b10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2008.
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to .
Commission
File Number 0-20288
COLUMBIA
BANKING SYSTEM, INC.
(Exact
name of registrant as specified in its charter)
|
|
Washington
|
91-1422237
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
|
1301
“A” Street
Tacoma,
Washington
|
98402-2156
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(253)
305-1900
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares of common stock outstanding at April 30, 2008 was
18,089,093.
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Page
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Item 1.
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1
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2
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3
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4
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5
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Item 2.
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13
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Item 3.
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23
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Item 4.
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23
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Item 1.
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25
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Item 1A.
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25
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Item 2.
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26
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Item 3.
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26
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Item 4.
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26
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Item 5.
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26
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Item 6.
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27
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28
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Columbia
Banking System, Inc.
(Unaudited)
|
|
Three Months Ended March 31,
|
|
(in
thousands except per
share) |
|
2008
|
|
|
2007
|
|
Interest
Income
|
|
|
|
|
|
|
Loans
|
|
$ |
41,303 |
|
|
$ |
34,030 |
|
Taxable
securities
|
|
|
4,980 |
|
|
|
4,785 |
|
Tax-exempt
securities
|
|
|
2,001 |
|
|
|
1,960 |
|
Federal
funds sold and deposits with banks
|
|
|
149 |
|
|
|
371 |
|
Total
interest income
|
|
|
48,433 |
|
|
|
41,146 |
|
Interest
Expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
14,835 |
|
|
|
12,159 |
|
Federal
Home Loan Bank advances
|
|
|
2,582 |
|
|
|
3,179 |
|
Long-term
obligations
|
|
|
487 |
|
|
|
507 |
|
Other
borrowings
|
|
|
202 |
|
|
|
598 |
|
Total
interest expense
|
|
|
18,106 |
|
|
|
16,443 |
|
Net
Interest Income
|
|
|
30,327 |
|
|
|
24,703 |
|
Provision
for loan and lease losses
|
|
|
2,076 |
|
|
|
638 |
|
Net
interest income after provision for loan and lease losses
|
|
|
28,251 |
|
|
|
24,065 |
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
3,568 |
|
|
|
2,959 |
|
Merchant
services fees
|
|
|
1,916 |
|
|
|
1,969 |
|
Gain
on sale of investment securities, net
|
|
|
882 |
|
|
|
— |
|
Gain
on redemption of Visa shares
|
|
|
1,962 |
|
|
|
— |
|
Bank
owned life insurance (“BOLI”)
|
|
|
505 |
|
|
|
426 |
|
Other
|
|
|
1,324 |
|
|
|
823 |
|
Total
noninterest income
|
|
|
10,157 |
|
|
|
6,177 |
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
13,396 |
|
|
|
11,358 |
|
Occupancy
|
|
|
3,259 |
|
|
|
2,837 |
|
Merchant
processing
|
|
|
866 |
|
|
|
823 |
|
Advertising
and promotion
|
|
|
581 |
|
|
|
547 |
|
Data
processing
|
|
|
815 |
|
|
|
567 |
|
Legal
and professional services
|
|
|
(51 |
) |
|
|
823 |
|
Taxes,
licenses and fees
|
|
|
751 |
|
|
|
613 |
|
Net
gain from other real estate owned
|
|
|
(23 |
) |
|
|
— |
|
Other
|
|
|
3,960 |
|
|
|
2,834 |
|
Total
noninterest expense
|
|
|
23,554 |
|
|
|
20,402 |
|
Income
before income taxes
|
|
|
14,854 |
|
|
|
9,840 |
|
Provision
for income taxes
|
|
|
3,877 |
|
|
|
2,557 |
|
Net
Income
|
|
$ |
10,977 |
|
|
$ |
7,283 |
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.61 |
|
|
$ |
0.45 |
|
Diluted
|
|
|
0.61 |
|
|
|
0.45 |
|
Dividends
paid per common share
|
|
$ |
0.17 |
|
|
$ |
0.15 |
|
Weighted
average number of common shares outstanding
|
|
|
17,850 |
|
|
|
16,104 |
|
Weighted
average number of diluted common shares outstanding
|
|
|
17,978 |
|
|
|
16,262 |
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
Columbia
Banking System, Inc.
(Unaudited)
(in
thousands)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
82,950 |
|
|
$ |
82,735 |
|
Interest-earning
deposits with banks
|
|
|
9,165 |
|
|
|
11,240 |
|
Federal
funds sold
|
|
|
31,500 |
|
|
|
—
|
|
Total
cash and cash equivalents
|
|
|
123,615 |
|
|
|
93,975 |
|
Securities
available for sale at fair value (amortized cost of $576,372 and $558,685,
respectively)
|
|
|
582,029 |
|
|
|
561,366 |
|
Federal
Home Loan Bank stock at cost
|
|
|
16,441 |
|
|
|
11,607 |
|
Loans
held for sale
|
|
|
5,944 |
|
|
|
4,482 |
|
Loans,
net of deferred loan fees of ($3,768) and ($3,931),
respectively
|
|
|
2,300,465 |
|
|
|
2,282,728 |
|
Less:
allowance for loan and lease losses
|
|
|
27,914 |
|
|
|
26,599 |
|
Loans,
net
|
|
|
2,272,551 |
|
|
|
2,256,129 |
|
Interest
receivable
|
|
|
14,200 |
|
|
|
14,622 |
|
Premises
and equipment, net
|
|
|
56,291 |
|
|
|
56,122 |
|
Other
real estate owned
|
|
|
—
|
|
|
|
181 |
|
Goodwill
|
|
|
95,981 |
|
|
|
96,011 |
|
Core
deposit intangible, net
|
|
|
6,754 |
|
|
|
7,050 |
|
Other
assets
|
|
|
72,780 |
|
|
|
77,168 |
|
Total
Assets
|
|
$ |
3,246,586 |
|
|
$ |
3,178,713 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$ |
508,955 |
|
|
$ |
468,237 |
|
Interest-bearing
|
|
|
2,017,559 |
|
|
|
2,029,824 |
|
Total
deposits
|
|
|
2,526,514 |
|
|
|
2,498,061 |
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
|
256,400 |
|
|
|
257,670 |
|
Securities
sold under agreements to repurchase
|
|
|
25,000 |
|
|
|
—
|
|
Other
borrowings
|
|
|
5,321 |
|
|
|
5,061 |
|
Total
short-term borrowings
|
|
|
286,721 |
|
|
|
262,731 |
|
Long-term
subordinated debt
|
|
|
25,540 |
|
|
|
25,519 |
|
Other
liabilities
|
|
|
56,144 |
|
|
|
50,671 |
|
Total
liabilities
|
|
|
2,894,919 |
|
|
|
2,836,982 |
|
Commitments
and contingent liabilities
|
|
|
—
|
|
|
|
—
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred stock
(no par value)
|
|
|
|
|
|
|
|
|
Authorized,
2 million shares; none outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Common stock (no par
value)
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares
|
|
63,034 |
|
|
|
63,034 |
|
|
|
|
|
|
|
Issued
and outstanding
|
|
18,084 |
|
|
|
17,953 |
|
|
|
228,156 |
|
|
|
226,550 |
|
Retained
earnings
|
|
|
|
|
|
|
|
|
|
115,932 |
|
|
|
110,169 |
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
7,579 |
|
|
|
5,012 |
|
Total
shareholders’ equity
|
|
|
|
|
|
|
|
|
|
351,667 |
|
|
|
341,731 |
|
Total
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
$ |
3,246,586 |
|
|
$ |
3,178,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
Columbia
Banking System, Inc.
(Unaudited)
|
|
Common
stock
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Number of
Shares
|
|
|
Amount
|
|
|
Retained
Earnings
|
|
|
Income (Loss)
|
|
|
Shareholders’
Equity
|
|
|
|
(in
thousands)
|
|
Balance
at January 1, 2007
|
|
|
16,060 |
|
|
$ |
166,763 |
|
|
$ |
89,037 |
|
|
$ |
(3,453 |
) |
|
$ |
252,347 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
7,283 |
|
|
|
— |
|
|
|
7,283 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain from securities, net of reclassification
adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,790 |
|
|
|
2,790 |
|
Net
unrealized gain from cash flow hedging instruments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
55 |
|
|
|
55 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,128 |
|
Issuance
of stock under stock option and other plans
|
|
|
57 |
|
|
|
891 |
|
|
|
— |
|
|
|
— |
|
|
|
891 |
|
Stock
award compensation expense
|
|
|
40 |
|
|
|
194 |
|
|
|
— |
|
|
|
— |
|
|
|
194 |
|
Stock
option compensation expense
|
|
|
— |
|
|
|
44 |
|
|
|
— |
|
|
|
— |
|
|
|
44 |
|
Tax
benefit associated with exercise of stock options
|
|
|
— |
|
|
|
141 |
|
|
|
— |
|
|
|
— |
|
|
|
141 |
|
Cash
dividends paid on common stock
|
|
|
— |
|
|
|
— |
|
|
|
(2,416 |
) |
|
|
— |
|
|
|
(2,416 |
) |
Balance
at March 31, 2007
|
|
|
16,157 |
|
|
$ |
168,033 |
|
|
$ |
93,904 |
|
|
$ |
(608 |
) |
|
$ |
261,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
17,953 |
|
|
$ |
226,550 |
|
|
$ |
110,169 |
|
|
$ |
5,012 |
|
|
$ |
341,731 |
|
Cumulative
effect of applying consensus in EITF 06-4
|
|
|
— |
|
|
|
— |
|
|
|
(2,155 |
) |
|
|
— |
|
|
|
(2,155 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
10,977 |
|
|
|
— |
|
|
|
10,977 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain from securities, net of reclassification
adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,904 |
|
|
|
1,904 |
|
Net
unrealized gain from cash flow hedging instruments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
663 |
|
|
|
663 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,544 |
|
Issuance
of stock under stock option and other plans
|
|
|
67 |
|
|
|
1,084 |
|
|
|
— |
|
|
|
— |
|
|
|
1,084 |
|
Stock
award compensation expense
|
|
|
64 |
|
|
|
384 |
|
|
|
— |
|
|
|
— |
|
|
|
384 |
|
Tax
benefit associated with exercise of stock options
|
|
|
— |
|
|
|
138 |
|
|
|
— |
|
|
|
— |
|
|
|
138 |
|
Cash
dividends paid on common stock
|
|
|
— |
|
|
|
— |
|
|
|
(3,059 |
) |
|
|
— |
|
|
|
(3,059 |
) |
Balance
at March 31, 2008
|
|
|
18,084 |
|
|
$ |
228,156 |
|
|
$ |
115,932 |
|
|
$ |
7,579 |
|
|
$ |
351,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
Columbia
Banking System, Inc.
(Unaudited)
|
|
Three
Months Ended
March 31,
|
|
(in
thousands) |
|
2008
|
|
|
2007
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
10,977 |
|
|
$ |
7,283 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
2,076 |
|
|
|
638 |
|
Deferred
income tax benefit
|
|
|
(220 |
) |
|
|
(237 |
) |
Excess
tax benefit from stock-based compensation
|
|
|
(138 |
) |
|
|
(41 |
) |
Stock-based
compensation expense
|
|
|
384 |
|
|
|
238 |
|
Depreciation,
amortization & accretion
|
|
|
1,708 |
|
|
|
1,542 |
|
Net
realized gain on sale of securities
|
|
|
(882 |
) |
|
|
— |
|
Net
realized (gain) loss on sale of other real estate and fixed
assets
|
|
|
(46 |
) |
|
|
2 |
|
Net
change in:
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
(1,462 |
) |
|
|
(2,066 |
) |
Interest
receivable
|
|
|
422 |
|
|
|
(1,288 |
) |
Interest
payable
|
|
|
1,204 |
|
|
|
515 |
|
Other
assets
|
|
|
(3,789 |
) |
|
|
11 |
|
Other
liabilities
|
|
|
3,243 |
|
|
|
(849 |
) |
Net
cash provided by operating activities
|
|
|
13,477 |
|
|
|
5,748 |
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchase
of securities available for sale
|
|
|
(76,907 |
) |
|
|
(800 |
) |
Proceeds
from sales of securities available for sale
|
|
|
51,358 |
|
|
|
— |
|
Proceeds
from principal repayments and maturities of securities available for
sale
|
|
|
8,545 |
|
|
|
10,316 |
|
Proceeds
from maturities of securities held to maturity
|
|
|
— |
|
|
|
250 |
|
Loans
originated and acquired, net of principal collected
|
|
|
(19,489 |
) |
|
|
(124,961 |
) |
Purchases
of premises and equipment
|
|
|
(1,425 |
) |
|
|
(772 |
) |
Purchase
of FHLB stock
|
|
|
(4,834 |
) |
|
|
— |
|
Proceeds
from termination of cash flow hedging instruments
|
|
|
8,093 |
|
|
|
— |
|
Proceeds
from sale of other real estate owned
|
|
|
204 |
|
|
|
— |
|
Proceeds
from disposal of premises and equipment
|
|
|
12 |
|
|
|
188 |
|
Net
cash used in investing activities
|
|
|
(34,443 |
) |
|
|
(115,779 |
) |
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
28,453 |
|
|
|
57,675 |
|
Proceeds
from Federal Home Loan Bank advances
|
|
|
873,268 |
|
|
|
825,945 |
|
Repayment
of Federal Home Loan Bank advances
|
|
|
(874,538 |
) |
|
|
(819,045 |
) |
Net
increase in repurchase agreement borrowings
|
|
|
25,000 |
|
|
|
50,000 |
|
Net
increase in other borrowings
|
|
|
260 |
|
|
|
146 |
|
Cash
dividends paid on common stock
|
|
|
(3,059 |
) |
|
|
(2,416 |
) |
Proceeds
from issuance of common stock, net
|
|
|
1,084 |
|
|
|
891 |
|
Excess
tax benefit from stock-based compensation
|
|
|
138 |
|
|
|
41 |
|
Net
cash provided by financing activities
|
|
|
50,606 |
|
|
|
113,237 |
|
Increase
in cash and cash equivalents
|
|
|
29,640 |
|
|
|
3,206 |
|
Cash
and cash equivalents at beginning of period
|
|
|
93,975 |
|
|
|
104,344 |
|
Cash
and cash equivalents at end of period
|
|
$ |
123,615 |
|
|
$ |
107,550 |
|
|
|
|
|
|
|
|
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
16,902 |
|
|
$ |
15,155 |
|
Cash
paid for income taxes
|
|
$ |
150 |
|
|
$ |
880 |
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
Columbia
Banking System, Inc.
1.
Basis of Presentation and Significant Accounting Policies
(a)
|
Basis
of Presentation
|
The
interim unaudited consolidated condensed financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for condensed interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial
information and footnotes have been omitted or condensed. The consolidated
condensed financial statements include the accounts of the Company, and its
wholly owned banking subsidiaries Columbia Bank and Bank of Astoria (“Astoria”).
All intercompany transactions and accounts have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair statement of the
results for the interim periods presented have been included. The results of
operations for the three months ended March 31, 2008 are not necessarily
indicative of results to be anticipated for the year ending December 31,
2008. The accompanying interim unaudited consolidated condensed
financial statements should be read in conjunction with the financial statements
and related notes contained in the Company’s 2007 Annual Report on Form
10-K.
(b)
|
Significant
Accounting Policies
|
The
significant accounting policies used in preparation of our consolidated
financial statements are disclosed in our 2007 Annual Report on Form 10-K. There
have not been any other material changes in our significant accounting policies
compared to those contained in our 2007 10-K disclosure for the year ended
December 31, 2007.
2.
Accounting Pronouncements Recently Issued or Adopted
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS 161”). This Statement requires enhanced disclosures about an
entity’s derivative and hedging activities and is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company plans to apply the enhanced disclosure
provisions of SFAS 161 to all derivative and hedging activities.
On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value
Measurements. SFAS 157 defines fair value, establishes a
framework for measuring fair value under accounting principles generally
accepted in the United States of America, and expands disclosures about fair
value measurement. For further information, see Note 7 of the Notes
to Unaudited Consolidated Condensed Financial Statements.
On
January 1, 2008, the Company began applying the consensus reached by the
Emerging Issues Task Force in Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (“EITF 06-4”). EITF 06-4 provides recognition
guidance regarding liabilities and related compensation costs for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. The Company recognized the
effects of applying the consensus through a change in accounting principle with
a cumulative-effect adjustment to retained earnings of $2.2
million. Application of this consensus did not have a material effect
on our results of operations.
3.
Share-based Payments
At
March 31, 2008 the Company had one equity compensation plan (the “Plan”),
which is shareholder approved, that provides for the granting of share options
and shares to eligible employees and directors up to 2,191,482 shares. Share
option and share awards are made at the discretion of the Board of
Directors.
Share Awards: Restricted
share awards provide for the immediate issuance of shares of Company common
stock to the recipient, with such shares held in escrow until certain service
conditions are met, generally five years of continual service. Recipients of
restricted shares do not pay any cash consideration to the Company for the
shares, have the right to vote all shares subject to such grant, and receive all
dividends with respect to such shares, whether or not the shares have vested.
The fair value of share awards is equal to the fair market value of the
Company’s common stock on the date of grant.
A summary
of the status of the Company’s nonvested shares as of March 31, 2008 is
presented below:
Nonvested
Shares
|
|
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Nonvested
at January 1, 2008
|
|
|
143,325 |
|
|
$ |
32.36 |
|
Granted
|
|
|
65,610 |
|
|
|
24.09 |
|
Vested
|
|
|
(4,165 |
) |
|
|
33.72 |
|
Forfeited
|
|
|
(1,450 |
) |
|
|
29.15 |
|
Nonvested
at March 31, 2008
|
|
|
203,320 |
|
|
$ |
29.68 |
|
As of
March 31, 2008 there was $4.1 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted average period
of 3.4 years. The total fair value of shares vested during the three months
ended March 31, 2008 and 2007 was $140,000 and $17,000,
respectively.
Share Options: Option awards
are generally granted with an exercise price equal to the market price of the
Company’s stock at the date of grant; those option awards generally vest based
on three years of continual service and are exercisable for a five-year period
after vesting. Option awards granted have a 10-year maximum term.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. The fair value of all options is amortized
on a straight-line basis over the requisite service periods, which are generally
the vesting periods. The expected life of options granted represents the period
of time that they are expected to be outstanding. The expected life is
determined based on historical experience with similar awards, giving
consideration to the contractual terms and vesting schedules. Expected
volatilities of our common stock are estimated at the date of grant based on the
historical volatility of the stock. The volatility factor is based on historical
stock prices over the most recent period commensurate with the estimated
expected life of the award. The risk-free interest rate is based on the U.S.
Treasury curve in effect at the time of the award. The expected dividend yield
is based on dividend trends and the market value of the Company’s stock price at
the time of the award.
A summary
of option activity under the Plan for the three months ended March 31, 2008
is presented below:
Options
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Balance
at January 1, 2008
|
|
|
331,868 |
|
|
$ |
14.77 |
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,431 |
) |
|
|
21.60 |
|
|
|
|
|
|
|
Exercised
|
|
|
(55,314 |
) |
|
|
13.84 |
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
|
274,123 |
|
|
$ |
14.89 |
|
|
|
3.4 |
|
|
$ |
2,220 |
|
Total
Exercisable at March 31, 2008
|
|
|
274,123 |
|
|
$ |
14.89 |
|
|
|
3.4 |
|
|
$ |
2,220 |
|
There
were no stock options granted by the Company during the three months ended
March 31, 2008 and 2007. The total intrinsic value of options exercised
during the three months ended March 31, 2008 and 2007 was $546,000 and $1.1
million, respectively.
As of
March 31, 2008, outstanding stock options consist of the
following:
Ranges
of
Exercise
Prices
|
|
Number of
Option
Shares
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
Weighted-Average
Exercise
Price of
Option
Shares
|
|
Number
of
Exercisable
Option Shares
|
|
Weighted-Average
Exercise
Price of
Exercisable Option
Shares
|
|
$ |
3.09 – 6.17 |
|
|
27,740 |
|
|
2.3 |
|
$ |
4.76 |
|
|
27,740 |
|
$ |
4.76 |
|
|
6.18 – 9.25 |
|
|
2,326 |
|
|
4.6 |
|
|
6.31 |
|
|
2,326 |
|
|
6.31 |
|
|
9.26 – 12.34 |
|
|
102,285 |
|
|
1.4 |
|
|
11.21 |
|
|
102,285 |
|
|
11.21 |
|
|
12.35 – 15.43 |
|
|
46,188 |
|
|
4.8 |
|
|
13.97 |
|
|
46,188 |
|
|
13.97 |
|
|
15.44 – 18.51 |
|
|
15,369 |
|
|
4.4 |
|
|
17.29 |
|
|
15,369 |
|
|
17.29 |
|
|
18.52 – 21.60 |
|
|
24,599 |
|
|
6.1 |
|
|
19.08 |
|
|
24,599 |
|
|
19.08 |
|
|
21.61 – 24.68 |
|
|
18,635 |
|
|
4.2 |
|
|
22.88 |
|
|
18,635 |
|
|
22.88 |
|
|
24.69 – 27.77 |
|
|
31,310 |
|
|
4.7 |
|
|
25.77 |
|
|
31,310 |
|
|
25.77 |
|
|
27.78 – 30.86 |
|
|
5,671 |
|
|
8.9 |
|
|
30.86 |
|
|
5,671 |
|
|
30.86 |
|
|
|
|
|
274,123 |
|
3.4 years
|
|
$ |
14.89 |
|
|
274,123 |
|
$ |
14.89 |
|
It is the
Company’s policy to issue new shares for share option exercises and share
awards. The Company expenses awards of share options and shares on a
straight-line basis over the related vesting term of the award. For the three
months ended March 31, 2008 and 2007, the Company recognized pre-tax
compensation expense related to share options and shares of $384,000 and
$238,000, respectively.
4.
Earnings per share
The
following table sets forth the computation of basic and diluted net income per
share for the three months ended March 31, 2008 and 2007 (in thousands,
except for per share data):
(dollars
in thousands, except per share)
|
|
For
The Three
Months Ended
3/31/2008
|
|
|
For
The Three
Months Ended
3/31/2007
|
|
Net
income
|
|
$ |
10,977 |
|
|
$ |
7,283 |
|
Weighted
average common shares outstanding (for basic calculation)
|
|
|
17,850 |
|
|
|
16,104 |
|
Incremental
shares from unexercised stock options and unvested restricted stock
awards
|
|
|
128 |
|
|
|
158 |
|
Weighted
average common stock and common equivalent shares outstanding (for diluted
calculation)
|
|
|
17,978 |
|
|
|
16,262 |
|
Net
earnings per common share – basic
|
|
$ |
0.61 |
|
|
$ |
0.45 |
|
Net
earnings per common share – diluted
|
|
$ |
0.61 |
|
|
$ |
0.45 |
|
Potential
dilutive shares are excluded from the computation of earnings per share if their
effect is anti-dilutive. For the three month periods ended March 31, 2008 and
March 31, 2007 there were 36,981 and 0 anti-dilutive shares outstanding,
respectively related to options to acquire common stock.
5.
Dividends
On
January 23, 2008, the Company declared a quarterly cash dividend of $0.17
per share, payable on February 20, 2008 to shareholders of record as of the
close of business on February 6, 2008. Subsequent to quarter end, on
April 23, 2008, the Company declared a quarterly cash dividend of $0.17 per
share, payable on May 21, 2008, to shareholders of record at the close of
business May 7, 2008. The payment of cash dividends is subject to Federal
regulatory requirements for capital levels and other restrictions. In addition,
the cash dividends paid by Columbia Bank and Bank of Astoria to the Company are
subject to both Federal and State regulatory requirements.
6.
Business Segment Information
The
Company is managed along two major lines of business: commercial banking and
retail banking. The treasury function of the Company, included in the “Other”
category, although not considered a line of business, is responsible for the
management of investments and interest rate risk. In addition, the provision for
loan and lease losses is included in the “Other” category. Subsequent
to quarter-end, on April 1, 2008, the Bank of Astoria banking subsidiary was
merged into the Columbia Bank banking subsidiary. This change in
internal organizational structure also changes the composition of the Company’s
reportable segments. Accordingly, segment results for the Bank of
Astoria are now included in the Retail Banking segment. Prior period
segment reporting has been restated to reflect this change.
The
Company generates segment results that include balances directly attributable to
business line activities. The financial results of each segment are derived from
the Company’s general ledger system. Overhead, including sales and back office
support functions and other indirect expenses are not allocated to the major
lines of business. Goodwill resulting from business combinations is included in
the Retail Banking segment. Since the Company is not specifically organized
around lines of business, most reportable segments comprise more than one
operating activity.
The
principal activities conducted by commercial banking are the origination of
commercial business loans, private banking services and real estate lending.
Retail banking includes all deposit products, with their related fee income, and
all consumer loan products as well as commercial loan products offered in the
Company’s branch offices.
Effective
January 1, 2008 the Company implemented a more robust internal funds transfer
pricing methodology. Internal funds transfer pricing refers to the
process we utilize to give an earnings credit to a branch or revenue center for
the deposit funds they generate while providing an earnings charge to the
centers that use deposit funds to make loans. The implementation of
this methodology changed the basis of measurement for segment net interest
income as presented in the tables below. Generally, this methodology
had the effect of increasing net interest income for the commercial banking
segment with a corresponding decrease in net interest income for the retail
banking segment. The increase in net interest income for the
commercial banking segment is driven primarily by the earnings credit for
deposit funds generated within that segment. In prior years, the
retail banking segment benefited from the earnings credit for deposit funds
generated by the commercial banking segment. Segment net interest
income after provision for loan and lease losses for the current quarter is not
directly comparable to the same line item in the first quarter of last year as
the prior quarter cannot practicably be restated.
The
organizational structure of the Company and its business line financial results
are not necessarily comparable with information from other financial
institutions. Financial highlights by lines of business are as
follows:
Condensed
Statements of Income:
|
|
Three Months
Ended March 31, 2008
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income after provision for loan and lease losses
|
|
$ |
13,632 |
|
|
$ |
16,051 |
|
|
$ |
(1,432 |
) |
|
$ |
28,251 |
|
Other
income
|
|
|
1,173 |
|
|
|
2,244 |
|
|
|
6,740 |
|
|
|
10,157 |
|
Other
expense
|
|
|
(2,696 |
) |
|
|
(9,198 |
) |
|
|
(11,660 |
) |
|
|
(23,554 |
) |
Net
income before income taxes
|
|
|
12,109 |
|
|
|
9,097 |
|
|
|
(6,352 |
) |
|
|
14,854 |
|
Income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,877 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,977 |
|
Total
assets
|
|
$ |
1,491,325 |
|
|
$ |
995,845 |
|
|
$ |
759,416 |
|
|
$ |
3,246,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31, 2007
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income after provision for loan and lease losses
|
|
$ |
6,455 |
|
|
$ |
18,776 |
|
|
$ |
(1,166 |
) |
|
$ |
24,065 |
|
Other
income
|
|
|
635 |
|
|
|
1,871 |
|
|
|
3,671 |
|
|
|
6,177 |
|
Other
expense
|
|
|
(2,804 |
) |
|
|
(6,196 |
) |
|
|
(11,402 |
) |
|
|
(20,402 |
) |
Net
income before income taxes
|
|
|
4,286 |
|
|
|
14,451 |
|
|
|
(8,897 |
) |
|
|
9,840 |
|
Income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,557 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,283 |
|
Total
assets
|
|
$ |
1,342,496 |
|
|
$ |
652,626 |
|
|
$ |
681,082 |
|
|
$ |
2,676,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
Fair Value Accounting and Measurement
SFAS 157
defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure requirements about fair value. SFAS 157, among
other things, requires the Company to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
We hold
fixed and variable rate interest bearing securities, investments in marketable
equity securities and certain other financial instruments, which are carried at
fair value. Fair value is determined based upon quoted prices when
available or through the use of alternative approaches, such as matrix or model
pricing, when market quotes are not readily accessible or
available.
The
valuation techniques are based upon observable and unobservable
inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our own market
assumptions. These two types of inputs create the following fair
value hierarchy:
Level 1 –
Quoted prices for identical instruments in active markets that are accessible at
the measurement date
Level 2 –
Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model
derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level 3 –
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable.
Fair
values are determined as follows:
Securities
at fair value are priced using matrix pricing based on the securities’
relationship to other benchmark quoted prices, and under the provisions of SFAS
157 are considered a Level 2 input method.
Interest
rate swap positions are valued in models, which use as their basis, readily
observable market parameters and are classified within level 2 of the valuation
hierarchy.
The
following table sets forth the Company’s financial assets and liabilities that
were accounted for at fair values as of March 31, 2008 by level within the fair
value hierarchy. As required by SFAS 157, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
(in
thousands) |
|
March 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ |
582,029 |
|
|
$ |
— |
|
|
$ |
582,029 |
|
|
$ |
— |
|
Interest
rate swap agreements
|
|
$ |
4,768 |
|
|
$ |
— |
|
|
$ |
4,768 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
4,768 |
|
|
$ |
— |
|
|
$ |
4,768 |
|
|
$ |
— |
|
8.
Comprehensive Income
The
components of comprehensive income are as follows:
|
|
Three
Months Ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Net
income as reported
|
|
$ |
10,977 |
|
|
$ |
7,283 |
|
Unrealized
gain from securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding gain from available for sale securities arising during
the period, net of tax of $1,385 and $1,512
|
|
|
2,475 |
|
|
|
2,790 |
|
Reclassification
adjustment of net gain from sale of available for sale securities included
in income, net of tax of $311 and $0
|
|
|
(571 |
) |
|
|
— |
|
Net
unrealized gain from securities, net of reclassification
adjustments
|
|
|
1,904 |
|
|
|
2,790 |
|
Unrealized
gain from cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Net
unrealized gain from cash flow hedging instruments arising during the
period, net of tax of $425 and $30
|
|
|
739 |
|
|
|
55 |
|
Reclassification
adjustment of net gain included in income, net of tax of $42 and
$0
|
|
|
(76 |
) |
|
|
— |
|
Net
unrealized gain from cash flow hedging instruments
|
|
|
663 |
|
|
|
55 |
|
Total
comprehensive income
|
|
$ |
13,544 |
|
|
$ |
10,128 |
|
9.
Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of
Credit
The
following table presents activity in the allowance for loan and lease losses for
the three months ended March 31, 2008 and 2007:
|
|
Three
Months Ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
26,599 |
|
|
$ |
20,182 |
|
Provision
charged to expense
|
|
|
2,076 |
|
|
|
638 |
|
Loans
charged-off
|
|
|
(1,215 |
) |
|
|
(153 |
) |
Recoveries
|
|
|
454 |
|
|
|
152 |
|
Ending
balance
|
|
$ |
27,914 |
|
|
$ |
20,819 |
|
Changes
in the allowance for unfunded loan commitments and letters of credit are
summarized as follows:
|
|
Three Months Ended
March 31,
|
|
(in
thousands) |
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
349 |
|
|
$ |
339 |
|
Net
changes in the allowance for unfunded loan commitments and letters of
credit
|
|
|
60 |
|
|
|
— |
|
Ending
balance
|
|
$ |
409 |
|
|
$ |
339 |
|
10.
Goodwill and Intangible Assets
The
Company had $96 million in goodwill at March 31, 2008 and December 31,
2007. At March 31, 2008 and December 31, 2007, the Company had a core
deposit intangible (“CDI”) asset of $6.8 million and $7.1 million, respectively.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,
goodwill is not amortized but is reviewed for potential impairment during the
third quarter on an annual basis, or if events or circumstances indicate a
potential impairment, at the reporting unit level. An impairment loss is
recorded to the extent that the carrying amount of goodwill exceeds its implied
fair value. The CDI is evaluated for impairment if events and circumstances
indicate a possible impairment. The CDI is amortized on an accelerated basis
over an estimated life of approximately 10 years. Amortization expense related
to the CDI was $296,000 and $96,000 for the three months ended March 31,
2008 and March 31, 2007 respectively. The CDI amortization expense is
included in other noninterest expense on the consolidated condensed statements
of income.
11.
Commitments and Contingent Liabilities
On March
18, 2008 Visa, Inc. (“Visa”) completed its initial public offering
(“IPO”). On March 31, 2008, Visa funded a litigation escrow account
with $3.0 billion from its IPO proceeds. Based on the Company’s Visa USA
membership percentage, the expected economic benefit to the Company from this
escrow account is $889,200. Accordingly, the Company recognized a reversal of
previously accrued legal expense of $889,200. This reversal is included in the
legal and professional services line item of the consolidated condensed
statements of income and is a reduction of the $1.8 million Visa litigation
liability the Company accrued during the fourth quarter of 2007. The Company’s
remaining Visa litigation reserve of approximately $888,000, which is included
in other liabilities on the consolidated condensed balance sheets, will be
subject to ongoing review and adjusted accordingly as information on Visa’s
litigation matters emerges.
In
addition, as a result of Visa’s IPO, the Company received 118,637 shares of
Class B Common Stock. Pursuant to Visa’s Certificate of
Incorporation, a portion of the Company’s shares were subject to mandatory
partial redemption. On March 28, 2008, 45,866 shares of the Company’s
Class B Visa Common Stock were redeemed for net cash proceeds of $1.96
million. Consistent with Securities and Exchange Commission guidance,
the Company will not recognize any gain on its remaining 72,771 shares of
unredeemed Visa Class B Common Stock until such time they are redeemed for
cash.
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
condensed financial statements of Columbia Banking System, Inc. (referred to in
this report as “we”, “our”, and “the Company”) and notes thereto presented
elsewhere in this report and with the December 31, 2007 audited
consolidated financial statements and its accompanying notes included in our
recent 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.
NOTE
REGARDING FORWARD LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q may be deemed to include forward looking
statements, which management believes to be a benefit to
shareholders. These forward looking statements describe management’s
expectations regarding future events and developments such as future operating
results, growth in loans and deposits, continued success of our style of banking
and the strength of the local economy. The words “will,” “believe,” “expect,”
“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 our filings with the SEC, factors that may cause actual
results to differ materially from those contemplated by such forward looking
statements include, among others, the following possibilities: (1) local
and national economic conditions are less favorable than expected or have a more
direct and pronounced effect on us than expected and adversely affect our
ability to continue internal growth at historical rates and maintain the quality
of our earning assets; (2) a continued decline in the housing/real estate
market; (3) changes in interest rates significantly reduce interest margins and
negatively affect funding sources; (4) deterioration of credit quality that
could, among other things, increase defaults and delinquency risks in the
Company’s loan portfolios (5) projected business increases following
strategic expansion activities are lower than expected; (6) competitive
pressure among financial institutions increases significantly;
(7) legislation or regulatory requirements or changes adversely affect the
businesses in which we are engaged; and (8) our ability to realize the
efficiencies we expect to receive from our investments in personnel,
acquisitions and infrastructure.
CRITICAL
ACCOUNTING POLICIES
Management
has identified the accounting policies related to the allowance for loan and
lease losses 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 heading
“Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters
of Credit” in our 2007 Annual Report on Form 10-K. There have not been any
material changes in our critical accounting policies relating to the allowance
for loan and lease losses as compared to those disclosed in our 2007 Annual
Report on Form 10-K.
OVERVIEW
Note: First
quarter 2007 financial information does not include the results of Mountain Bank
Holding Company and Town Center Bancorp, which were both acquired on July 23,
2007.
Earnings
Summary
The
Company reported net income of $11.0 million for the first quarter of 2008 or
$.61 per diluted share, compared with $7.3 million, or $0.45 per diluted share
for the first quarter of 2007. Return on average assets and return on
average equity were 1.39% and 12.60%, respectively, for the first quarter of
2008, compared with returns of 1.14% and 11.52%, respectively, for the first
quarter of 2007. The Company’s results for the first quarter of 2008
improved from the same period in 2007, as increases in noninterest expense and
the provision for loan and lease losses were outpaced by increases in net
interest income and noninterest income. In addition, the first
quarter 2008 results reflect the financial consolidation of Mountain Bank
Holding Company and Town Center Bancorp, which were both acquired on July 23,
2007; consequently, the first quarter 2007 financial information does not
include the results of the two organizations.
Revenue
(net interest income plus noninterest income) for the first quarter of 2008, was
$9.6 million, or 31%, higher than the first quarter of 2007, reflecting a 64%
increase in noninterest income driven primarily by gains on the sale of
investment securities and gains associated with Visa, Inc.’s (“Visa”) recent
initial public offering (“IPO”). Net interest income increased 23%
from the prior year driven primarily by growth in earning
assets. Excluding the $882,000 gain arising from the sale of
investment securities and the $1.96 million gain from Visa’s IPO, revenue was
$6.8 million, or 22%, higher than the same period last year.
Total
noninterest expense in the first quarter of 2008 was $3.2 million, or 15%,
higher than in the first quarter of 2007, principally due to higher operating
costs from investments in personnel, branches and data
processing. These increases were mitigated by a partial reversal,
totaling $889,000, of legal expenses related to certain Visa litigation
previously accrued in the fourth quarter of 2007. Excluding the
partial reversal of Visa litigation legal expenses, noninterest expense was $4.0
million, or 20%, higher than in the first quarter of 2008.
The
provision for loan and lease losses for the first quarter of 2008 increased $1.4
million, or 225%, compared with the first quarter of 2007. The increased
provision for loan and lease losses is a result of an increase in the average
balance of loans outstanding, increased net loan charge-offs and continuing
weakness in the for-sale housing industry and the economy in
general.
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.
Note: First
quarter 2007 financial information does not include the results of Mountain Bank
Holding Company and Town Center Bancorp, which were both acquired on July 23,
2007.
Net
Interest Income
For the
three months ended March 31, 2008 the net interest margin remained stable when
compared to the same period in 2007. Interest income for the first
quarter of 2008 increased 18% over the same period in 2007 while interest
expense increased 10%. The increase in interest income in the current
quarter as compared to the same quarter in 2007 is primarily due to increased
volumes in loans coupled with increased yields on available-for-sale
securities. The increase in interest expense is attributed to
increased levels of deposits from the 2007 acquisitions as well as increased
volumes of short-term borrowings, primarily Federal Home Loan Bank
advances.
The
following tables set 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
ending March 31,
|
|
|
Three months
ending March 31,
|
|
|
|
2008
|
|
|
2007
|
|
(in
thousands)
|
|
Average
Balances
(1)
|
|
|
Interest
Earned
/
Paid
|
|
|
Average
Rate
|
|
|
Average
Balances
(1)
|
|
|
Interest
Earned
/
Paid
|
|
|
Average
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
$ |
2,304,588 |
|
|
$ |
41,303 |
|
|
|
7.21 |
% |
|
$ |
1,765,692 |
|
|
$ |
34,030 |
|
|
|
7.82 |
% |
Securities
(2)
|
|
|
582,056 |
|
|
|
8,300 |
|
|
|
5.74 |
% |
|
|
597,952 |
|
|
|
7,820 |
|
|
|
5.30 |
% |
Interest-earning
deposits with banks and federal funds sold
|
|
|
19,528 |
|
|
|
149 |
|
|
|
3.07 |
% |
|
|
28,728 |
|
|
|
371 |
|
|
|
5.24 |
% |
Total
interest-earning assets
|
|
|
2,906,172 |
|
|
$ |
49,752 |
|
|
|
6.89 |
% |
|
|
2,392,372 |
|
|
$ |
42,221 |
|
|
|
7.16 |
% |
Other
earning assets
|
|
|
47,159 |
|
|
|
|
|
|
|
|
|
|
|
38,776 |
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
232,682 |
|
|
|
|
|
|
|
|
|
|
|
154,877 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,186,013 |
|
|
|
|
|
|
|
|
|
|
$ |
2,586,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
844,845 |
|
|
$ |
9,087 |
|
|
|
4.33 |
% |
|
$ |
556,926 |
|
|
$ |
5,841 |
|
|
|
4.25 |
% |
Savings
accounts
|
|
|
114,868 |
|
|
|
115 |
|
|
|
0.40 |
% |
|
|
109,211 |
|
|
|
109 |
|
|
|
0.40 |
% |
Interest-bearing
demand and money market accounts
|
|
|
1,044,382 |
|
|
|
5,633 |
|
|
|
2.17 |
% |
|
|
921,411 |
|
|
|
6,209 |
|
|
|
2.73 |
% |
Total
interest-bearing deposits
|
|
|
2,004,095 |
|
|
|
14,835 |
|
|
|
2.98 |
% |
|
|
1,587,548 |
|
|
|
12,159 |
|
|
|
3.11 |
% |
Federal
Home Loan Bank advances
|
|
|
284,054 |
|
|
|
2,582 |
|
|
|
3.66 |
% |
|
|
233,243 |
|
|
|
3,179 |
|
|
|
5.53 |
% |
Securities
sold under agreements to repurchase
|
|
|
19,231 |
|
|
|
142 |
|
|
|
2.98 |
% |
|
|
44,445 |
|
|
|
596 |
|
|
|
5.44 |
% |
Other
borrowings and interest-bearing liabilities
|
|
|
5,252 |
|
|
|
60 |
|
|
|
4.57 |
% |
|
|
353 |
|
|
|
2 |
|
|
|
2.63 |
% |
Long-term
subordinated debt
|
|
|
25,527 |
|
|
|
487 |
|
|
|
7.67 |
% |
|
|
22,384 |
|
|
|
507 |
|
|
|
9.19 |
% |
Total
interest-bearing liabilities
|
|
|
2,338,159 |
|
|
$ |
18,106 |
|
|
|
3.11 |
% |
|
|
1,887,973 |
|
|
$ |
16,443 |
|
|
|
3.53 |
% |
Noninterest-bearing
deposits
|
|
|
451,095 |
|
|
|
|
|
|
|
|
|
|
|
413,588 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
46,488 |
|
|
|
|
|
|
|
|
|
|
|
28,172 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
350,271 |
|
|
|
|
|
|
|
|
|
|
|
256,292 |
|
|
|
|
|
|
|
|
|
Total
liabilities & shareholders’ equity
|
|
$ |
3,186,013 |
|
|
|
|
|
|
|
|
|
|
$ |
2,586,025 |
|
|
|
|
|
|
|
|
|
Net
interest income (2)
|
|
|
|
|
|
$ |
31,646 |
|
|
|
|
|
|
|
|
|
|
$ |
25,778 |
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.38 |
% |
|
|
|
|
|
|
|
|
|
|
4.37 |
% |
(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 $1.1 million
and $639,000 for the three months ended March 31, 2008 and 2007,
respectively.
|
(2)
|
Tax-exempt
income is calculated on a tax equivalent basis, based on a marginal tax
rate of 35%.
|
Provision
for Loan and Lease Losses
During
the first quarter of 2008, the Company allocated $2.1 million to its provision
for loan and lease losses, compared to $638,000 for the same period in 2007. The
increased provision for loan and lease losses is a result of an increase in the
average balance of loans outstanding, increased net loan charge-offs and
continuing weakness in the for-sale housing industry and the economy in
general. While the Pacific Northwest continues to outperform the rest
of the nation, we recognize that we are not immune to the economic challenges
outside the Pacific Northwest region as many customers are engaged in business
activities which are impacted by the national economy.
Noninterest
Income
Noninterest
income increased $4.0 million, or 64%, to $10.2 million for the first quarter of
2008 from $6.2 million one year ago. The increase in noninterest income is
primarily due to the gain on the redemption of Visa shares of $2.0 million and a
gain on sale of investment securities of $882,000. Service charges
and other fees increased $609,000, or 21%, during the first quarter of 2008 as
compared to the same period in 2007 reflecting a change in our deposit account
fee structure in conjunction with an increase in the number of deposit accounts.
Other income includes such things as income from mortgage and international
banking, miscellaneous loan fees, and income from our customer interest rate
swap program. Other income was favorably impacted this quarter by
$244,000 of income related to our customer interest rate swap program as well as
increase of $108,000 in miscellaneous loan fees and $56,000 of broker fees
received.
Noninterest
Expense
Total
noninterest expense increased $3.2 million, or 15%, for the first quarter of
2008 from $20.4 million for the first quarter of 2007. This increase is
primarily attributable to increases in compensation and employee benefits,
occupancy expenses and data processing expenses. Compensation and employee
benefits expenses increased $2 million in the first quarter of 2008 primarily as
a result of our third quarter 2007 acquisitions, general wage increases and
overall employee benefit expense increases. Occupancy expenses increased
$422,000 from the first quarter of 2007 primarily due to expenses related to the
above mentioned acquisitions and the opening of two additional branches late in
2007. Data processing expenses increased $248,000 from the first
quarter of 2007 as a result of increased volumes due in part by the
acquisitions. These increases were partially offset by lower legal
expenses related to the reversal of previously accrued expenses relating to the
Visa IPO. For additional information on the Visa IPO, see Note 11 to
the unaudited consolidated condensed financial statements in “Item 1. Financial
Statements (unaudited)” of this report.
Share-based payments: Pretax
share-based compensation recognized under SFAS 123(R) for the three months ended
March 31, 2008 was $384,000 compared to $238,000 for the same period in
2007. These expenses reduced basic earnings per share by $0.03 and $0.01 and
diluted earnings per share by $0.02 and $0.01, respectively for the quarters
ended March 31, 2008 and 2007. Share-based compensation expense recorded
during the quarter related to both stock options and stock awards. We anticipate
an additional $4.1 million in pre-tax share-based compensation through 2012 for
awards outstanding as of March 31, 2008. For additional information, see
Note 3 to the unaudited consolidated condensed financial statements in “Item 1.
Financial Statements (unaudited)” of this report.
The
following table presents selected items included in other noninterest expense
and the associated change from period to period:
|
|
Three months ended
March
31,
|
|
|
Increase
(Decrease)
Amount
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Core
deposit intangible amortization (“CDI”)
|
|
$ |
296 |
|
|
$ |
96 |
|
|
$ |
200 |
|
Software
support & maintenance
|
|
|
200 |
|
|
|
180 |
|
|
|
20 |
|
Telephone &
network communications
|
|
|
399 |
|
|
|
273 |
|
|
|
126 |
|
Federal
Reserve Bank processing fees
|
|
|
111 |
|
|
|
113 |
|
|
|
(2 |
) |
Supplies
|
|
|
263 |
|
|
|
288 |
|
|
|
(25 |
) |
Postage
|
|
|
362 |
|
|
|
291 |
|
|
|
71 |
|
Investor
relations
|
|
|
51 |
|
|
|
75 |
|
|
|
(24 |
) |
Travel
|
|
|
94 |
|
|
|
79 |
|
|
|
15 |
|
ATM
network
|
|
|
199 |
|
|
|
137 |
|
|
|
62 |
|
Sponsorships &
charitable contributions
|
|
|
159 |
|
|
|
87 |
|
|
|
72 |
|
Regulatory
premiums
|
|
|
502 |
|
|
|
42 |
|
|
|
460 |
|
Directors
fees
|
|
|
135 |
|
|
|
110 |
|
|
|
25 |
|
Employee
expenses
|
|
|
181 |
|
|
|
171 |
|
|
|
10 |
|
Insurance
|
|
|
120 |
|
|
|
110 |
|
|
|
10 |
|
Losses
on CRA investments (1)
|
|
|
128 |
|
|
|
181 |
|
|
|
(53 |
) |
Miscellaneous
|
|
|
760 |
|
|
|
601 |
|
|
|
159 |
|
Total
other non-interest expense
|
|
$ |
3,960 |
|
|
$ |
2,834 |
|
|
$ |
1,126 |
|
(1)
|
A
substantial portion of these losses is offset by credits taken as a
reduction in our current period income tax
expense.
|
In
managing our business, we review the efficiency ratio, on a fully
taxable-equivalent basis (see definition in table below), which is not defined
in accounting principles generally accepted in the United States. Our
efficiency ratio [noninterest expense divided by the sum of net interest income
and noninterest income on a tax-equivalent basis, excluding gains arising from
the sale of investment securities, OREO and the redemption of Visa shares as
well as the reversal of previously accrued Visa litigation expense] was 62.36%
and 63.39% for the first quarters of 2008 and 2007,
respectively. Other companies may define or calculate the efficiency
ratio differently. We believe this presentation provides investors
with a more accurate picture of our operating efficiency.
Reconciliation
of Financial Data to GAAP Financial Measures
|
|
Three
Months Ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Net
interest income (1)
|
|
$ |
30,327 |
|
|
$ |
24,703 |
|
Tax
equivalent adjustment for non-taxable investment securities interest
income (2)
|
|
|
1,319 |
|
|
|
1,075 |
|
Adjusted
net interest income
|
|
$ |
31,646 |
|
|
$ |
25,778 |
|
Noninterest
income
|
|
$ |
10,157 |
|
|
$ |
6,177 |
|
Gain
on sale of investment securities, net
|
|
|
(882 |
) |
|
|
— |
|
Gain
on redemption of Visa shares
|
|
|
(1,962 |
) |
|
|
— |
|
Tax
equivalent adjustment for BOLI income (2)
|
|
|
272 |
|
|
|
229 |
|
Adjusted
noninterest income
|
|
$ |
7,585 |
|
|
$ |
6,406 |
|
Noninterest
expense
|
|
$ |
23,554 |
|
|
$ |
20,402 |
|
Net
gain from OREO
|
|
|
23 |
|
|
|
— |
|
Reversal
of previously accrued Visa litigation expense
|
|
|
889 |
|
|
|
— |
|
Adjusted
noninterest expense
|
|
$ |
24,466 |
|
|
$ |
20,402 |
|
Efficiency
ratio
|
|
|
65.00 |
% |
|
|
66.07 |
% |
Efficiency
ratio (fully taxable-equivalent)
|
|
|
62.36 |
% |
|
|
63.39 |
% |
Tax
Rate
|
|
|
35.00 |
% |
|
|
35.00 |
% |
(1)
|
Amount
represents net interest income before provision for loan
losses.
|
(2)
|
Fully
taxable-equivalent basis: Non taxable revenue is increased by the
statutory tax rate to recognize the income tax benefit of the income
realized.
|
Income
Taxes
We
recorded an income tax provision of $3.9 million during the first quarter of
2008 compared to a provision of $2.6 million for the first quarter of 2007, with
both periods resulting in an effective tax rate of 26%. Our effective
tax rate is less than the statutory rate primarily due to earnings on both
tax-exempt municipal securities and bank owned life insurance. For additional
information, refer to our annual report on Form 10-K for the year ended
December 31, 2007.
Credit
Risk Management
The
extension of credit in the form of loans or other credit products to individuals
and businesses is one of our principal business activities. Our policies and
applicable laws and regulations require risk analysis as well as ongoing
portfolio and credit management. We manage our credit risk through lending limit
constraints, credit review, approval policies, and extensive, ongoing internal
monitoring. We also manage credit risk through diversification of the loan
portfolio by type of loan, type of industry, type of borrower and by limiting
the aggregation of debt limits to a single borrower. In analyzing our existing
portfolio, we review our consumer and residential loan portfolios by their
performance as a pool of loans since no single loan is individually significant
or judged by its risk rating, size, or potential risk of loss. In contrast, the
monitoring process for the commercial business, private banking, real estate
construction, and commercial real estate portfolios includes periodic reviews of
individual loans with risk ratings assigned to each loan and performance judged
on a loan by loan basis. We review these loans to assess the ability of the
borrower to service all of its interest and principal obligations and, as a
result, the risk rating may be adjusted accordingly. In the event that full
collection of principal and interest is not reasonably assured, the loan is
appropriately downgraded and, if warranted, placed on nonaccrual status even
though the loan may be current as to principal and interest payments.
Additionally, we review these types of loans for impairment in accordance with
SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan”.
Impaired loans are considered for nonaccrual status and will typically remain as
such until all principal and interest payments are brought current and the
prospects for future payments in accordance with the loan agreement appear
relatively certain.
Loan
policies, credit quality criteria, portfolio guidelines and other controls are
established under the guidance of our Chief Credit Officer and approved, as
appropriate, by the Board. Credit Administration, together with the loan
committee, has the responsibility for administering the credit approval process.
As another part of its control process, we use an independent internal credit
review and examination function to provide assurance that loans and commitments
are made and maintained as prescribed by our credit policies. This includes a
review of documentation when the loan is initially extended and subsequent
monitoring to assess continued performance and proper risk
assessment.
We have
good diversification of loan types within our portfolio. In addition,
the Pacific Northwest economy has continued to outperform the rest of the
nation. However, we recognize that we are not immune to the
challenges faced outside the Northwest region as many customers are engaged in
business activities which are impacted by the national
economy. Accordingly, we will continue to build reserves for possible
loan losses.
Loan
Portfolio Analysis
We are a
full service commercial bank, originating a wide variety of loans, but
concentrating our lending efforts on originating commercial business and
commercial real estate loans.
The
following table sets forth our loan portfolio by type of loan for the dates
indicated:
(in
thousands)
|
|
March 31,
2008
|
|
|
%
of
Total
|
|
|
December 31,
2007
|
|
|
%
of
Total
|
|
Commercial
business
|
|
$ |
780,177 |
|
|
|
33.9 |
% |
|
$ |
762,365 |
|
|
|
33.4 |
% |
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
62,733 |
|
|
|
2.7 |
|
|
|
60,991 |
|
|
|
2.7 |
|
Commercial
and five or more family residential commercial properties
|
|
|
843,148 |
|
|
|
36.7 |
|
|
|
852,139 |
|
|
|
37.3 |
|
Total
real estate
|
|
|
905,881 |
|
|
|
39.4 |
|
|
|
913,130 |
|
|
|
40.0 |
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
282,797 |
|
|
|
12.3 |
|
|
|
269,115 |
|
|
|
11.8 |
|
Commercial
and five or more family residential commercial properties
|
|
|
155,362 |
|
|
|
6.8 |
|
|
|
165,490 |
|
|
|
7.2 |
|
Total
real estate construction
|
|
|
438,159 |
|
|
|
19.1 |
|
|
|
434,605 |
|
|
|
19.0 |
|
Consumer
|
|
|
180,016 |
|
|
|
7.8 |
|
|
|
176,559 |
|
|
|
7.8 |
|
Sub-total
loans
|
|
|
2,304,233 |
|
|
|
100.2 |
|
|
|
2,286,659 |
|
|
|
100.2 |
|
Less:
Deferred loan fees
|
|
|
(3,768 |
) |
|
|
(0.2 |
) |
|
|
(3,931 |
) |
|
|
(0.2 |
) |
Total
loans
|
|
$ |
2,300,465 |
|
|
|
100.0 |
% |
|
$ |
2,282,728 |
|
|
|
100.0 |
% |
Loans
held for sale
|
|
$ |
5,944 |
|
|
|
|
|
|
$ |
4,482 |
|
|
|
|
|
Loan
growth for the first quarter 2008 was primarily from commercial business loans,
which rose $17.8 million, or 2.3% from year-end 2007, followed by an
increase of $13.7 million primarily in advances under pre-existing relationships
in our one-to-four family residential construction portfolio, and
finally, from a $3.5 million increase in consumer
loans. Commercial real estate and commercial construction loans
declined by $19.1 million, due to contractual repayments and refinancing
activity.
Commercial Loans: We are
committed to providing competitive commercial lending in our primary market
areas. We believe that increases in commercial lending during the three months
of 2008 were due to the confidence of business owners in the stability of our
local economy. Management expects to continue to expand its
commercial lending products and to emphasize, in particular, relationship
banking with businesses, and business owners.
Real Estate Loans: These
loans are used to collateralize outstanding advances from the FHLB. Generally,
our policy is to originate residential loans for sale to third parties. Those
residential loans are secured by properties located within our primary market
areas, and typically have loan-to-value ratios of 80% or lower. However, the
loan amounts may exceed 80% with private mortgage insurance.
Generally,
commercial and five-or-more family residential real estate loans are made to
borrowers who have existing banking relationships with us. Our underwriting
standards generally require that the loan-to-value ratio for these loans not
exceed 75% of appraised value, cost, or discounted cash flow value, as
appropriate, and that commercial properties maintain debt coverage ratios (net
operating income divided by annual debt servicing) of 1.2 or better. However,
underwriting standards can be influenced by competition and other factors. We
endeavor to maintain the highest practical underwriting standards while
balancing the need to remain competitive in our lending practices.
Real Estate Construction
Loans: We originate a variety of real estate construction loans.
One-to-four family residential construction loans are originated for the
construction of custom homes (where the home buyer is the borrower) and to
provide financing to builders for the construction of pre-sold homes and
speculative residential construction.
Consumer Loans: Consumer
loans include automobile loans, boat and recreational vehicle financing, home
equity and home improvement loans and miscellaneous personal loans.
Foreign Loans: Our banking
subsidiaries are not involved with loans to foreign companies or foreign
countries.
Nonperforming
Assets
Nonperforming
assets consist of: (i) nonaccrual loans; (ii) restructured loans, for which
concessions, including the reduction of interest rates below a rate otherwise
available to that borrower or the deferral of interest or principal, have been
granted due to the borrower’s weakened financial condition (interest on
restructured loans is accrued at the restructured rates when it is anticipated
that no loss of original principal will occur); (iii) other real estate
owned; and (iv) other personal property owned. Collectively, nonaccrual and
restructured loans are considered nonperforming loans.
Nonaccrual loans: The
consolidated financial statements are prepared according to the accrual basis of
accounting. This includes the recognition of interest income on the loan
portfolio, unless a loan is placed on a nonaccrual basis, which occurs when
there are serious doubts about the collectibility of principal or interest.
Generally our policy is to discontinue the accrual of interest on all loans past
due 90 days or more and place them on nonaccrual status. When a loan
is placed on nonaccrual status, any accrued but unpaid interest on that date is
removed from interest income.
At
March 31, 2008, total nonperforming assets consisted of $187,000 in other
personal property owned and nonperforming loans of $14.8 million, compared to
other real estate owned of $181,000 and nonperforming loans of $14.5 million at
December 31, 2007. The percent of non-performing assets to
period-end assets remained at .46% for March 31, 2008 and December 31,
2007.
The
following tables set forth, at the dates indicated, information with respect to
our nonaccrual loans, restructured loans, total nonperforming loans and total
nonperforming assets:
(in
thousands)
|
|
March 31,
2008
|
|
December 31,
2007 |
|
Nonaccrual:
|
|
|
|
|
Commercial
business
|
|
$ |
3,778 |
|
$ |
2,170 |
Real
estate:
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
384 |
|
|
204 |
Commercial
and five or more family residential
|
|
|
312 |
|
|
1,112 |
Total
real estate
|
|
|
696 |
|
|
1,316 |
Real
estate construction:
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
5,804 |
|
|
6,005 |
Commercial
and five or more family residential
|
|
|
3,676 |
|
|
3,676 |
Total
real estate construction
|
|
|
9,480 |
|
|
9,681 |
Consumer
|
|
|
414 |
|
|
838 |
Total
nonaccrual loans
|
|
|
14,368 |
|
|
14,005 |
Restructured:
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
468 |
|
|
456 |
Total
nonperforming loans
|
|
|
14,836 |
|
|
14,461 |
Other
real estate owned
|
|
|
— |
|
|
181 |
Other
personal property owned
|
|
|
187 |
|
|
— |
Total
nonperforming assets
|
|
$ |
15,023 |
|
$ |
14,642 |
Nonperforming
assets are centered in a small number of lending relationships which management
considers adequately reserved. Generally, these relationships are
well collateralized though loss of principal on certain of these loans will
remain in question until the loans are paid or collateral is
liquidated.
The
majority of non-performing assets are centered in four credits, three of which
are real estate construction loans and one of which is commercial
business. The first relationship is a single $4.6 million credit
originated in October of 2006 in which Columbia Bank participates with another
lender who acts as agent in the transaction. The borrower is engaged
in the business of selling residential lots to builders of the purpose of
constructing single family residences. The borrower’s inability to
obtain final plat approval prior to the expiration of agreements for the sale of
lots at a predetermined price combined with softening market conditions resulted
in new agreements for the sale of lots at prices reduced from the original
agreements. The second relationship is for money we advanced in 2005
for the construction of an income-producing property along the Oregon
coast. The loans total approximately $1.5 million at March 31, 2008
and became past due as the borrower encountered operational challenges including
delays, cost overruns and the inability to lease up the building as originally
anticipated. The third relationship is a $2.4 million credit which
reflects continued stress in real-estate related lending. The final
relationship is a commercial client which has been negatively impacted by the
decline in the for-sale housing market. This client has now obtained
financing from another lender and we are in the process of transitioning this
account to the new lender. We will continue our collection efforts
and liquidation of collateral to recover as large a portion of the nonperforming
assets as possible.
Allowance
for Loan and Lease Losses
At
March 31, 2008, our allowance for loan and lease losses (“ALLL”) was $27.9
million, or 1.21% of total loans (excluding loans held for sale), 188% of
nonperforming loans and 186% of nonperforming assets. This compares with an
allowance of $26.6 million, or 1.17% of the total loan portfolio (excluding
loans held for sale), 184% of nonperforming loans and 182% of nonperforming
assets at December 31, 2007.
There
have been no significant changes during the first quarter of 2008 in estimation
methods or assumptions that affected our methodology for assessing the
appropriateness of the ALLL. Adjustments to the percentages of the allowance
allocated to loan categories are made based on trends with respect to
delinquencies and problem loans within each pool of loans. The Company maintains
a conservative approach to credit quality and will continue to prudently add to
its loan and lease loss allowance as necessary in order to maintain adequate
reserves, factoring in changes and trends in the local and national
economy. Management carefully monitors and evaluates the loan
portfolio and continues to emphasize credit quality and strengthening of its
loan monitoring systems and controls.
In
addition to the ALLL, we maintain an allowance for unfunded loan commitments and
letters of credit. We report this allowance as a component of other liabilities
on our consolidated balance sheet. We determine this amount using estimates of
the probability of the ultimate funding and losses related to those credit
exposures. This methodology is similar to the methodology we use for determining
the adequacy of our ALLL. At March 31, 2008 and December 31, 2007, our
allowance for unfunded loan commitments and letters of credit was $409,000 and
$339,000, respectively.
The
following table provides an analysis of our allowance for loan and lease losses
at the dates and the periods indicated:
|
|
Three
Months Ended
March 31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
26,599 |
|
|
$ |
20,182 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
(359 |
) |
|
|
(97 |
) |
Residential
construction, land and acquisitions
|
|
|
(107 |
) |
|
|
— |
|
Consumer
|
|
|
(749 |
) |
|
|
(56 |
) |
Total
charge-offs
|
|
|
(1,215 |
) |
|
|
(153 |
) |
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
31 |
|
|
|
98 |
|
Commercial
real estate
|
|
|
300 |
|
|
|
9 |
|
Consumer
|
|
|
123 |
|
|
|
45 |
|
Total
recoveries
|
|
|
454 |
|
|
|
152 |
|
Net
charge-offs
|
|
|
(761 |
) |
|
|
(1 |
) |
Provision
charged to expense
|
|
|
2,076 |
|
|
|
638 |
|
Ending
balance
|
|
$ |
27,914 |
|
|
$ |
20,819 |
|
Total
loans, net at end of period (1)
|
|
$ |
2,300,465 |
|
|
$ |
1,833,852 |
|
Allowance
for loan and lease losses to total loans
|
|
|
1.21
|
% |
|
|
1.14 |
% |
(1)
|
Excludes
loans held for sale
|
Securities
All of
our securities are classified as available for sale and carried at fair value.
These securities are used by management as part of our asset/liability
management strategy and may be sold in response to changes in interest rates or
significant prepayment risk. In accordance with our investment strategy,
management monitors market conditions with a view to realize gains on its
available for sale securities portfolio when prudent. During the quarter, we
recorded a gain on sale of investment securities of $882,000. The
gain resulted from the execution of a strategy to extend the weighted average
life of approximately $50 million of the investment portfolio. At
March 31, 2008 and December 31, 2007, the market value of securities
available for sale had an unrealized gain, net of tax, of $3.6 million and $1.7
million, respectively. The change in market value of securities available for
sale is due primarily to fluctuations in interest rates.
The
following table sets forth our securities portfolio by type for the dates
indicated:
(in
thousands)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise
|
|
$ |
29,174 |
|
|
$ |
61,300 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
355,815 |
|
|
|
303,742 |
|
State
and municipal securities
|
|
|
194,482 |
|
|
|
193,965 |
|
Other
securities
|
|
|
2,558 |
|
|
|
2,359 |
|
Total
|
|
$ |
582,029 |
|
|
$ |
561,366 |
|
Liquidity
and Sources of Funds
Our
primary sources of funds are customer deposits. Additionally, we utilize
advances from the Federal Home Loan Bank of Seattle (the “FHLB”) and wholesale
repurchase agreements to supplement our funding needs. These funds, together
with loan repayments, loan sales, retained earnings, equity and other borrowed
funds are used to make loans, to acquire securities and other assets, and to
fund continuing operations.
Deposit
Activities
Our
deposit products include a wide variety of transaction accounts, savings
accounts and time deposit accounts. Core deposits (demand deposit, savings, and
money market accounts) increased $10.6 million since year-end 2007 and
certificate of deposit balances increased $17.9 million, or 2%, compared to
year-end 2007.
We have
established a branch system to serve our consumer and business depositors. In
addition, management’s strategy for funding asset growth is to make use of
brokered and other wholesale deposits on an as-needed basis. At March 31,
2008 and December 31, 2007, brokered and other wholesale deposits
(excluding public deposits) totaled $117 million and $72 million,
respectively. The brokered deposits have varied
maturities.
The
following table sets forth the Company’s deposit base by type of product for the
dates indicated:
(in
thousands)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
Deposit
Composition |
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and other non interest bearing
|
|
$ |
508,955 |
|
|
$ |
468,237 |
|
|
$ |
447,052 |
|
Interest
bearing demand
|
|
|
471,980 |
|
|
|
478,596 |
|
|
|
430,967 |
|
Money
market
|
|
|
584,834 |
|
|
|
609,502 |
|
|
|
530,542 |
|
Savings
|
|
|
116,486 |
|
|
|
115,324 |
|
|
|
110,236 |
|
Certificates
of deposit
|
|
|
844,259 |
|
|
|
826,402 |
|
|
|
562,229 |
|
Total
deposits
|
|
$ |
2,526,514 |
|
|
$ |
2,498,061 |
|
|
$ |
2,081,026 |
|
Borrowings
We rely
on FHLB advances as another source of both short and long-term borrowings. FHLB
advances are secured by one-to-four family real estate mortgages and certain
other assets. At March 31, 2008, we had FHLB advances of $256.4 million,
compared to advances of $257.7 million at December 31, 2007.
We also
utilize wholesale repurchase agreements as a supplement to our funding sources.
Wholesale repurchase agreements are secured by mortgage-backed securities. At
March 31, 2008, we had repurchase agreements of $25.0 million, compared to
agreements of $0 million at December 31, 2007. Management anticipates that
we will continue to rely on both FHLB advances and wholesale repurchase
agreements in the future, and we will use those funds primarily to make loans
and purchase securities.
During
2001, the Company, through a special purpose trust (“the Trust”) participated in
a pooled trust preferred offering, whereby the Trust issued $22.0 million of 30
year floating rate capital securities. The capital securities constitute
guaranteed preferred beneficial interests in debentures issued by the Trust. The
debentures had an initial rate of 7.29% and a rate of 6.82% at March 31,
2008. The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted
quarterly. Through the Trust, we may call the debentures at any time for a
premium and after ten years at par, allowing us to retire the debt early if
market conditions are favorable. Through recent acquisition, the Company assumed
an additional $3.0 million in floating rate trust preferred obligations; these
debentures had a rate of 8.01% at March 31, 2008. The floating
rate is based on the 3-month LIBOR plus 3.75% and is adjusted
quarterly.
The trust
preferred obligations are classified as long-term subordinated debt and our
related investment in the Trust is recorded in other assets on the consolidated
balance sheets. The balance of the long-term subordinated debt was $25.5 million
at March 31, 2008 and December 31, 2007. The subordinated debt payable
to the Trust is on the same interest and payment terms as the trust preferred
obligations issued by the Trust.
Additionally,
we have a $20.0 million line of credit with a large commercial bank with an
interest rate indexed to LIBOR. At March 31, 2008 and December 31,
2007 there was $5 million outstanding on the line of credit. In the event of
discontinuance of the line by either party, we have up to two years to repay any
outstanding balance.
Contractual
Obligations & Commitments
We are
party to many contractual financial obligations, including repayment of
borrowings, operating and equipment lease payments, commitments to extend credit
and investments in affordable housing partnerships. At March 31, 2008, we
had commitments to extend credit of $775.4 million compared to $857.6 million at
December 31, 2007.
Capital
Resources
Shareholders’
equity at March 31, 2008 was $351.7 million, up 3% from $341.7 million at
December 31, 2007. The increase is due primarily to net income of $11
million for the first quarter of 2008. Shareholders’ equity was 10.8% of total
period-end assets at March 31, 2008 and December 31,
2007.
Capital Ratios: Banking
regulations require bank holding companies to maintain a minimum “leverage”
ratio of core capital to adjusted quarterly average total assets of at least 3%.
In addition, banking regulators have adopted risk-based capital guidelines,
under which risk percentages are assigned to various categories of assets and
off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I
capital generally consists of common shareholders’ equity and trust preferred
obligations, less goodwill and certain identifiable intangible assets, while
Tier II capital includes the allowance for loan losses and subordinated debt,
both subject to certain limitations. Regulatory minimum risk-based capital
guidelines require Tier I capital of 4% of risk-adjusted assets and total
capital (combined Tier I and Tier II) of 8% to be considered “adequately
capitalized”.
Federal
Deposit Insurance Corporation regulations set forth the qualifications necessary
for a bank to be classified as “well capitalized”, primarily for assignment of
FDIC insurance premium rates. To qualify as “well capitalized,” banks must have
a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted
capital ratio of at least 10%, and a leverage ratio of at least 5%. Failure to
qualify as “well capitalized” can negatively impact a bank’s ability to expand
and to engage in certain activities.
The
Company and its subsidiaries qualify as “well-capitalized” at March 31,
2008 and December 31, 2007.
|
|
Company
|
|
|
Columbia
Bank
|
|
|
Astoria
|
|
|
Requirements
|
|
|
|
3/31/2008
|
|
|
12/31/2007
|
|
|
3/31/2008
|
|
|
12/31/2007
|
|
|
3/31/2008
|
|
|
12/31/2007
|
|
|
Adequately
capitalized
|
|
|
Well-
capitalized
|
|
Total
risk-based capital ratio
|
|
|
11.07 |
% |
|
|
10.90 |
% |
|
|
10.74 |
% |
|
|
10.49 |
% |
|
|
10.79 |
% |
|
|
12.61 |
% |
|
|
8 |
% |
|
|
10 |
% |
Tier
1 risk-based capital ratio
|
|
|
10.00 |
% |
|
|
9.87 |
% |
|
|
9.67 |
% |
|
|
9.47 |
% |
|
|
9.58 |
% |
|
|
11.42 |
% |
|
|
4 |
% |
|
|
6 |
% |
Leverage
ratio
|
|
|
8.59 |
% |
|
|
8.54 |
% |
|
|
8.33 |
% |
|
|
8.23 |
% |
|
|
8.31 |
% |
|
|
9.50 |
% |
|
|
4 |
% |
|
|
5 |
% |
Stock
Repurchase Program
In March
2002 the Board of Directors approved a stock repurchase program whereby the
Company may systematically repurchase up to 500,000 of its outstanding shares of
Common Stock. The Company may repurchase shares from time to time in the open
market or in private transactions, under conditions which allow such repurchases
to be accretive to earnings while maintaining capital ratios that exceed the
guidelines for a well-capitalized financial institution. As of March 31,
2008 we have repurchased 64,788 shares of common stock in this current stock
repurchase program, none of which was repurchased in the periods covered by this
report.
A number
of measures are used to monitor and manage interest rate risk, including income
simulations and interest sensitivity (gap) analyses. An income simulation model
is the primary tool used to assess the direction and magnitude of changes in net
interest income resulting from changes in interest rates. Basic assumptions in
the model include prepayment speeds on mortgage-related assets, cash flows and
maturities of other investment securities, loan and deposit volumes and pricing.
These assumptions are inherently subjective and, as a result, the model cannot
precisely estimate net interest income or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes and changes in market conditions and management strategies, among other
factors. At March 31, 2008, based on the measures used to monitor and
manage interest rate risk, there has not been a material change in the Company’s
interest rate risk since December 31, 2007. For additional information,
refer to “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” referenced in the Company’s 2007 Annual Report on Form
10-K.
Evaluation
of Disclosure Controls and Procedures
An
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded
that as of the end of the period covered by this report, our disclosure controls
and procedures are effective in ensuring that the information required to be
disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934 is (i) accumulated and communicated to our management (including the
CEO and CFO) to allow timely decisions regarding required disclosure, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
Changes
in Internal Controls over Financial Reporting
There was
no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
The
Company and its banking subsidiaries are parties to routine litigation arising
in the ordinary course of business. Management believes that, based on the
information currently known to them, any liabilities arising from such
litigation will not have a material adverse impact on the Company’s financial
condition, results of operations or cash flows.
Our
business exposes us to certain risks. The following is a discussion of what we
currently believe are the most significant risks and uncertainties that may
affect our business, financial condition and future results.
Economic
downturns in the market areas we serve or a rapidly increasing interest rate
environment could increase the credit risk within the loan
portfolio.
Lending
activities are our largest source of credit risk, which is the risk that a
borrower will fail to meet their obligations in accordance with agreed upon
terms. We manage the credit risk inherent in our loan portfolio through the
establishment of sound underwriting policies and procedures. We maintain an
allowance for loan and lease losses as well as an allowance for unfunded loan
commitments and letters of credit to absorb anticipated future losses. Although
we consider our allowance for loan and lease losses and allowance for unfunded
loan commitments and letters of credit to be adequate at March 31, 2008, a
significant downturn in the economy could result in higher delinquencies and
defaults which would negatively impact our financial position. A substantial
portion of the loans in our portfolio are variable rate. While recently we have
been in a decreasing interest rate environment, a rapidly increasing interest
rate environment or inability to access credit or other funding could impair our
borrower’s ability to service the interest portion of their obligations to us.
This could result in decreased net income from increased provisions to the
allowance for loan and lease losses as well as decreased interest income
resulting from an increase in nonaccrual loans.
A
rapid change in interest rates could negatively impact net interest
income.
We are
exposed to interest rate risk, which is the risk that changes in prevailing
interest rates will adversely affect assets, liabilities, capital, income and
expenses at different times or in different amounts. We utilize a number of
measures to monitor and manage interest rate risk, such as income simulations
and interest sensitivity (gap) analyses. A number of factors that impact
interest rates are beyond our control such as general economic conditions as
well as governmental and regulatory policies. We cannot assure you
that we can minimize interest rate risk. The impact of rate changes
to our net interest income is determined by the amount of change and the time
horizon over which change occurs.
Competition.
We face
significant competition from other financial institutions for loans and
deposits. We believe the most significant competitive factor is customer
service, in addition to interest rates offered on loans and paid on deposits,
fee structures, branch locations, and the range of banking services and products
offered. Failure to maintain our service culture could increase the
susceptibility of our customer base to our competitors marketing campaigns and
thwart our efforts to expand our existing customer base.
Failure
to hire or retain management and staff could impede our ability to maintain or
grow earnings.
Maintaining
our current customer base is reliant upon the retention of key management and
personnel across all our business lines. We rely on these talented professionals
to manage lines of business which are critical in the generation of operating
revenue. In addition, the failure to attract new employees critical to the
execution of our expansion plan could result in diminished returns on our
investment in these initiatives.
The
tightening of available liquidity could limit our ability to meet loan demand,
which could adversely affect our earnings.
A
tightening of the credit market and the inability to obtain adequate money to
fund continued loan growth may negatively affect asset growth and, therefore,
earnings capability. In addition to any deposit growth, maturity of
investment securities and loan payments, we rely on certain wholesale funding
sources to fund loans. In the event of a downturn in the economy,
these additional funding sources could be negatively affected which could limit
the funds available to us.
Concentration
in real estate loans.
We have a
high concentration of loans secured by real estate and a downturn in the real
estate market, for any reason, could hurt our business and our
prospects. Our business activities and credit exposure are
concentrated in loans secured by real estate. A decline in the real
estate market could hurt our business because the collateral securing those
loans would decrease in value. A downturn in the local economy could
have a material adverse effect both on a borrower’s ability to repay these
loans, as well as the value of the real property held as
collateral. Our ability to recover on defaulted loans by foreclosing
and selling the real estate collateral would then be diminished and we would be
more likely to suffer losses on defaulted loans.
Allowance
for loan and lease losses may not be adequate to cover actual loan losses, which
could adversely affect earnings.
We
maintain an allowance for loan and lease losses in an amount that is believed
adequate to provide for losses inherent in the portfolio. The size of
the ALLL is determined through quarterly assessments of the probable estimated
losses in the loan portfolio. The ALLL is increased by provisions for
loan and lease losses charged to expense, and is reduced by loans charged off,
net of recoveries. We believe the best information available is used
by us to determine the ALLL. However, unforeseen market conditions could result
in adjustments to the ALLL, affecting net income, if circumstances differ from
the assumptions used in determining the ALLL. For additional
discussion see “Allowance for Loan and Lease Losses” in “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of
this report.
None.
None.
Item 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
On March
1, 2008, Columbia entered into a Supplemental Compensation Agreement (“Unit
Plan”) with Kent L. Roberts, Executive Vice President and Director of Human
Resources. The Unit Plan provides that Mr. Roberts will begin
receiving a monthly payment beginning the first month following the fifth
anniversary of the Unit Plan, based on an annual aggregate payment of $25,000
per year for five years. In the event Mr. Roberts’ employment is
terminated by the Company without cause, or he is terminated due to disability,
Mr. Roberts will be entitled to receive a payment based on the prorated portion
of his term of employment, payable in monthly payments following the tenth
anniversary of the plan. If Mr. Roberts leaves the employment of
Columbia prior to expiration during the five-year period, the entire amount is
forfeited. Once receiving the benefit, there is a non-competition
clause against the participant gaining employment with a competing
organization.
|
|
10
|
Form
of Supplemental Compensation Agreement between the Bank and Mr. Kent L.
Roberts
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32
|
Certification
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
|
COLUMBIA
BANKING SYSTEM, INC.
|
|
|
|
|
Date:
May 9, 2008
|
|
By
|
/s/ MELANIE J. DRESSEL
|
|
|
|
|
Melanie
J. Dressel
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
Date:
May 9, 2008
|
|
By
|
/s/ GARY R. SCHMINKEY
|
|
|
|
|
Gary
R. Schminkey
Executive
Vice President and Chief Financial Officer
(Principal
Financial Officer)
|
|
|
|
|
Date:
May 9, 2008
|
|
By
|
/s/ CLINT E. STEIN
|
|
|
|
|
Clint
E. Stein
Senior
Vice President and Chief Accounting Officer
(Principal
Accounting Officer)
|