business loans and term commercial real estate loans.

The allowance for noncovered loan losses to period end loans was 2.08% at September 30, 2012 compared to 2.14% at June 30, 2012 and 2.26% at December 31, 2011.  

Impact of Acquired Loan Accounting

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

Acquired Loan Portfolio Activity












Three Months Ended


Nine Months Ended



September 30, 2012


September 30, 2011


September 30, 2012


September 30, 2011



(in thousands)

Incremental accretion income on acquired impaired loans


$   11,260


$   14,604


$   44,455


$   35,858

Incremental accretion income on other acquired loans


613


5,096


4,851


5,096

(Provision) recapture for losses on covered loans


3,992


(433)


(23,381)


(2,312)

Change in FDIC loss-sharing asset


(12,951)


(10,855)


(14,787)


(32,048)

Claw back liability expense


(334)


(1,146)


(100)


(3,294)

Pre-tax earnings impact


$    2,580


$    7,266


$   11,038


$    3,300

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 September 30, 2012, the accretable yield on acquired impaired loans was $188.5 million and the net discount on other acquired loans was $6.4 million.  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 $4.0 million net recapture of provision for losses on covered loans in the current period is partially offset by an 80%, or $3.2 million, adjustment to the change in the FDIC loss-sharing asset, resulting in a favorable net pre-tax earnings impact of $800 thousand. The recapture for losses on covered loans was primarily due to increased expected future cash flows as re-measured during the current quarter when compared to the prior quarter's re-measurement. 

 The $13.0 million change in the FDIC loss-sharing asset in the current quarter negatively affected noninterest income and consists of $9.7 million of scheduled amortization expense, the $3.2 million unfavorable adjustment described above and approximately $64 thousand of expense related to covered other real estate owned.

Balance Sheet

At September 30, 2012, Columbia's total assets were $4.90 billion, a 2% increase from $4.79 billion in total assets at both June 30, 2012 and December 31, 2011. Noncovered loans were $2.48 billion at September 30, 2012, up 2% from $2.44 billion at June 30, 2012 and up 5% from $2.35 billion at December 31, 2011.   Net noncovered loan growth was approximately $40 million from June 30, 2012 and $128 million from year-end 2011.  Securities, including FHLB stock, were $965.6 million at September 30, 2012, down 5% from $1.02 billion at June 30, 2012 and down 8% from $1.05 billion at December 31, 2011.

Total deposits at September 30, 2012 were $3.94 billion, a 3% increase from $3.83 billion at June 30, 2012, and a 3% increase from $3.82 billion at December 31, 2011.  Core deposits comprised 94% of total deposits, and were $3.69 billion at September 30, 2012, an increase of 3% from $3.57 billion at June 30, 2012, and an increase of 5% from $3.51 billion at December 31, 2011.

Total shareholders' equity was $762.0 million at September 30, 2012, compared to $758.7 million and $759.3 million at June 30, 2012 and December 31, 2011, respectively. In accordance with Columbia's recent capital and dividend strategies, total shareholders' equity has remained relatively unchanged over the past four quarters.

Third Quarter 2012 Operating Results

Quarter ended September 30, 2012

Net Interest Income

Net interest income for the third quarter of 2012 was $57.3 million, a decrease of 12% from $64.8 million for the same quarter in 2011, primarily due to the accretion income recorded during the third quarter of 2011 related to our acquired loan portfolios.

Compared to the second quarter of 2012, net interest income decreased 4% from $59.7 million primarily due to the continued moderation of accretion income on acquired loans. During the third quarter of 2012, Columbia recorded $11.9 million in incremental accretion income on acquired loans compared to $15.0 million for the second quarter of 2012.

Noninterest Income (Loss)

Total noninterest income was a loss of $911 thousand for the third quarter of 2012, compared to income of $2.2 million a year earlier.  The decrease from the prior-year period was primarily due to the change in the FDIC loss-sharing asset, which, when combined with the gain on bank acquisition recorded in August 2011, accounted for $3.9 million.

Excluding these two items, noninterest income was up approximately $800 thousand, or 7%, with approximately half of the increase driven by merchant card services volume, and the other half from fees on deposit accounts.   On a year-to-date basis, noninterest income was up 16% compared to the same period in 2011.

Prior to the change in the FDIC loss-sharing asset, noninterest income was up approximately $100 thousand in the third quarter 2012 on a linked-quarter basis compared to the second quarter 2012. The change in the FDIC loss-sharing asset was a decrease of $12.8 million which resulted in an overall noninterest income decline of $12.7 million.

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



Three Months Ended



September 30,


June 30,



2012


2011


2012



(in thousands)

Adjustments reflected in income







Amortization, net


(9,694)


(10,928)


(9,851)

Loan impairment (recapture)


(3,193)


921


9,350

Sale of other real estate


(1,315)


(1,471)


(1,498)

Write-downs of other real estate


1,141


467


1,732

Other


110


156


99

Change in FDIC loss-sharing asset


$  (12,951)


$  (10,855)


$    (168)














Noninterest Expense

Total noninterest expense for the third quarter of 2012 was $40.9 million, an increase of 3% from $39.9 million for the same quarter in 2011.  The increase from the prior-year period was due to a rise in legal and professional costs of $826 thousand, which includes $1.1 million of costs related to the recently announced merger with West Coast Bancorp, as well as an increase in other noninterest expense of $1.2 million.  The increase in other noninterest expense was primarily due to $1.2 million in expense recapture from other personal property owned for the third quarter of  last year, compared to just $108 thousand in the current quarter. These increases were partially offset by an $812 thousand reduction in FDIC clawback liability expense and an $874 thousand decrease in the net cost of operation of other real estate owned.

Compared to the second quarter of 2012, noninterest expense increased $1.1 million, or 3%.  The increase was attributable to the previously mentioned expenses associated with the recently announced merger with West Coast Bancorp. 

Merger Activity

In September, 2012, Columbia announced the signing of a definitive merger agreement with West Coast Bancorp ("West Coast"), headquartered in Lake Oswego, Oregon. The agreement was unanimously approved by the Board of Directors of each company.  The transaction is expected to be completed in the first quarter of 2013, after obtaining the approval of the shareholders of each company and the necessary regulatory approvals.   Ms. Dressel commented, "After the merger, Columbia will rank as the number one community bank in deposit market share in both Oregon and Washington.  We will have extensive coverage throughout both states, with over 150 branches, about $7.2 billion in assets, and continued strong capital levels.  Customers of both banks will enjoy increased convenience and a broader array of product offerings, further enhancing our style of banking."

Cash Dividend Announcement

Melanie Dressel commented, "For the past four quarters, we have provided a full payout of earnings with our regular and special dividends as we did not see the need to accumulate capital.  As a result of our recent acquisition announcement, we are discontinuing our special dividend.  We will pay a regular cash dividend of $0.09 per common share on November 21, 2012 to shareholders of record as of the close of business on November 7, 2012."   

Conference Call

Columbia's management will discuss the third quarter 2012 results on a conference call scheduled for Thursday, October 25, 2012 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 #41231628.

A conference call replay will be available from approximately 4:00 p.m. PDT on October 25, 2012 through midnight PDT on November 1, 2012.  The conference call replay can be accessed by dialing 1-855-859-2056 and entering Conference ID code #41231628.

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.  For the sixth consecutive year, the bank was named in 2012 as one of Puget Sound Business Journal's "Washington's Best Workplaces."

Columbia Banking System has 101 banking offices, including 76 branches in Washington State and 25 branches in Oregon. Columbia 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