Columbia Banking System Announces Earnings of $6.8 Million for First Quarter 2010; Declares Cash Dividend

TACOMA, Wash., April 28 /PRNewswire-FirstCall/ -- Columbia Banking System, Inc. (Nasdaq: COLB) today announced net income applicable to common shareholders of $6.8 million for the first quarter of 2010 compared to net income applicable to common shareholders of $419,000 for the same quarter of 2009.  On a diluted per common share basis, net income for the quarter was $0.24, an increase from earnings per common share of $0.02 in the first quarter of 2009.  Included in the first quarter 2010 result was a $9.8 million pre-tax gain on the acquisition of the former American Marine Bank, which was offset by a $15.0 million provision for loan losses due to the challenging Pacific Northwest economy, particularly the continued decline in real estate values.

"We are pleased that our capital strength has allowed us to implement strategic initiatives to increase our presence in the Pacific Northwest and benefit from market disruptions," said Melanie Dressel, President & Chief Executive Officer. "Although we are seeing signs of improvement in the regional economy, it has not translated into robust loan demand.  In the interim, our focus continues to be to position ourselves for the future through geographic expansion and selective hiring of high quality business bankers, while still looking for opportunities to fine tune our operations to efficiently accommodate our anticipated growth over the next several years. Our two FDIC-assisted transactions in the first quarter moved us considerably closer to our often-stated goal of growing into a true Pacific Northwest regional community bank as we increased our branch system by over 60% and significantly improved our presence in important markets for us."

Significant Influences on the Quarter ended March 31, 2010

Acquisition of Columbia River Bank

On January 22, 2010, Columbia State Bank acquired certain assets and assumed certain liabilities of Columbia River Bank from the Federal Deposit Insurance Corporation ("FDIC"), which had been appointed receiver of the institution, including 21 branches located in Oregon and Washington. Columbia State Bank acquired tangible assets with a fair value of approximately $884.9 million, including $480.3 million of loans, an FDIC indemnification asset of $143.6 million, $100.7 million of investment securities, $98.1 million of cash and cash equivalents and $62.2 million of other assets.  Columbia State Bank assumed liabilities with a fair value of approximately $912.9 million, including $893.4 million of insured and uninsured deposits, $18.4 million of Federal Home Loan Bank ("FHLB") advances and $1.1 million of other liabilities.  In connection with this acquisition, Columbia State Bank entered into loss-sharing agreements with the FDIC which cover approximately $676.1 million in face value of Columbia River Bank's loans. The transaction resulted in goodwill of $14.5 million and a core deposit intangible of $13.4 million.  The Company adjusted the initially reported goodwill related to the Columbia River Bank acquisition, increasing it from $8.6 million to $14.5 million, as a result of corresponding adjustments to the fair value of loans acquired from the FDIC at the date of acquisition.  

Acquisition of American Marine Bank

On January 29, 2010, Columbia State Bank acquired substantially all of the deposits and assets of American Marine Bank from the FDIC, which had been appointed receiver of the institution, including  11 branches located in western Washington.  Columbia State Bank acquired tangible assets with a fair value of approximately $303.5 million, including $176.3 million of loans, an FDIC indemnification asset of $66.8 million, $28.6 million of investment securities, $14.5 million of cash and cash equivalents and $17.3 million of other assets.   Columbia State Bank assumed liabilities with a fair value of approximately $292.6 million, including $254.0 million of insured and uninsured deposits, $37.7 million of FHLB advances and $974,000 of other liabilities. In connection with this acquisition, Columbia State Bank entered into loss-sharing agreements with the FDIC which cover approximately $243.8 million in face value of American Marine Bank's loans.  In addition, as part of this acquisition, Columbia State Bank received regulatory approval to exercise trust powers and intends to continue to operate the Trust and Wealth Management Division of American Marine Bank.  The transaction resulted in a bargain purchase gain of $9.8 million, and a core deposit intangible of $4.3 million.

The assets acquired and liabilities assumed in these two FDIC-assisted transactions have been accounted for under the acquisition method of accounting (formerly the purchase method).  The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their estimated fair values as of their respective acquisition dates. .

As a result of the loss-sharing agreements with the FDIC, the loans and foreclosed assets acquired in the FDIC-assisted transactions are presented separately in the Company's balance sheet as "covered loans" and "covered other real estate owned." These assets were recorded at fair value without a corresponding allowance for credit losses. Additionally, in connection with both transactions, the Company has recorded on its balance sheet a $210.4 million FDIC indemnification asset, which is the present value of the cash flows the Company expects to collect from the FDIC under the loss-sharing agreements.  

Capital Strength

The Company's total risk-based capital ratio at March 31, 2010 was 17.80%, well in excess of the minimum of 10% required to be "well-capitalized" under applicable regulatory standards.  Our excess capital over and above the 10% minimum to be well-capitalized was roughly $195 million at March 31, 2010.  At the end of the first quarter 2010, our tangible common equity to tangible assets ratio stood at 8.3% as compared to 11.4% at December 31, 2009.  The decline was reflective of adding tangible assets with a fair value of approximately $1.2 billion in the two FDIC-assisted acquisitions announced in the first quarter.

Net Interest Margin

Columbia's net interest margin increased to 4.78% in the first quarter of 2010, up from 4.26% for the same quarter last year and 4.30% in the fourth quarter of 2009. The net interest margin was positively impacted by the repricing to current market rates of the assets acquired and liabilities assumed in our two acquisitions and the associated purchase accounting marks.  This was offset by interest reversals for the quarter ended March 31, 2010 related to nonaccrual loans totaling $364,000.  

Asset Quality

The majority of assets acquired in both FDIC-assisted transactions during the first quarter 2010 are covered under FDIC loss-sharing agreements, and loan valuations incorporate estimated losses.  As a result, a large portion of our covered loan portfolio has minimal loss exposure.  Loans that were classified as nonperforming loans by Columbia River Bank and American Marine Bank are no longer classified as nonperforming.  At acquisition, the carrying value of these loans was adjusted to reflect fair value, and are covered under the FDIC loss sharing agreements.  The new book value reflects an amount that management believes will ultimately be collected.

Total nonperforming assets at March 31, 2010 were $126.6 million,  up $4.9 million, or 4% from  $121.7 million at March 31, 2009 and down $3.0  million, or 2%, from $129.5 million at December 31, 2009. The ratio of nonperforming assets to total assets at March 31, 2010 was 3.62%, compared to 3.99% at March 31, 2009 and 4.05% at December 31, 2009.

Balance Sheet

At March 31, 2010, the Company's total assets were $4.13 billion, an increase of 29% from $3.2 billion at December 31, 2009.  Total shareholders' equity at March 31, 2010 was $538.7 million, an increase of 30%, from $415.7 million at March 31, 2009, and total market capitalization was $573.4 million at March 31, 2010, up from $370.7 million at March 31, 2009.

Loans

Loans not covered under the FDIC loss-sharing agreements ("non-covered loans") were $1.95 billion at March 31, 2010, down 3.0% from $2.00 billion at December 31, 2009.  The average yield on non-covered loans for the quarter ended March 31, 2010 was 6.16%.  The non-covered loan portfolio continues to be diversified, mitigating risk by avoiding concentration in any one segment.  The portfolio includes 38% commercial business loans, 6% total construction including commercial and residential, 46% real estate and 10% consumer.  Net loans covered under the FDIC-loss sharing agreements ("covered loans"), which provide protection against credit risk on those covered loans, totaled $625.3 million at March 31, 2010.  

Deposits

Total deposits at March 31, 2010 increased 44% to $3.37 billion from $2.34 billion at March 31, 2009, and 36% 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 52%, from $1.87 billion at March 31, 2009 to $2.86 billion at March 31, 2010.  The average cost of deposits for the quarter ended March 31, 2010 was 0.64%.

Operating Results

Quarter ended March 31, 2010

Net Interest Income

Net interest income for the first quarter of 2010 was $38.3 million, an increase of 37% from $27.9 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 4.78% in the first quarter of 2010, from 4.26% for the same quarter last year. The net interest margin was negatively impacted by interest reversals for the quarter ended March 31, 2010 related to nonaccrual loans totaling $364,000.  However, the net interest margin was also positively impacted by accretion of the discount on the loan portfolios acquired in the two FDIC-assisted transactions.

Average interest-earning assets were $3.37 billion during the quarter, an increase of 22% compared with $2.77 billion during the same quarter of 2009.   The yield on average interest-earning assets increased 6 basis points (a basis point equals 1/100 of 1%) to 5.51% during the quarter compared with 5.45% during the same quarter of 2009.  During the same period, average interest-bearing liabilities increased to $2.57 billion, or 20%, from $2.14 billion in the first quarter of 2009. The cost of average interest-bearing liabilities decreased 59 basis points to 0.95% during the quarter, from 1.54% in the same quarter of 2009.

Noninterest Income

Noninterest income was $18.5 million, compared to $7.0 million in the first quarter of last year.  The increase was primarily due to the $9.8 million gain on the American Marine Bank acquisition, and an increase of $1.8 million in service charges and other fees primarily resulting from the impact of the normal operations of Columbia River Bank and American Marine Bank.

Noninterest Expense

Total noninterest expense for the first quarter of 2010 was $33.9 million, an increase of 46% from $23.2 million for the same quarter in 2009.   The increase was primarily due to the addition of operating expenses of Columbia River Bank and American Marine Bank in January 2010.  In addition to the normalized operating expenses for these two acquisitions, we expect expenses to be elevated for the next two quarters as we convert systems and incur other acquisition-related expenses.  

Income Taxes

Although Columbia had pre-tax earnings of $7.9 million in the first quarter of 2010, the Company recorded an income tax benefit of $66,000 due to the significant portion of pre-tax earnings flowing from tax-exempt assets.

Nonperforming Assets and Loan Loss Provision

At March 31, 2010, nonperforming assets were $126.6 million, compared to $121.7 million at March 31, 2009 and $129.5 million at December 31, 2009.

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 March 31, 2010, net loan charge-offs were approximately $11.5 million, compared to $9.5 million for the same period a year ago, and $13.2 million during the fourth quarter of 2009.  Charge-offs in the 1-4 family residential loan and residential construction portfolios of $4.7 million for the first quarter of 2010 were centered in residential land and lot development loans.  

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

For the first quarter 2010, the provision for loan losses was $15.0 million compared to $11.0 million for the same quarter last year and $15.0 million for the fourth quarter of 2009.  The elevated provision levels are related to continued weakness in the Pacific Northwest economy.  The allowance for loan losses to non-covered period-end loans was 2.92% at March 31, 2010 compared to 2.66% and 2.02% at December 31, 2009 and March 31, 2009, respectively.

Columbia's provision for loan losses reflects management's continuing evaluation of the loan portfolio's credit quality, which is affected by a broad range of economic factors.  Additional factors affecting the provision include but are not limited to net-loan charge offs, non-accrual loans, specific reserves and risk-rating migration.

Non-covered past due loans were $16.4 million at March 31, 2010, or 0.84% of total non-covered loans compared to $9.1 million, or 0.45% of total loans, at December 31, 2009.

"Overall credit quality for the quarter was stable, and in line with our expectations," Ms. Dressel commented.  "We continue to make progress in reducing our level of nonperforming assets associated with our non-covered construction loans, and saw modest negative migration in our non-covered commercial real estate perm portfolio and non-covered consumer loans. We continue to be very proactive in managing our loan portfolio."

Organizational Update

Ms. Dressel commented, "We are pleased with the reception we have received from the customers of the former Columbia River Bank and the former American Marine Bank   The transitions continue to go smoothly, and we are very pleased with the teamwork and dedication of our new team members as we move toward our conversions, which are scheduled for the second quarter for Columbia River Bank and the third quarter for American Marine Bank.  The opening of our Portland office, which will house business bankers and a full-service branch in Fox Tower, has been slightly delayed, and is scheduled to open during the second quarter of this year."

Ms. Dressel continued, "I am also very pleased that readers of South Sound Magazine voted Columbia Bank as the best bank in their "2010 Best of the South Sound" spring edition."

Cash Dividend Announcement

The Board of Directors has announced a quarterly cash dividend of $0.01 per common share, which will be paid on May 26, 2010 to shareholders of record as of the close of business on May 12, 2010.  

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 which was awarded second place in the large employer category by Seattle Business Magazine's 100 Best Companies to Work For 2009 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 85 banking offices, including 60 branches in Washington State and 25 branches in Oregon. Columbia State 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.

SOURCE Columbia Banking System, Inc.