Columbia Banking System Announces Fourth Consecutive Quarterly Profit for Third Quarter 2010; Declares Cash Dividend

TACOMA, Wash., Oct. 28 /PRNewswire-FirstCall/ -- Columbia Banking System, Inc. (Nasdaq: COLB) today announced net income applicable to common shareholders of $2.5 million for the third quarter of 2010 compared to a net loss applicable to common shareholders of $2.6 million for the same quarter of 2009.  On a diluted per common share basis, earnings for the quarter were $0.06, compared to a net loss of $0.11 a year earlier.  As economic uncertainties continued, management added a $9.0 million provision for loan losses, excluding loans covered under the FDIC loss-sharing agreements, for the quarter ended September 30, 2010 compared to $16.5 million for the third quarter of 2009.

Net income applicable to common shareholders for the nine months ended September 30, 2010 was $13.2 million, compared to a net loss of $8.8 million for the first nine months of 2009.  On a diluted per common share basis, earnings for the first nine months of 2010 were $0.38, compared to a loss of $0.45 a year earlier.  In addition, earnings were impacted by conversion expenses due to the FDIC-assisted acquisitions of the former American Marine Bank and Columbia River Bank; both conversions have been completed.  Including temporary help and vendor-related costs, conversion expenses recognized in the first nine months of 2010 were approximately $1.9 million, with $650,000 incurred in the third quarter 2010.

Melanie Dressel, President & Chief Executive Officer said, "We have gained real momentum as we continue our drive to increase our presence in the Pacific Northwest and benefit from the opportunities available to us during this historic period in our industry.  Our share of deposits has increased in markets that are key to achieving our strategic objectives. The addition of new retail locations, as well as two additional experienced teams of bankers in both Washington and Oregon, is progressing well.  The transitions of the former Columbia River Bank and American Marine Bank to our systems have been successfully completed, and the integration results of both organizations have exceeded our expectations."

Ms. Dressel continued, "We are encouraged with our improving credit metrics, resulting in decreases in both our provision for loan losses and total net charge-offs for the quarter."

Significant Influences on the Quarter Ended September 30, 2010

Capital

On August 11, 2010, Columbia redeemed all 76,898 shares of Series A preferred stock, originally issued to the U.S. Department of the Treasury on November 21, 2008 for approximately $76.9 million in capital under its Capital Purchase Program ("CPP").  During the third quarter, the Company paid a total of $77.8 million to the Treasury, consisting of $76.9 million in principal and $918,504 in accrued and unpaid dividends.  Additionally, on September 1, 2010, the Company repurchased the common stock warrant issued to the U.S. Treasury in conjunction with the CPP for $3.3 million. The warrant repurchase, along with the August redemption of the entire amount of Series A preferred stock, represents full repayment of all CPP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.  Earnings available to common shareholders were reduced by $2.3 million by the repayment of the $76.9 million, representing the remaining unamortized discount on the preferred stock.

The Company's total risk-based capital ratio at September 30, 2010 exceeded 24%, more than double the minimum of 10% required to be "well-capitalized" under applicable regulatory standards.  Our excess capital over and above the 10% minimum was approximately $359.4 million at September 30, 2010.  At the end of the third quarter 2010, our tangible common equity to tangible assets ratio stood at 14.0% as compared to 13.7% at June 30, 2010 and 11.4% at December 31, 2009.  

Liquidity

Columbia's liquidity ratio of approximately 47% for the quarter translates into over $2 billion of available funding for our general operations and to meet the needs of our customers.

Net Interest Margin

Columbia's net interest margin increased to 5.24% in the third quarter of 2010, up from 4.34% for the same quarter last year and 4.30% in the fourth quarter of 2009.  The net interest margin in the third quarter was positively impacted due to the $7.2 million of accretion of the discounts on our acquired  loan portfolios. The net interest margin was negatively impacted by interest reversals of $139,000 related to loans moving to nonaccrual status during the quarter. Additionally, the net interest margin was negatively affected by larger levels of interest-earning cash invested at relatively low yields.  The Company continues to seek attractive investment opportunities to reduce its level of overnight funds.

During the first nine months of 2010, Columbia's net interest margin increased to 4.90% from 4.34% a year earlier.   Interest reversals impacting the net interest margin for the first nine months of 2010 were $933,000.

The table below shows the effect on the net interest margin of the increased yield from the additional accretion of income over the stated contractual loan rate on the acquired loan portfolios for the third quarter and the first nine months of 2010.

Balance Sheet

At September 30, 2010, the Company's total assets were $4.25 billion, an increase of 34% from $3.20 billion at December 31, 2009.  Total shareholders' equity at September 30, 2010 was $704.7 million, an increase of 33% from $528.1 million at December 31, 2009.

Loans not covered under the FDIC loss-sharing agreements ("noncovered loans") were $1.93 billion at September 30, 2010, down 4% from $2.01 billion at December 31, 2009.  The noncovered loan portfolio continues to be diversified, mitigating risk by minimizing concentration in any one segment.  The portfolio includes 39% commercial business loans, 6% total construction including commercial and residential, 3% one-to-four family residential real estate, and 10% consumer.  Approximately 42% of the portfolio is commercial real estate, consisting of 59% income property and 41% owner occupied property.   Net loans covered under the FDIC-loss sharing agreements ("covered loans"), which provide protection against credit risk on those covered loans, totaled $561 million at September 30, 2010.  

Total deposits at September 30, 2010 increased 35% to $3.30 billion from $2.44 billion at September 30, 2009, and 33% from $2.48 billion at December 31, 2009.  Core deposits (defined as demand, savings, money market accounts and certificates of deposit under $100,000) increased 42% to $2.93 billion at September 30, 2010, from $2.07 billion at June 30, 2009, and comprised 89% of total deposits.  

The table below illustrates growth in core deposits on a linked-quarter basis, showing an increase in core deposits from the first quarter 2010, while total deposits have been impacted as consumers have shifted away from jumbo certificates of deposits.

Asset Quality

At September 30, 2010, nonperforming assets were $121.1 million, compared to $131.9 million at June 30, 2010 and $129.5 million at December 31, 2009.  As of September 30, 2009, nonperforming assets were $148.9 million.   The decrease in nonperforming assets for the quarter was primarily centered in term commercial real estate and residential non-accrual construction loans.  The balance of the noncovered loan portfolio remained stable for the quarter.

The table below sets forth information with respect to our nonaccrual loans, restructured loans, total nonperforming loans and total nonperforming assets.  

For the quarter ended September 30, 2010, net loan charge-offs were approximately $6.4 million, compared to $13.7 million for the same period a year ago, and $10.7 million during the second quarter of 2010.  Charge-offs for the quarter were distributed among commercial business, term commercial real estate, residential construction and consumer loans.  The distribution is consistent with management's expectations as the loan portfolio enters into the latter stages of the credit cycle. The following table provides an analysis of the Company's allowance for noncovered loan and lease losses at the dates and the periods indicated.

For the third quarter 2010, the provision for noncovered loan losses was $9.0 million compared to $16.5 million for the same quarter last year, and $13.5 million for the prior quarter.  An additional provision of $0.5 million for covered loans was made for the quarter.  The allowance for noncovered loan losses to noncovered period-end loans was 3.22% at September 30, 2010 compared to 2.50% and 2.31% at December 31, 2009 and September 30, 2009, respectively.

Noncovered past due loans were $12.8 million at September 30, 2010, or 0.66% of total non-covered loans compared to $16.0 million, or 0.83% of total noncovered loans, as of June 30, 2010 and $9.1 million, or 0.45% of total loans, as of December 31, 2009.

Ms. Dressel commented, "We are pleased to see both nonperforming assets and net charge-offs decline for the quarter. This past quarter represents our fifth consecutive quarter of declining net charge-offs and provisions.  This improvement resulted in our ability to strengthen our balance sheet by increasing our reserves for noncovered loans to total loans while reducing the amount of the provision expense for loan and lease losses for the current quarter. The trends in our loan portfolio remain positive; however, the pace of improvement has been slower than we had hoped, due to the sluggish economic recovery."  

Operating Results

Quarter ended September 30, 2010

Net Interest Income

Net interest income for the third quarter of 2010 was $47.0 million, an increase of 61% from $29.1 million for the same quarter in 2009, primarily due to the impact of the addition of Columbia River Bank and American Marine Bank loan portfolios. The Company's net interest margin increased to 5.24% in the third quarter of 2010, from 4.34% for the same quarter last year. The net interest margin was negatively impacted by interest reversals for the quarter ended September 30, 2010 related to noncovered nonaccrual loans, and by the short-term investment of the proceeds of the May, 2010 equity offering.  However, the net interest margin was positively impacted by accretion of the discount on the loan portfolios acquired in the two FDIC-assisted transactions.

Average interest-earning assets were $3.65 billion during the quarter, an increase of 31% compared with $2.78 billion during the same quarter of 2009.   The yield on average interest-earning assets increased 52 basis points (a basis point equals 1/100 of 1%) to 5.80% during the third quarter compared with 5.28% during the same quarter of 2009.  During the same period, average interest-bearing liabilities increased to $2.64 billion, or 31%, from $2.02 billion in the third quarter of 2009.  The cost of average interest-bearing liabilities decreased 52 basis points to 0.77% during the quarter, from 1.29% in the same quarter of 2009.

Average interest-earning assets increased to $3.55 billion in the first nine months of 2010 from $2.75 billion in the 2009 period.  The yield on average interest-earning assets increased 13 basis points to 5.52% in the first nine months of 2010, from 5.39% in 2009.  Average interest-bearing liabilities were $2.63 billion compared to $2.08 billion for the first nine months of 2009.  The cost of average interest-bearing liabilities decreased 56 basis points to 0.84% in the first nine months of 2010, compared with 1.40% for the 2009 period.  

Noninterest Income

Noninterest income was $5.2 million, compared to $7.2 million in the third quarter of last year.  The decrease was primarily due to a $4.5 million change in the FDIC indemnification asset recorded during the third quarter 2010.  Noninterest income was positively impacted by an increase of $2.7 million in service charges and other fees primarily attributable to the addition of Columbia River Bank and American Marine Bank.

The table below illustrates the effect on noninterest income for the change in the FDIC indemnification asset and the gain on bank acquisition for the three months and nine months ended September 30, 2010.

Noninterest Expense

Total noninterest expense for the third quarter of 2010 was $33.5 million, an increase of 45% from $23.1 million for the same quarter in 2009.   The addition of operating expenses of Columbia River Bank and American Marine Bank, both acquired in January 2010, was the primary reason for the increase.  Ms. Dressel noted, "We expect OREO-related expenses to remain elevated as we work through the credit cycle."

Organizational Update

Ms. Dressel commented, "We were very pleased with the increase in our share of the deposit market in both Washington and Oregon, as reported by the FDIC in its annual analysis as of June 30, 2010.  In addition to increases due to our two acquisitions, our share of deposits grew as the result of financial industry disruptions in the communities we serve, highlighting our external focus on true customer service.

Columbia now ranks 9th in deposit market share in Washington, up from 11th a year ago, and ranks in 12th place in Oregon, up from 27th place in 2009.  We significantly increased our market share in our headquarters county, Pierce County, moving from 15.5% to over 18%."

Ms. Dressel noted, "We continue to receive positive responses from customers in the new communities we serve in both Oregon and Washington.   I would like to express my thanks to our team members for the successful and smooth conversion of the former American Marine Bank to our system during the third quarter."  

Cash Dividend Announcement

The Board of Directors has announced a quarterly cash dividend of $0.01 per common share, which will be paid on November 24, 2010 to shareholders of record as of the close of business on November, 10 2010.  

Conference Call

Columbia's management will discuss the third quarter 2010 financial results on a conference call scheduled for Thursday, October 28, 2010 at 1:00 p.m. PDT (4:00 p.m. EDT).  Interested parties may listen to this discussion by calling 1-888-318-7969; Conference ID code #17852058.    

A conference call replay will be available from approximately 4:00 p.m. PDT on  October 28, 2010, through midnight PDT on November 4, 2010.  The conference call replay can be accessed by dialing 1-800-642-1687 and entering Conference ID code #17852058.

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 which was awarded third place in the large employer category by Seattle Business Magazine's 100 Best Companies to Work For 2010 and was designated one of  Puget Sound Business Journal's "Washington's Best Workplaces 2009".  

With the January, 2010 FDIC-assisted acquisitions of Columbia River Bank and American Marine Bank, Columbia Banking System has 83 banking offices, including 59 branches in Washington State and 24 branches in Oregon. Columbia Bank does business under the Bank of Astoria name at the Bank of Astoria's former branches located in Astoria, Warrenton, Seaside, Cannon Beach, Manzanita and Tillamook. 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.