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COLB > SEC Filings for COLB > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for COLUMBIA BANKING SYSTEM INC

Form 10-Q for COLUMBIA BANKING SYSTEM INC


6-Aug-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the unaudited consolidated financial statements of Columbia Banking System, Inc. (referred to in this report as "we", "our", "Columbia" and "the Company") and notes thereto presented elsewhere in this report and with the December 31, 2013 audited consolidated financial statements and its accompanying notes included in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "should," "projects," "seeks," "estimates" or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report, the following factors, among others, could cause actual results to differ materially from the anticipated results:
local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth and maintain the quality of our earning assets;

the local housing/real estate markets where we operate and make loans could face challenges;

the risks presented by an uncertain economy, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;

the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions (including the proposed Intermountain merger) and infrastructure may not be realized;

the possibility that the proposed merger with Intermountain does not close in a timely manner or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;

the effect on the trading price of our stock if the merger with Intermountain is not completed;

the ability to successfully combine Columbia and the Intermountain organizations;

interest rate changes could significantly reduce net interest income and negatively affect funding sources;

projected business increases following strategic expansion or opening of new branches could be lower than expected;

changes in the scope and cost of Federal Deposit Insurance Corporation ("FDIC") insurance and overall regulatory costs;

the impact of acquired loans on our earnings;

changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

competition among financial institutions could increase significantly;

continued consolidation in the Pacific Northwest financial services industry resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;

the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;

the reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers;

our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk; and

our profitability measures could be adversely affected if we are unable to effectively manage our capital.

You should take into account that forward-looking statements speak only as of the date of this report. 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, except as required under federal securities laws.


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CRITICAL ACCOUNTING POLICIES
Management has identified the accounting policies related to the allowance for loan and lease losses, business combinations, acquired impaired loans, FDIC loss sharing asset and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation" under the headings "Allowance for Loan and Lease Losses", "Business Combinations", "Acquired Impaired Loans", "FDIC Loss Sharing Asset" and "Valuation and Recoverability of Goodwill" in our 2013 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies as compared to those disclosed in our 2013 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
On April 1, 2013, the Company completed its acquisition of West Coast. The Company acquired approximately $2.63 billion in assets, including $1.41 billion in loans measured at fair value, and approximately $1.88 billion in deposits. Due to the timing of this acquisition, our results of operations for the six month period ended June 30, 2014 include the acquisition for the full six month period, however the prior year period only includes the acquisition for three months of the six month period. See Note 3 to the Consolidated Financial Statements in "Item 1. Financial Statements (unaudited)" of this report for further information regarding this acquisition. Earnings Summary
The Company reported net income for the second quarter of $21.2 million or $0.40 per diluted common share, compared to $14.6 million or $0.28 per diluted common share for the second quarter of 2013. For the first six months of 2014, the Company reported net income of $41.1 million, or $0.77 per diluted common share, compared to $26.8 million, or $0.58 per diluted common share, for the first six months of 2013.
The increase in net income for the current quarter compared to the prior year period was due to a combination of higher noninterest income and lower noninterest expense, partially offset by a decrease in net interest income. The increase in net income for the first six months of 2014 compared to the same prior year period was due to higher net interest income and higher noninterest income, partially offset by higher noninterest expense. Comparison of current quarter to prior year period Revenue (net interest income plus noninterest income) for the three months ended June 30, 2014 was $89.8 million, 3% more than the same period in 2013. The increase in revenue was a result of higher noninterest income due to a decrease in the expense recorded for the change in the FDIC loss-sharing asset, partially offset by a decrease in loan interest income as a result of lower incremental accretion on the acquired loan portfolios. For a more complete discussion of these topics, please refer to the net interest income and noninterest income sections contained in the ensuing pages.
The provision for loan and lease losses for the second quarter of 2014 was $600 thousand for the noncovered loan portfolio and $1.5 million for the covered loan portfolio compared to a provision of $2.0 million for the noncovered loan portfolio and a provision recapture of $1.7 million for the covered loan portfolio during the second quarter of 2013. The small provision for the noncovered portfolio was primarily due to net charge-offs for the period, partially offset by improving asset quality metrics, and the provision for the covered loan portfolio was primarily due to a decrease in the expected present value of future cash flows as remeasured during the current quarter when compared to the prior quarter's remeasurement.
Total noninterest expense for the quarter ended June 30, 2014 was $57.8 million, down from $64.5 million for the second quarter of 2013. The decrease from the prior-year period was primarily due to higher acquisition-related expenses recorded during the second quarter of 2013. For a more complete discussion of this topic, please refer to the noninterest expense section contained in the ensuing pages.


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Net income was negatively affected by the pre-tax earnings impact of the FDIC acquired loan portfolios for both the current and prior year periods. The negative effect of the FDIC acquired loan portfolios was larger in the prior year period primarily due to greater amortization of the FDIC loss-sharing asset recorded in the prior year period. The following table illustrates the impact to earnings associated with the Company's FDIC acquired loan portfolios for the periods indicated:

                                               Three Months Ended June 30,           Six Months Ended June 30,
                                                2014                2013              2014               2013
                                                                       ( in thousands)
Incremental accretion income on FDIC
acquired loans                             $      5,829       $        8,475     $     12,522       $     17,920
Recapture (provision) for losses on
covered loans                                    (1,517 )              1,712           (3,939 )              732
Change in FDIC loss-sharing asset (1)            (5,050 )            (13,137 )         (9,869 )          (23,620 )
FDIC clawback liability recovery
(expense)                                           103                 (199 )           (101 )             (430 )
Pre-tax earnings impact of FDIC acquired
loan portfolios                            $       (635 )     $       (3,149 )   $     (1,387 )     $     (5,398 )


__________


(1) For additional information on the FDIC loss-sharing asset, please see the "FDIC Loss-sharing Asset" section of Management's Discussion and Analysis and Note 8 to the Consolidated Financial Statements in "Item 1. Financial Statements (unaudited)" of this report. Comparison of current year-to-date to prior year period Revenue (net interest income plus noninterest income) for the six months ended June 30, 2014 was $177.7 million, compared to $141.9 million for the same period in 2013. The increase in revenue was a result of higher net interest income and higher noninterest income primarily due to the timing of the acquisition of West Coast in the middle of the prior year period. For a more complete discussion of this topic, please refer to the net interest income section and noninterest income sections contained in the ensuing pages. The provision for loan and lease losses for the six months ended June 30, 2014 was $100 thousand for the noncovered loan portfolio and a provision of $3.9 million for the covered loan portfolio compared to a provision of $1.0 million for the noncovered loan portfolio and a provision recapture of $732 thousand for the covered loan portfolio during the first six months of 2013. The $100 thousand provision for the noncovered loan portfolio was driven by net charge offs experienced during the period, partially offset by improving credit metrics within the noncovered loan portfolio. The $3.9 million in provision for losses on covered loans was primarily due to a decrease in the present value of expected future cash flows as remeasured during the current period when compared to the prior period's remeasurement. Total noninterest expense for the six months ended June 30, 2014 was $115.2 million, a 12% increase from the first six months of 2013. The increase from the prior-year period was primarily due to the timing of the West Coast acquisition being in the middle of the prior year period. For a more complete discussion of this topic, please refer to the noninterest expense section contained in the ensuing pages. Net Interest Income
Comparison of current quarter to prior year period Net interest income for the second quarter of 2014 was $75.1 million, a decrease of 6% from $80.0 million for the same quarter in 2013. The decrease in net interest income was due to lower incremental accretion income on acquired loans. For additional information on the Company's accounting policies related to recording interest income on loans, please refer to "Item 8. Financial Statements and Supplementary Data" in our 2013 Annual Report on Form 10-K. The Company's net interest margin (tax equivalent) decreased to 4.86% in the second quarter of 2014, from 5.19% for the same quarter last year. This decrease was also due to lower incremental accretion income on acquired loan portfolios. The Company's operating net interest margin (tax equivalent) decreased modestly to 4.27% from 4.34% due to lower rates on loans.


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Comparison of current year-to-date to prior year period Net interest income for the six months ended June 30, 2014 was $149.1 million, an increase of 12% from $133.5 million for the same period in 2013. The increase in net interest income was primarily due to higher average loan balances during the current year as the acquisition of West Coast occurred in the middle of the prior year six month period. The Company's net interest margin (tax equivalent) decreased to 4.86% for the first six months of 2014, from 5.13% for the prior year period. The decrease in the Company's net interest margin (tax equivalent) was primarily due to lower accretion income on the acquired loan portfolios. As shown in the table below, the Company recorded $23.6 million in total incremental accretion during the six months ended June 30, 2014, a decrease of $3.9 million from the prior year period. The Company's operating net interest margin (tax equivalent) for the six months ended June 30, 2014 decreased modestly to 4.23% from 4.28% due to lower rates on loans.
The following table shows the impact to interest income of incremental accretion income as well as the net interest margin and operating net interest margin for the periods presented:

                                       Three Months Ended June 30,           Six Months Ended June 30,
                                         2014               2013              2014               2013
                                                           (dollars in thousands)
Incremental accretion income due
to:
FDIC acquired impaired loans       $       5,734       $       7,837     $     12,223       $     16,212
Other FDIC acquired loans                     95                 638              299              1,708
Other acquired loans                       5,481               9,635           11,096              9,635
Incremental accretion income       $      11,310       $      18,110     $     23,618       $     27,555

Net interest margin (tax
equivalent)                                 4.86 %              5.19 %           4.86 %             5.13 %
Operating net interest
margin (tax equivalent) (1)                 4.27 %              4.34 %           4.23 %             4.28 %


__________


(1) Operating net interest margin (tax equivalent) is a non-GAAP measurement. See Non-GAAP measures section of Item 2, Management's Discussion and Analysis.


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The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total net interest income and net interest margin:

                                        Three Months Ended June 30,                      Three Months Ended June 30,
                                                    2014                                             2013
                                   Average           Interest        Average        Average           Interest        Average
                                  Balances         Earned / Paid       Rate        Balances         Earned / Paid       Rate
                                                                   (dollars in thousands)
ASSETS
Loans, excluding covered
loans, net (1) (3)             $   4,373,439     $        56,807       5.20 %   $   4,192,519     $        60,881       5.81 %
Covered loans, net (2)               272,917              10,622      15.57 %         378,662              14,074      14.87 %
Taxable securities                 1,281,753               6,382       1.99 %       1,328,806               4,890       1.47 %
Tax exempt securities (3)            364,240               4,192       4.60 %         336,375               3,890       4.63 %
Interest-earning deposits
with banks and federal funds
sold                                  46,753                  30       0.26 %          47,919                  33       0.27 %
Total interest-earning
assets                             6,339,102     $        78,033       4.92 %       6,284,281     $        83,768       5.33 %
Other earning assets                 130,462                                          113,403
Noninterest-earning assets           759,623                                          713,273
Total assets                   $   7,229,187                                    $   7,110,957
LIABILITIES AND SHAREHOLDERS' EQUITY
Certificates of deposit        $     480,459     $           325       0.27 %   $     590,261     $           535       0.36 %
Savings accounts                     527,370                  14       0.01 %         477,574                  28       0.02 %
Interest-bearing demand            1,187,274                 115       0.04 %       1,059,772                 153       0.06 %
Money market accounts              1,612,607                 275       0.07 %       1,858,974                 338       0.07 %
Total interest-bearing
deposits                           3,807,710                 729       0.08 %       3,986,581               1,054       0.11 %
Federal Home Loan Bank
advances (4)                          68,306                 115       0.67 %         106,309                 849       3.19 %
Other borrowings                      25,000                 119       1.90 %          68,205                 376       2.21 %
Total interest-bearing
liabilities                        3,901,016     $           963       0.10 %       4,161,095     $         2,279       0.22 %
Noninterest-bearing deposits       2,161,171                                        1,838,221
Other noninterest-bearing
liabilities                           82,073                                           60,261
Shareholders' equity               1,084,927                                        1,051,380
Total liabilities &
shareholders' equity           $   7,229,187                                    $   7,110,957

Net interest income (tax equivalent) $ 77,070 $ 81,489 Net interest margin (tax equivalent) 4.86 % 5.19 %

(1) Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on certain acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $1.2 million and $840 thousand for the three months ended June 30, 2014 and 2013, respectively. The accretion of net unearned discounts on certain acquired loans was $5.6 million and $10.3 million for the three months ended June 30, 2014 and 2013, respectively.

(2) Incremental accretion on acquired impaired loans is included in covered loan interest earned. The incremental accretion income on acquired impaired loans was $5.7 million and $7.8 million for the three months ended June 30, 2014 and 2013, respectively.

(3) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on noncovered loans was $425 thousand and $118 thousand for the three months ended June 30, 2014 and 2013, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.5 million and $1.4 million for the three months ended June 30, 2014 and 2013, respectively.

(4) Federal Home Loan Bank advances includes a prepayment charge of $1.5 million during the three months ended June 30, 2013. As a result of the prepayment, the Company recorded $874 thousand in premium amortization, which partially offset the impact of the prepayment charge.


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The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total net interest income and net interest margin:

                                        Six Months Ended June 30,                      Six Months Ended June 30,
                                                   2014                                           2013
                                  Average          Interest        Average       Average          Interest        Average
                                 Balances        Earned / Paid       Rate       Balances        Earned / Paid       Rate
                                                                 (dollars in thousands)
ASSETS
Loans, excluding covered
loans, net (1) (3)             $ 4,311,118     $       111,753       5.18 %   $ 3,380,360     $        94,045       5.56 %
Covered loans, net (2)             280,915              21,574      15.36 %       390,954              29,066      14.87 %
Taxable securities               1,305,584              13,134       2.01 %     1,056,992               9,124       1.73 %
Tax exempt securities (3)          358,497               8,301       4.63 %       303,122               7,457       4.92 %
Interest-earning deposits
with banks and federal funds
sold                                36,043                  44       0.24 %       184,581                 234       0.25 %
Total interest-earning
assets                           6,292,157     $       154,806       4.92 %     5,316,009     $       139,926       5.26 %
Other earning assets               128,703                                         97,094
Noninterest-earning assets         765,849                                        574,140
Total assets                   $ 7,186,709                                    $ 5,987,243
LIABILITIES AND SHAREHOLDERS' EQUITY
Certificates of deposit        $   491,731     $           687       0.28 %   $   536,750     $         1,115       0.42 %
Savings accounts                   520,678                  28       0.01 %       402,584                  44       0.02 %
Interest-bearing demand          1,178,042                 223       0.04 %       950,352                 331       0.07 %
Money market accounts            1,599,686                 543       0.07 %     1,477,098                 653       0.09 %
Total interest-bearing
deposits                         3,790,137               1,481       0.08 %     3,366,784               2,143       0.13 %
Federal Home Loan Bank
advances (4)                        69,491                 229       0.66 %        56,751                 920       3.24 %
Other borrowings                    25,000                 238       1.90 %        46,722                 495       2.12 %
Total interest-bearing
liabilities                      3,884,628     $         1,948       0.10 %     3,470,257     $         3,558       0.21 %
Noninterest-bearing deposits     2,145,407                                      1,545,749
Other noninterest-bearing
liabilities                         80,485                                         60,570
Shareholders' equity             1,076,189                                        910,667
Total liabilities &
shareholders' equity           $ 7,186,709                                    $ 5,987,243

Net interest income (tax equivalent) $ 152,858 $ 136,368 Net interest margin (tax equivalent) 4.86 % 5.13 %

(1) Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $2.1 million and $1.5 million for the six months ended June 30, 2014 and 2013, respectively. The accretion of net unearned discounts on other FDIC acquired loans and other acquired loans was $11.4 million and $11.3 million for the six months ended June 30, 2014 and 2013, respectively.

(2) Incremental accretion on acquired impaired loans is included in covered loan interest earned. The incremental accretion income on acquired impaired loans was $12.2 million and $16.2 million for the six months ended June 30, 2014 and 2013, respectively.

(3) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on noncovered loans was $782 thousand and $246 thousand for the six months ended June 30, 2014 and 2013, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.0 million and $2.7 million for the six months ended June 30, 2014 and 2013, respectively.

(4) Federal Home Loan Bank advances includes a prepayment charge of $1.5 million during the six months ended June 30, 2013. As a result of the prepayment, the Company recorded $874 thousand in premium amortization, which partially . . .

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