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 June 30, 2009.
¨
|
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 issuer 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
(Issuer’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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes o Noo
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting company ¨
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 July 20, 2009 was 18,291,927
TABLE OF
CONTENTS
|
|
|
|
Page
|
|
|
|
|
|
|
|
Item 1.
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
Item 2.
|
|
17
|
|
|
|
Item 3.
|
|
35
|
|
|
|
Item 4.
|
|
35
|
|
|
|
|
|
|
|
Item 1.
|
|
36
|
|
|
|
Item 1A.
|
|
36
|
|
|
|
Item 2.
|
|
39
|
|
|
|
Item 3.
|
|
39
|
|
|
|
Item 4.
|
|
39
|
|
|
|
Item 5.
|
|
40
|
|
|
|
Item 6.
|
|
41
|
|
|
|
|
|
42
|
PART
I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
Columbia
Banking System, Inc.
(Unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
thousands except per share)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
29,250 |
|
|
$ |
37,334 |
|
|
$ |
59,051 |
|
|
$ |
78,637 |
|
Taxable
securities
|
|
|
4,195 |
|
|
|
4,895 |
|
|
|
8,403 |
|
|
|
9,875 |
|
Tax-exempt
securities
|
|
|
2,076 |
|
|
|
1,999 |
|
|
|
4,089 |
|
|
|
4,000 |
|
Federal
funds sold and deposits in banks
|
|
|
9 |
|
|
|
95 |
|
|
|
16 |
|
|
|
244 |
|
Total
interest income
|
|
|
35,530 |
|
|
|
44,323 |
|
|
|
71,559 |
|
|
|
92,756 |
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,874 |
|
|
|
11,461 |
|
|
|
12,766 |
|
|
|
26,296 |
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
|
|
700 |
|
|
|
1,995 |
|
|
|
1,465 |
|
|
|
4,577 |
|
Long-term
obligations
|
|
|
306 |
|
|
|
429 |
|
|
|
657 |
|
|
|
916 |
|
Other
borrowings
|
|
|
119 |
|
|
|
164 |
|
|
|
237 |
|
|
|
366 |
|
Total
interest expense
|
|
|
6,999 |
|
|
|
14,049 |
|
|
|
15,125 |
|
|
|
32,155 |
|
Net
Interest Income
|
|
|
28,531 |
|
|
|
30,274 |
|
|
|
56,434 |
|
|
|
60,601 |
|
Provision
for loan and lease losses
|
|
|
21,000 |
|
|
|
15,350 |
|
|
|
32,000 |
|
|
|
17,426 |
|
Net
interest income after provision for loan and lease losses
|
|
|
7,531 |
|
|
|
14,924 |
|
|
|
24,434 |
|
|
|
43,175 |
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
3,562 |
|
|
|
3,738 |
|
|
|
7,176 |
|
|
|
7,306 |
|
Merchant
services fees
|
|
|
1,880 |
|
|
|
2,162 |
|
|
|
3,650 |
|
|
|
4,078 |
|
Redemption
of Visa and Mastercard shares
|
|
|
49 |
|
|
|
1,066 |
|
|
|
49 |
|
|
|
3,028 |
|
Gain
on sale of investment securities, net
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
882 |
|
Bank
owned life insurance ("BOLI")
|
|
|
516 |
|
|
|
549 |
|
|
|
1,017 |
|
|
|
1,054 |
|
Other
|
|
|
993 |
|
|
|
1,790 |
|
|
|
2,082 |
|
|
|
3,114 |
|
Total
noninterest income
|
|
|
7,000 |
|
|
|
9,305 |
|
|
|
13,974 |
|
|
|
19,462 |
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
12,296 |
|
|
|
12,348 |
|
|
|
24,148 |
|
|
|
25,744 |
|
Occupancy
|
|
|
2,937 |
|
|
|
3,199 |
|
|
|
5,982 |
|
|
|
6,458 |
|
Merchant
processing
|
|
|
879 |
|
|
|
904 |
|
|
|
1,693 |
|
|
|
1,770 |
|
Advertising
and promotion
|
|
|
687 |
|
|
|
637 |
|
|
|
1,379 |
|
|
|
1,218 |
|
Data
processing
|
|
|
1,003 |
|
|
|
783 |
|
|
|
1,964 |
|
|
|
1,598 |
|
Legal
and professional fees
|
|
|
1,019 |
|
|
|
765 |
|
|
|
1,986 |
|
|
|
714 |
|
Taxes,
licenses and fees
|
|
|
597 |
|
|
|
796 |
|
|
|
1,393 |
|
|
|
1,547 |
|
Regulatory
premiums
|
|
|
2,492 |
|
|
|
394 |
|
|
|
3,499 |
|
|
|
836 |
|
Net
cost of operation of other real estate
|
|
|
225 |
|
|
|
-
- |
|
|
|
272 |
|
|
|
(23 |
) |
Other
|
|
|
3,179 |
|
|
|
3,541 |
|
|
|
6,179 |
|
|
|
7,059 |
|
Total
noninterest expense
|
|
|
25,314 |
|
|
|
23,367 |
|
|
|
48,495 |
|
|
|
46,921 |
|
Income
(loss) before income taxes
|
|
|
(10,783 |
) |
|
|
862 |
|
|
|
(10,087 |
) |
|
|
15,716 |
|
Provision
(benefit) for income taxes
|
|
|
(5,253 |
) |
|
|
(1,074 |
) |
|
|
(6,069 |
) |
|
|
2,803 |
|
Net
Income (Loss)
|
|
$ |
(5,530 |
) |
|
$ |
1,936 |
|
|
$ |
(4,018 |
) |
|
$ |
12,913 |
|
Net
Income (Loss) Applicable to Common Shareholders
|
|
$ |
(6,634 |
) |
|
$ |
1,903 |
|
|
$ |
(6,222 |
) |
|
$ |
12,787 |
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.37 |
) |
|
$ |
0.11 |
|
|
$ |
(0.35 |
) |
|
$ |
0.72 |
|
Diluted
|
|
$ |
(0.37 |
) |
|
$ |
0.11 |
|
|
$ |
(0.35 |
) |
|
$ |
0.71 |
|
Dividends
paid per common share
|
|
$ |
0.01 |
|
|
$ |
0.17 |
|
|
$ |
0.05 |
|
|
$ |
0.34 |
|
Weighted
average number of common shares outstanding
|
|
|
18,002 |
|
|
|
17,898 |
|
|
|
17,991 |
|
|
|
17,874 |
|
Weighted
average number of diluted common shares outstanding
|
|
|
18,002 |
|
|
|
18,021 |
|
|
|
17,991 |
|
|
|
17,998 |
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
CONSOLIDATED
CONDENSED BALANCE SHEETS
Columbia
Banking System, Inc.
(Unaudited)
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
|
|
|
|
|
$ |
106,507 |
|
|
$ |
84,787 |
|
Interest-earning
deposits with banks
|
|
|
|
|
|
|
|
|
226 |
|
|
|
3,943 |
|
Total
cash and cash equivalents
|
|
|
|
|
|
|
|
|
106,733 |
|
|
|
88,730 |
|
Securities
available for sale at fair value (amortized cost of $536,298 and $525,110,
respectively)
|
|
|
|
|
|
|
|
|
546,404 |
|
|
|
528,918 |
|
Federal
Home Loan Bank stock at cost
|
|
|
|
|
|
|
|
|
11,607 |
|
|
|
11,607 |
|
Loans
held for sale
|
|
|
|
|
|
|
|
|
2,272 |
|
|
|
1,964 |
|
Loans,
net of deferred loan fees of ($4,278) and ($4,033),
respectively
|
|
|
|
|
|
|
2,119,443 |
|
|
|
2,232,332 |
|
Less:
allowance for loan and lease losses
|
|
|
|
|
|
|
|
|
48,880 |
|
|
|
42,747 |
|
Loans,
net
|
|
|
|
|
|
|
|
|
2,070,563 |
|
|
|
2,189,585 |
|
Interest
receivable
|
|
|
|
|
|
|
|
|
10,474 |
|
|
|
11,646 |
|
Premises
and equipment, net
|
|
|
|
|
|
|
|
|
63,445 |
|
|
|
61,139 |
|
Other
real estate owned
|
|
|
|
|
|
|
|
|
8,369 |
|
|
|
2,874 |
|
Goodwill
|
|
|
|
|
|
|
|
|
95,519 |
|
|
|
95,519 |
|
Core
deposit intangible, net
|
|
|
|
|
|
|
|
|
5,368 |
|
|
|
5,908 |
|
Other
assets
|
|
|
|
|
|
|
|
|
101,103 |
|
|
|
99,189 |
|
Total
Assets
|
|
|
|
|
|
|
|
$ |
3,021,857 |
|
|
$ |
3,097,079 |
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
|
|
|
|
|
|
$ |
491,617 |
|
|
$ |
466,078 |
|
Interest-bearing
|
|
|
|
|
|
|
|
|
1,861,709 |
|
|
|
1,916,073 |
|
Total
deposits
|
|
|
|
|
|
|
|
|
2,353,326 |
|
|
|
2,382,151 |
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
|
|
|
|
|
|
|
|
161,000 |
|
|
|
200,000 |
|
Securities
sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
25,000 |
|
Other
borrowings
|
|
|
|
|
|
|
|
|
-
- |
|
|
|
201 |
|
Long-term
subordinated debt
|
|
|
|
|
|
|
|
|
25,636 |
|
|
|
25,603 |
|
Other
liabilities
|
|
|
|
|
|
|
|
|
45,024 |
|
|
|
48,739 |
|
Total
liabilities
|
|
|
|
|
|
|
|
|
2,609,986 |
|
|
|
2,681,694 |
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Preferred
stock (no par value, 76,898 aggregate liquidation
preference)
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Issued
and outstanding
|
|
|
77 |
|
|
|
77 |
|
|
|
74,015 |
|
|
|
73,743 |
|
Common
Stock (no par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares
|
|
|
63,033 |
|
|
|
63,033 |
|
|
|
|
|
|
|
|
|
Issued
and outstanding
|
|
|
18,264 |
|
|
|
18,151 |
|
|
|
234,016 |
|
|
|
233,192 |
|
Retained
earnings
|
|
|
|
|
|
|
|
|
|
|
95,939 |
|
|
|
103,061 |
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
7,901 |
|
|
|
5,389 |
|
Total
shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
411,871 |
|
|
|
415,385 |
|
Total
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
$ |
3,021,857 |
|
|
$ |
3,097,079 |
|
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
|
CONSOLIDATED
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
Columbia
Banking System, Inc.
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Number
of
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
(in
thousands)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
Balance
at January 1, 2008
|
|
|
-
- |
|
|
$ |
-
- |
|
|
|
17,953 |
|
|
$ |
226,550 |
|
|
$ |
110,169 |
|
|
$ |
5,012 |
|
|
$ |
341,731 |
|
Cumulative
effect of applying EITF 06-4 consensus
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(2,137 |
) |
|
|
-
- |
|
|
|
(2,137 |
) |
Adjusted
balance
|
|
|
-
- |
|
|
|
-
- |
|
|
|
17,953 |
|
|
|
226,550 |
|
|
|
108,032 |
|
|
|
5,012 |
|
|
|
339,594 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
12,913 |
|
|
|
-
- |
|
|
|
12,913 |
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss from securities, net of reclassification
adjustments
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(4,816 |
) |
|
|
(4,816 |
) |
Net
change in cash flow hedging instruments
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
438 |
|
|
|
438 |
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,378 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,535 |
|
Common
stock issued - stock option and other plans
|
|
|
-
- |
|
|
|
-
- |
|
|
|
93 |
|
|
|
1,399 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1,399 |
|
Common
stock issued - restricted stock awards, net of cancelled
awards
|
|
|
-
- |
|
|
|
-
- |
|
|
|
65 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
Share-based
payment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
739 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
739 |
|
Tax
benefit associated with share-based compensation
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
138 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
138 |
|
Cash
dividends paid on common stock
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(6,135 |
) |
|
|
-
- |
|
|
|
(6,135 |
) |
Balance
at June 30, 2008
|
|
|
-
- |
|
|
$ |
-
- |
|
|
|
18,111 |
|
|
$ |
228,826 |
|
|
$ |
114,810 |
|
|
$ |
634 |
|
|
$ |
344,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
77 |
|
|
$ |
73,743 |
|
|
|
18,151 |
|
|
$ |
233,192 |
|
|
$ |
103,061 |
|
|
$ |
5,389 |
|
|
$ |
415,385 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(4,018 |
) |
|
|
-
- |
|
|
|
(4,018 |
) |
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain from securities, net of reclassification
adjustments
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
4,061 |
|
|
|
4,061 |
|
Net
change in cash flow hedging instruments
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(879 |
) |
|
|
(879 |
) |
Pension
plan plan liability adjustment, net
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(670 |
) |
|
|
(670 |
) |
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,512 |
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,506 |
) |
Accretion
of preferred stock discount
|
|
|
-
- |
|
|
|
272 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(272 |
) |
|
|
-
- |
|
|
|
-
- |
|
Common
stock issued - stock option and other plans
|
|
|
-
- |
|
|
|
|
|
|
|
35 |
|
|
|
345 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
345 |
|
Common
stock issued - restricted stock awards, net of cancelled
awards
|
|
|
-
- |
|
|
|
-
- |
|
|
|
78 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
Share-based
payment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
575 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
575 |
|
Tax
benefit deficiency associated with share-based
compensation
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(96 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
(96 |
) |
Preferred
dividends
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1,922 |
) |
|
|
-
- |
|
|
|
(1,922 |
) |
Cash
dividends paid on common stock
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(910 |
) |
|
|
-
- |
|
|
|
(910 |
) |
Balance
at June 30, 2009
|
|
|
77 |
|
|
$ |
74,015 |
|
|
|
18,264 |
|
|
$ |
234,016 |
|
|
$ |
95,939 |
|
|
$ |
7,901 |
|
|
$ |
411,871 |
|
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
|
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
Columbia
Banking System, Inc.
(Unaudited)
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
(4,018 |
) |
|
$ |
12,913 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
32,000 |
|
|
|
17,426 |
|
Deferred
income tax benefit
|
|
|
(2,925 |
) |
|
|
(429 |
) |
Excess
tax benefit from stock-based compensation
|
|
|
-
- |
|
|
|
(138 |
) |
Stock-based
compensation expense
|
|
|
575 |
|
|
|
739 |
|
Depreciation,
amortization and accretion
|
|
|
3,435 |
|
|
|
3,664 |
|
Net
realized gain on sale of securities
|
|
|
-
- |
|
|
|
(882 |
) |
Net
realized gain (loss) on sale of other assets
|
|
|
154 |
|
|
|
(119 |
) |
Gain
on termination of cash flow hedging instruments
|
|
|
(1,364 |
) |
|
|
(467 |
) |
Net
change in:
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
(308 |
) |
|
|
1,159 |
|
Interest
receivable
|
|
|
1,172 |
|
|
|
2,333 |
|
Interest
payable
|
|
|
(1,558 |
) |
|
|
(2,184 |
) |
Other
assets
|
|
|
(857 |
) |
|
|
(1,431 |
) |
Other
liabilities
|
|
|
(2,559 |
) |
|
|
(7,584 |
) |
Net
cash provided by operating activities
|
|
|
23,747 |
|
|
|
25,000 |
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of securities available for sale
|
|
|
(43,951 |
) |
|
|
(76,907 |
) |
Proceeds
from sales of securities available for sale
|
|
|
-
- |
|
|
|
51,358 |
|
Proceeds
from principal repayments and maturities of securities available for
sale
|
|
|
32,311 |
|
|
|
30,105 |
|
Loans
originated and acquired, net of principal collected
|
|
|
77,529 |
|
|
|
3,717 |
|
Purchases
of premises and equipment
|
|
|
(4,663 |
) |
|
|
(7,019 |
) |
Proceeds
from disposal of premises and equipment
|
|
|
10 |
|
|
|
114 |
|
Purchase
of FHLB stock
|
|
|
-
- |
|
|
|
(5,653 |
) |
Proceeds
from termination of cash flow hedging instruments
|
|
|
-
- |
|
|
|
8,093 |
|
Improvements
and other changes to other real estate owned
|
|
|
(6 |
) |
|
|
-
- |
|
Proceeds
from sales of other real estate and other personal property
owned
|
|
|
3,571 |
|
|
|
204 |
|
Net
cash provided by investing activities
|
|
|
64,801 |
|
|
|
4,012 |
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(28,825 |
) |
|
|
(99,137 |
) |
Proceeds
from Federal Home Loan Bank and Federal Reserve Bank
borrowings
|
|
|
709,000 |
|
|
|
1,491,268 |
|
Repayment
from Federal Home Loan Bank and Federal Reserve Bank
borrowings
|
|
|
(748,000 |
) |
|
|
(1,419,938 |
) |
Proceeds
from repurchase agreement borrowings
|
|
|
-
- |
|
|
|
25,000 |
|
Net
increase (decrease) in other borrowings
|
|
|
(201 |
) |
|
|
46 |
|
Cash
dividends paid
|
|
|
(2,768 |
) |
|
|
(6,135 |
) |
Proceeds
from issuance of common stock
|
|
|
249 |
|
|
|
1,399 |
|
Excess
tax benefit from stock-based compensation
|
|
|
-
- |
|
|
|
138 |
|
Net
cash used in financing activities
|
|
|
(70,545 |
) |
|
|
(7,359 |
) |
Increase
in cash and cash equivalents
|
|
|
18,003 |
|
|
|
21,653 |
|
Cash
and cash equivalents at beginning of period
|
|
|
88,730 |
|
|
|
93,975 |
|
Cash
and cash equivalents at end of period
|
|
$ |
106,733 |
|
|
$ |
115,628 |
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
16,683 |
|
|
$ |
34,339 |
|
Cash
paid for income tax
|
|
$ |
500 |
|
|
$ |
8,652 |
|
Loans
transferred to other real estate owned
|
|
$ |
9,248 |
|
|
$ |
-
- |
|
|
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
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 subsidiary Columbia Bank. 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 six months
ended June 30, 2009 are not necessarily indicative of results to be anticipated
for the year ending December 31, 2009. 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 2008
Annual Report on Form 10-K.
Significant
Accounting Policies
The
significant accounting policies used in preparation of our consolidated
financial statements are disclosed in our 2008 Annual Report on Form 10-K. There
have not been any other changes in our significant accounting policies compared
to those contained in our 2008 10-K disclosure for the year ended
December 31, 2008.
2.
Accounting Pronouncements Recently Issued or Adopted
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation
46(R) (“SFAS 167”). SFAS No. 167 significantly changes
the criteria for determining whether the consolidation of a variable interest
entity is required. SFAS No. 167 also addresses the effect of changes
required by SFAS No. 166 on FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities and concerns regarding the application of certain provisions of
Interpretation No. 46(R), including concerns that the accounting and
disclosures under the Interpretation do not always provide timely and useful
information about an entity’s involvement in a variable interest entity. SFAS
No. 167 is effective for interim and annual reporting periods that begin
after November 15, 2009. The Company is currently assessing the impact of
the adoption of SFAS No. 167 on its consolidated financial position and
results of operations.
In April
2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies. This FSP amends and clarifies FASB Statement
No. 141 (revised 2007), Business Combinations, to
address application issues raised by preparers, auditors, and members of the
legal profession on initial recognition and measurement, subsequent measurement
and accounting, and disclosure of assets and liabilities arising from
contingencies in a business combination. This FSP is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
In April
2009, the Securities and Exchange Commission issued SAB No. 111. This
SAB amends and replaces Topic 5.M. in the SAB series entitled Other Than Temporary Impairment of
Certain Investments in Debt and Equity Securities to exclude debt
securities from its scope. The SEC released SAB No. 111 in response
to the FASB’s issuance of FSP FAS 115-2 and FAS 124-2, which provided guidance
for assessing whether an impairment of a debt security is other than
temporary. The Company will continue to apply the guidance, as
revised, in SAB Topic 5.M in assessing whether an impairment of an equity
security is other than temporary.
Recently
Adopted Accounting Pronouncements
In May
2009, the FASB issued Statement of Financial Accounting Standard No. 165, Subsequent Events (“SFAS
165”). This Statement sets forth the period after the balance sheet
date during which management of a reporting entity shall evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity shall recognize
events or transactions occurring after the balance sheet date in its financial
statements and the disclosures that an entity shall make about events or
transactions that occurred after the balance
sheet
date. This Statement became effective for the Company at June 30,
2009 (see Note 13) and had no impact on the Company’s financial condition or
results of operation.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make it more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities. The
Company adopted this FSP at June 30, 2009 and there was no effect on our
financial condition and results of operations as a result of applying the
guidance in this FSP.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This FSP requires disclosures about
the fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements. This FSP also amends APB Opinion No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. The Company adopted this
FSP at June 30, 2009 (see Note 12).
In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly. This FSP provides additional guidance for estimating
fair value in accordance with FASB Statement No. 157, Fair Value Measurements,
when the transaction volume and level of market activity for the asset or
liability have significantly decreased. This FSP also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. The Company adopted this FSP at June 30, 2009 and there was
no effect on our financial condition and results of operations as a result of
applying the guidance in this FSP.
In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Base Payment Transactions Are Participating Securities
(“FSP EITF 03-6-1”). Under this FSP, unvested share-based
payment awards that contain nonforfeitable rights to dividends will be
considered to be a separate class of common stock and will be included in the
basic EPS calculation using the two-class method that is described in FASB
Statement No. 128, Earnings
per Share. This FSP became effective for the Company on
January 1, 2009, and required retrospective adjustment of all prior periods
presented (see Note 3).
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 amends and requires enhanced
qualitative, quantitative and credit risk disclosures about an entity’s
derivative and hedging activities, but does not change the scope or accounting
principles of Statement No. 133. SFAS 161 became effective for fiscal
years and interim periods beginning after November 15, 2008. Because
SFAS 161 impacts the Company’s disclosure and not its accounting treatment for
derivative financial instruments and related hedged items, adoption of SFAS 161
did not impact the Company’s financial condition or results of operations (See
Note 11).
3.
Earnings per Common Share
Basic EPS
is computed by dividing income applicable to common shareholders by the weighted
average number of common shares outstanding for the period. Common
shares outstanding include common stock and vested restricted stock awards where
recipients have satisfied the vesting terms. Diluted EPS reflects the
assumed conversion of all dilutive securities. The Company calculates
earnings per share using the two-class method as described in SFAS 128 (see Note
2). The following table sets forth the computation of
basic and diluted earnings per share for the three and six months ended June 30,
2009 and 2008:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
thousands except per share)
|
|
2009
|
|
|
2008
(1)
|
|
|
2009
|
|
|
2008
(1)
|
|
Net
income (loss)
|
|
$ |
(5,530 |
) |
|
$ |
1,936 |
|
|
$ |
(4,018 |
) |
|
$ |
12,913 |
|
Preferred
dividends
|
|
|
(961 |
) |
|
|
-
- |
|
|
|
(1,922 |
) |
|
|
-
- |
|
Accretion
of issuance discount for preferred stock
|
|
|
(140 |
) |
|
|
-
- |
|
|
|
(272 |
) |
|
|
-
- |
|
Dividends
and undistributed earnings allocated to unvested share-based payment
awards
|
|
|
(3 |
) |
|
|
(33 |
) |
|
|
(10 |
) |
|
|
(126 |
) |
Net
income (loss) applicable to common shareholders
|
|
$ |
(6,634 |
) |
|
$ |
1,903 |
|
|
$ |
(6,222 |
) |
|
$ |
12,787 |
|
Basic
weighted average common shares outstanding
|
|
|
18,002 |
|
|
|
17,898 |
|
|
|
17,991 |
|
|
|
17,874 |
|
Dilutive
effect of potential common shares from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
granted under equity incentive program
|
|
|
-
- |
|
|
|
123 |
|
|
|
-
- |
|
|
|
124 |
|
Diluted
weighted average common shares outstanding (2)
|
|
|
18,002 |
|
|
|
18,021 |
|
|
|
17,991 |
|
|
|
17,998 |
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.37 |
) |
|
$ |
0.11 |
|
|
$ |
(0.35 |
) |
|
$ |
0.72 |
|
Diluted
(2)
|
|
$ |
(0.37 |
) |
|
$ |
0.11 |
|
|
$ |
(0.35 |
) |
|
$ |
0.71 |
|
Potentially
dilutive securities that were not included in the computation of diluted
EPS because to do so would be anti-dilutive.
|
|
|
957 |
|
|
|
37 |
|
|
|
958 |
|
|
|
37 |
|
(1)
|
The
Company adopted FSP EITF 03-6-1 on January 1, 2009. All prior
periods have been restated to the current period’s
presentation.
|
(2)
|
Due
to the net loss applicable to common shareholders in the second quarter
and first six months of 2009, basic shares were used to calculate diluted
earnings per share. Adding dilutive securities to the
denominator would result in
anti-dilution.
|
4.
Dividends
On
January 29, 2009, the Company declared a quarterly cash dividend of $0.04
per share, payable on February 25, 2009 to shareholders of record as of the
close of business on February 11, 2009. On April 22, 2009, the
Company declared a quarterly cash dividend of $0.01 per share, payable on May
20, 2009, to shareholders of record at the close of business on May 6,
2009. Subsequent to quarter end, on July 22, 2009, the Company
declared a quarterly cash dividend of $0.01 per share, payable on August 19,
2009, to shareholders of record at the close of business August 5,
2009. The decision to continue with the reduced quarterly dividend as
compared to recent quarters was based upon the Board of Directors’ review of the
Company’s dividend payout ratio and dividend yield balanced with the Company’s
desire to retain capital. 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 to the
Company are subject to both Federal and State regulatory
requirements.
5.
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.
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 relationships, 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, 2009 the Company began allocating the provision for loan and lease
losses to the reportable segments. Prior to 2009, the provision for
loan and lease losses was included in the “Other” category. Segment
net interest income after provision for loan and lease losses for the prior
period has been restated to be comparable to the same line item for the current
period.
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:
|
|
Three
Months Ended June 30, 2009
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
11,409 |
|
|
$ |
11,930 |
|
|
$ |
5,192 |
|
|
$ |
28,531 |
|
Provision
for loan and lease losses
|
|
|
(15,356 |
) |
|
|
(5,644 |
) |
|
|
-
- |
|
|
|
(21,000 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
(3,947 |
) |
|
|
6,286 |
|
|
|
5,192 |
|
|
|
7,531 |
|
Noninterest
income
|
|
|
642 |
|
|
|
2,213 |
|
|
|
4,145 |
|
|
|
7,000 |
|
Noninterest
expense
|
|
|
(3,401 |
) |
|
|
(6,309 |
) |
|
|
(15,604 |
) |
|
|
(25,314 |
) |
Income
(loss) before income taxes
|
|
|
(6,706 |
) |
|
|
2,190 |
|
|
|
(6,267 |
) |
|
|
(10,783 |
) |
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,253 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,530 |
) |
Total
assets
|
|
$ |
1,411,255 |
|
|
$ |
872,534 |
|
|
$ |
738,068 |
|
|
$ |
3,021,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2008
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
11,391 |
|
|
$ |
14,418 |
|
|
$ |
4,465 |
|
|
$ |
30,274 |
|
Provision
for loan and lease losses
|
|
|
(10,240 |
) |
|
|
(5,110 |
) |
|
|
-
- |
|
|
|
(15,350 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
1,151 |
|
|
|
9,308 |
|
|
|
4,465 |
|
|
|
14,924 |
|
Noninterest
income
|
|
|
1,140 |
|
|
|
5,399 |
|
|
|
2,766 |
|
|
|
9,305 |
|
Noninterest
expense
|
|
|
(2,854 |
) |
|
|
(10,028 |
) |
|
|
(10,485 |
) |
|
|
(23,367 |
) |
Income
(loss) before income taxes
|
|
|
(563 |
) |
|
|
4,679 |
|
|
|
(3,254 |
) |
|
|
862 |
|
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,074 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,936 |
|
Total
assets
|
|
$ |
1,388,252 |
|
|
$ |
1,138,968 |
|
|
$ |
642,387 |
|
|
$ |
3,169,607 |
|
|
|
Six
Months Ended June 30, 2009
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
21,682 |
|
|
$ |
24,247 |
|
|
$ |
10,505 |
|
|
$ |
56,434 |
|
Provision
for loan and lease losses
|
|
|
(21,786 |
) |
|
|
(10,214 |
) |
|
|
-
- |
|
|
|
(32,000 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
(104 |
) |
|
|
14,033 |
|
|
|
10,505 |
|
|
|
24,434 |
|
Noninterest
income
|
|
|
1,584 |
|
|
|
4,463 |
|
|
|
7,927 |
|
|
|
13,974 |
|
Noninterest
expense
|
|
|
(7,797 |
) |
|
|
(11,703 |
) |
|
|
(28,995 |
) |
|
|
(48,495 |
) |
Income
(loss) before income taxes
|
|
|
(6,317 |
) |
|
|
6,793 |
|
|
|
(10,563 |
) |
|
|
(10,087 |
) |
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,069 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,018 |
) |
Total
assets
|
|
$ |
1,411,255 |
|
|
$ |
872,534 |
|
|
$ |
738,068 |
|
|
$ |
3,021,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2008
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
22,724 |
|
|
$ |
29,843 |
|
|
$ |
8,034 |
|
|
$ |
60,601 |
|
Provision
for loan and lease losses
|
|
|
(11,767 |
) |
|
|
(5,659 |
) |
|
|
-
- |
|
|
|
(17,426 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
10,957 |
|
|
|
24,184 |
|
|
|
8,034 |
|
|
|
43,175 |
|
Noninterest
income
|
|
|
2,623 |
|
|
|
10,330 |
|
|
|
6,509 |
|
|
|
19,462 |
|
Noninterest
expense
|
|
|
(5,834 |
) |
|
|
(20,022 |
) |
|
|
(21,065 |
) |
|
|
(46,921 |
) |
Income
(loss) before income taxes
|
|
|
7,746 |
|
|
|
14,492 |
|
|
|
(6,522 |
) |
|
|
15,716 |
|
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,803 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,913 |
|
Total
assets
|
|
$ |
1,388,252 |
|
|
$ |
1,138,968 |
|
|
$ |
642,387 |
|
|
$ |
3,169,607 |
|
6.
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. 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:
Certain
preferred stock securities at fair value are priced using quoted prices for
identical instruments in active markets and are classified within level 1 of the
valuation hierarchy.
Other
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 value on a recurring basis at June 30, 2009 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 at
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
thousands)
|
|
June
30, 2009
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise preferred stock
|
|
$ |
496 |
|
|
$ |
496 |
|
|
$ |
-
- |
|
|
$ |
-
- |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
346,344 |
|
|
|
-
- |
|
|
|
346,344 |
|
|
|
-
- |
|
State
and municipal debt securities
|
|
|
198,602 |
|
|
|
-
- |
|
|
|
198,602 |
|
|
|
-
- |
|
Other
securities
|
|
|
962 |
|
|
|
-
- |
|
|
|
962 |
|
|
|
-
- |
|
Total
securities available for sale
|
|
$ |
546,404 |
|
|
$ |
496 |
|
|
$ |
545,908 |
|
|
$ |
-
- |
|
Other
assets (Interest rate contracts)
|
|
$ |
9,489 |
|
|
$ |
-
- |
|
|
$ |
9,489 |
|
|
$ |
-
- |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities (Interest rate contracts)
|
|
$ |
9,489 |
|
|
$ |
-
- |
|
|
$ |
9,489 |
|
|
$ |
-
- |
|
Certain
assets and liabilities are measured at fair value on a nonrecurring basis after
initial recognition such as loans measured for impairment and OREO. The
following methods were used to estimate the fair value of each such class of
financial instrument:
Impaired loans - A
loan is considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of the loan
agreement. Impaired loans are measured by the fair market value of the
collateral less estimated costs to sell.
Other real estate owned -
OREO is real property that the Bank has taken ownership of in partial or full
satisfaction of a loan or loans. OREO is recorded at the lower of the carrying
amount of the loan or fair value less estimated costs to sell. This amount
becomes the property’s new basis. Any write-downs based on the property fair
value less estimated cost to sell at the date of acquisition are charged to the
allowance for loan and lease losses. Management periodically reviews OREO in an
effort to ensure the property is carried at the lower of its new basis or fair
value, net of estimated costs to sell. Any write-downs subsequent to
acquisition are charged to earnings.
The
following table sets forth the Company’s financial assets that were accounted
for at fair value on a nonrecurring basis at June 30, 2009:
|
|
Fair
value at
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
thousands)
|
|
June
30, 2009
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Impaired
loans (1)
|
|
$ |
29,743 |
|
|
$ |
-
- |
|
|
$ |
-
- |
|
|
$ |
29,743 |
|
Other
real estate owned (2)
|
|
|
1,690 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1,690 |
|
|
|
$ |
31,433 |
|
|
$ |
-
- |
|
|
$ |
-
- |
|
|
$ |
31,433 |
|
(1)
|
In
accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, impaired loans totaling $44.2 million were
subject to specific valuation allowances and/or partial charge-offs
totaling $14.5 million during the quarter ended June 30,
2009.
|
(2)
|
Loans
receivable transferred to other real estate owned during the quarter ended
June 30, 2009 with a carrying amount of $1.9 million were written down to
their fair value of $1.7 million, less cost to sell of $169 thousand (or
$1.5 million), resulting in a loss of $399 thousand, which was charged to
the allowance for loan and lease losses during the
period.
|
7.
Other Comprehensive Income (Loss)
The
components of other comprehensive income (loss) are as follows:
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Net
unrealized gain(loss) from available for sale securities arising during
the period, net of tax of ($1,625) and $3,712
|
|
$ |
2,949 |
|
|
$ |
(6,737 |
) |
Net
change in cash flow hedging instruments, net of tax of $249 and
$124
|
|
|
(452 |
) |
|
|
(225 |
) |
Pension
plan liability adjustment, net of tax of ($10) and $0
|
|
|
19 |
|
|
|
-
- |
|
Other
comprehensive income (loss)
|
|
$ |
2,516 |
|
|
$ |
(6,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Unrealized
gain(loss) from securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding gain(loss) from available for sale securities arising
during the period, net of tax of $(2,237) and $2,345
|
|
$ |
4,061 |
|
|
$ |
(4,245 |
) |
Reclassification
adjustment of net gain from sale of available for sale securities included
in income, net of tax of $0 and $311
|
|
|
-
- |
|
|
|
(571 |
) |
Net
unrealized gain (loss) from securities, net of reclassification
adjustment
|
|
|
4,061 |
|
|
|
(4,816 |
) |
Cash
flow hedging instruments:
|
|
|
|
|
|
|
|
|
Net
unrealized gain from cash flow hedging instruments arising during the
period, net of tax of $0 and $(425)
|
|
|
-
- |
|
|
|
739 |
|
Reclassification
adjustment of net gain included in income, net of tax of $485 and
$166
|
|
|
(879 |
) |
|
|
(301 |
) |
Net
change in cash flow hedging instruments
|
|
|
(879 |
) |
|
|
438 |
|
Pension
plan liability adjustment:
|
|
|
|
|
|
|
|
|
Unrecognized
net actuarial loss during period, net of tax of $379 and
$0
|
|
|
(689 |
) |
|
|
-
- |
|
Less:
amortization of unrecognized net actuarial loss included in net periodic
pension cost, net of tax of ($10) and $0
|
|
|
19 |
|
|
|
-
- |
|
Pension
plan liability adjustment, net
|
|
|
(670 |
) |
|
|
-
- |
|
Other
comprehensive income (loss)
|
|
$ |
2,512 |
|
|
$ |
(4,378 |
) |
8.
Securities
The
following tables summarize the amortized cost, gross unrealized gains and
losses, and the resulting fair value of securities available for sale at June
30, 2009 and December 31, 2008:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
(in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise preferred stock
|
|
$ |
488 |
|
|
$ |
76 |
|
|
$ |
(68 |
) |
|
$ |
496 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
337,650 |
|
|
|
8,882 |
|
|
|
(188 |
) |
|
|
346,344 |
|
State
and municipal securities
|
|
|
197,160 |
|
|
|
5,064 |
|
|
|
(3,622 |
) |
|
|
198,602 |
|
Other
securities
|
|
|
1,000 |
|
|
|
-
- |
|
|
|
(38 |
) |
|
|
962 |
|
Total
|
|
$ |
536,298 |
|
|
$ |
14,022 |
|
|
$ |
(3,916 |
) |
|
$ |
546,404 |
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise
|
|
$ |
488 |
|
|
$ |
- - |
|
|
$ |
-
- |
|
|
$ |
488 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
335,207 |
|
|
|
6,889 |
|
|
|
(258 |
) |
|
|
341,838 |
|
State
and municipal securities
|
|
|
188,415 |
|
|
|
2,547 |
|
|
|
(5,309 |
) |
|
|
185,653 |
|
Other
securities
|
|
|
1,000 |
|
|
|
-
- |
|
|
|
(61 |
) |
|
|
939 |
|
Total
|
|
$ |
525,110 |
|
|
$ |
9,436 |
|
|
$ |
(5,628 |
) |
|
$ |
528,918 |
|
The fair
value of temporarily impaired securities, the amount of unrealized losses and
the length of time these unrealized losses existed as of June 30, 2009 and
December 31, 2008:
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(in
thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise preferred stock
|
|
$ |
264 |
|
|
$ |
(68 |
) |
|
$ |
-
- |
|
|
$ |
- |
|
|
$ |
264 |
|
|
$ |
(68 |
) |
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
8,502 |
|
|
|
(188 |
) |
|
|
-
- |
|
|
|
- |
|
|
|
8,502 |
|
|
|
(188 |
) |
State
and municipal securities
|
|
|
36,755 |
|
|
|
(1,189 |
) |
|
|
41,303 |
|
|
|
(2,433 |
) |
|
|
78,058 |
|
|
|
(3,622 |
) |
Other
securities
|
|
|
-
- |
|
|
|
-
- |
|
|
|
962 |
|
|
|
(38 |
) |
|
|
962 |
|
|
|
(38 |
) |
Total
|
|
$ |
45,521 |
|
|
$ |
(1,445 |
) |
|
$ |
42,265 |
|
|
$ |
(2,471 |
) |
|
$ |
87,786 |
|
|
$ |
(3,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(in
thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise stock
|
|
$ |
-
- |
|
|
$ |
-
- |
|
|
$ |
-
- |
|
|
$ |
-
- |
|
|
$ |
-
- |
|
|
$ |
-
- |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
562 |
|
|
|
(3 |
) |
|
|
17,414 |
|
|
|
(255 |
) |
|
|
17,976 |
|
|
|
(258 |
) |
State
and municipal securities
|
|
|
95,560 |
|
|
|
(4,744 |
) |
|
|
6,863 |
|
|
|
(565 |
) |
|
|
102,423 |
|
|
|
(5,309 |
) |
Other
securities
|
|
|
-
- |
|
|
|
-
- |
|
|
|
939 |
|
|
|
(61 |
) |
|
|
939 |
|
|
|
(61 |
) |
Total
|
|
$ |
96,122 |
|
|
$ |
(4,747 |
) |
|
$ |
25,216 |
|
|
$ |
(881 |
) |
|
$ |
121,338 |
|
|
$ |
(5,628 |
) |
The
unrealized losses on the above securities are primarily attributable to
fluctuations in market interest rates subsequent to their purchase by the
Company. In addition, management does not intend to sell any impaired
securities nor does available evidence suggest it is more likely than not that
management will be required to sell any impaired
securities. Management believes the nature of securities in the
Bank’s investment portfolio present a very high probability of a recovery of the
securities’ amortized cost basis, as the majority of the securities held are
backed by government agencies or government-sponsored
enterprises. However, this recovery may not occur for some time,
perhaps greater than the one-year time horizon or perhaps even at
maturity.
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 and six months ended June 30, 2009 and 2008:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
44,249 |
|
|
$ |
27,914 |
|
|
$ |
42,747 |
|
|
$ |
26,599 |
|
Provision
charged to expense
|
|
|
21,000 |
|
|
|
15,350 |
|
|
|
32,000 |
|
|
|
17,426 |
|
Loans
charged off
|
|
|
(16,797 |
) |
|
|
(1,688 |
) |
|
|
(26,504 |
) |
|
|
(2,903 |
) |
Recoveries
|
|
|
428 |
|
|
|
148 |
|
|
|
637 |
|
|
|
602 |
|
Ending
balance
|
|
$ |
48,880 |
|
|
$ |
41,724 |
|
|
$ |
48,880 |
|
|
$ |
41,724 |
|
Changes
in the allowance for unfunded loan commitments and letters of credit are
summarized as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
550 |
|
|
$ |
349 |
|
|
$ |
500 |
|
|
$ |
349 |
|
Net
changes in the allowance for unfunded commitments and letters of
credit
|
|
|
25 |
|
|
|
110 |
|
|
|
75 |
|
|
|
110 |
|
Ending
balance
|
|
$ |
575 |
|
|
$ |
459 |
|
|
$ |
575 |
|
|
$ |
459 |
|
At June 30,
2009 and December 31, 2008, the total recorded investment in impaired loans was
$127.8 million and $106.8 million, respectively. At June 30, 2009,
$31.7 million of impaired loans had a specific valuation allowance of $5.6
million. At December 31, 2008, $8.3 million of impaired loans had a
specific valuation allowance of $1.2 million.
10.
Goodwill and Intangible Assets
At June
30, 2009 and December 31, 2008, the Company had $95.5 million in
goodwill. In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” goodwill is not amortized but is reviewed for potential
impairment at the reporting unit level during the third quarter on an annual
basis and between annual tests in certain circumstances such as material adverse
changes in legal, business, regulatory, and economic factors. An impairment loss
is recorded to the extent that the carrying amount of goodwill exceeds its
implied fair value. At June
30, 2009, the Company concluded there were no more likely than not indicators of
impairment and no interim impairment test was performed.
At June 30,
2009 and December 31, 2008, the Company had a core deposit intangible
(“CDI”) asset of $5.4 million and $5.9 million, respectively. 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 $271,000
and $296,000 for the three months ended June 30, 2009 and June 30, 2008 and
$541,000 and $592,000 for the six months ended June 30, 2009 and June 30, 2008,
respectively. The Company estimates that aggregate amortization expense on the
CDI will be $1.0 million for 2009, $963,000 for 2010, $893,000 for 2011 and
$832,000 for 2012. The CDI amortization expense is included in other
noninterest expense on the consolidated condensed statements of
income.
11. Derivatives
and Hedging Activities
The
Company periodically enters into certain commercial loan interest rate swap
agreements in order to provide commercial loan customers the ability to convert
from variable to fixed interest rates. Under these agreements, the
Company enters into a variable-rate loan agreement with a customer in addition
to a swap agreement. This swap agreement effectively converts the
customer’s variable rate loan into a fixed rate. The Company then
enters into a corresponding swap agreement with a third party in order to offset
its exposure on the variable and fixed components of the customer
agreement. As the interest rate swap agreements with the customers
and third parties are not designated as hedges under SFAS 133, the instruments
are marked to market in earnings.
The
following table presents the fair value of derivative instruments at June 30,
2009 and 2008:
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
(in
thousands)
|
Balance
Sheet Location
|
|
Fair Value
|
|
Balance
Sheet Location
|
|
Fair Value
|
|
Balance
Sheet Location
|
|
Fair Value
|
|
Balance
Sheet Location
|
|
Fair Value
|
|
Derivatives
not designated as hedging instruments under Statement 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
Other
assets
|
|
$ |
9,489 |
|
Other
assets
|
|
$ |
3,151 |
|
Other
liabilities
|
|
$ |
9,489 |
|
Other
liabilities
|
|
$ |
3,151 |
|
12. Fair
Value of Financial Instruments
The
following table summarizes carrying amounts and estimated fair values of
selected financial instruments as well as assumptions used by the Company in
estimating fair value:
|
|
|
June
30, 2009
|
|
(in thousands)
|
Assumptions
Used in Estimating Fair Value
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
Approximately
equal to carrying value
|
|
$ |
106,507 |
|
|
$ |
106,507 |
|
Interest-earning
deposits with banks
|
Approximately
equal to carrying value
|
|
|
226 |
|
|
|
226 |
|
Securities
available for sale
|
Quoted
market prices, discounted expected future cash flows
|
|
|
546,404 |
|
|
|
546,404 |
|
Loans
held for sale
|
Approximately
equal to carrying value
|
|
|
2,272 |
|
|
|
2,272 |
|
Loans
|
Comparable
market statistics
|
|
|
2,070,563 |
|
|
|
1,899,290 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
Fixed-rate
certificates of deposit: Discounted expected future cash flows All
other deposits: Approximately equal to carrying value
|
|
$ |
2,353,326 |
|
|
$ |
2,357,481 |
|
FHLB
and FRB borrowings
|
Discounted
expected future cash flows
|
|
|
161,000 |
|
|
|
159,582 |
|
Repurchase
agreements
|
Discounted
expected future cash flows
|
|
|
25,000 |
|
|
|
29,900 |
|
Long-term
subordinated debt
|
Discounted
expected future cash flows
|
|
|
25,636 |
|
|
|
10,092 |
|
Off-Balance-Sheet Financial
Instruments: The fair value of commitments, guarantees, and letters
of credit at June 30, 2009, approximates the recorded amounts of the related
fees, which are not material. The fair value is estimated based upon fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate commitments, the fair value estimation takes into
consideration an interest rate risk factor. The fair value of guarantees and
letters of credit is based on fees currently charged for similar
agreements.
13. Subsequent
Events
Subsequent
events are events
or transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions
that provide additional evidence about conditions that existed at the date of
the balance sheet, including the estimates inherent in the process of preparing
financial statements. Nonrecognized subsequent events are events that
provide evidence about conditions that did not exist at the date of the balance
sheet but arose after that date. Management
has reviewed events occurring through July 31, 2009, the date the financial
statements were issued and no subsequent events occurred requiring accrual or
disclosure.
Item 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OFOPERATIONS
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, 2008 audited
consolidated financial statements and its accompanying notes included in our
Annual Report on Form 10-K. In the following discussion, unless otherwise noted,
references to increases or decreases in average balances in items of income and
expense for a particular period and balances at a particular date refer to the
comparison with corresponding amounts for the period or date one year
earlier.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report on Form 10-Q may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions that are not historical facts,
and other statements identified by words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or
words of similar meaning. These forward-looking statements are based
on current beliefs and expectations of management and are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. In
addition to the factors set forth in this Form 10-Q, the sections titled “Risk
Factors,” “Business” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” from our 2008 Annual Report on Form 10-K,
the following factors, among others, could cause actual results to differ
materially from the anticipated results:
·
|
local
and national economic conditions could be less favorable than expected or
could have a more direct and pronounced effect on us than expected and
adversely affect our ability to continue internal growth at historical
rates and maintain the quality of our earning
assets;
|
·
|
the
local housing/real estate market could continue to
decline;
|
·
|
the
risks presented by a continued economic recession, which could adversely
affect credit quality, collateral values, including real estate
collateral, investment values, liquidity and loan originations and loan
portfolio delinquency rates;
|
·
|
interest
rate changes could significantly reduce net interest income and negatively
affect funding sources;
|
·
|
projected
business increases following strategic expansion or opening of new
branches could be lower than
expected;
|
·
|
competition
among financial institutions could increase
significantly;
|
·
|
the
goodwill we have recorded in connection with acquisitions could become
impaired, which may have an adverse impact on our earnings and
capital;
|
·
|
the
reputation of the financial services industry could deteriorate, which
could adversely affect our ability to access markets for funding and to
acquire and retain customers;
|
·
|
legislation
or changes in regulatory requirements could adversely affect the
businesses in which we are engaged, our results of operations and
financial condition; and
|
·
|
the
efficiencies we expect to receive from investments in personnel,
acquisitions and infrastructure could not be
realized.
|
Given the
described uncertainties and risks, we cannot guarantee our future performance or
results of operations and you should not place undue reliance on these
forward-looking statements. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
CRITICAL
ACCOUNTING POLICIES
We have
established certain accounting policies in preparing our Consolidated Financial
Statements that are in accordance with accounting principles generally accepted
in the United States. Our significant accounting policies are presented in Note
1 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data” in our 2008 Annual Report on Form 10-K. Certain of these
policies require the use of judgments, estimates and economic assumptions which
may prove inaccurate or are subject to variation that may significantly affect
our reported results of operations and financial position for the periods
presented or in future periods. Management believes that the
judgments,
estimates
and economic assumptions used in the preparation of the Consolidated Financial
Statements are appropriate given the factual circumstances at the
time. We consider the following policies to be most critical in
understanding the judgments that are involved in preparing our consolidated
financial statements.
Allowance
for Loan and Lease Losses
The
allowance for loan and lease losses (“ALLL”) is established to absorb known and
inherent losses in our loan and lease portfolio. Our methodology in determining
the appropriate level of the ALLL includes components for a general valuation
allowance in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 5, Accounting for Contingencies,
a specific valuation allowance in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan and an unallocated component. Both quantitative and
qualitative factors are considered in determining the appropriate level of the
ALLL. Quantitative factors include historical loss experience, delinquency and
charge-off trends, collateral values, past-due and nonperforming loan trends and
the evaluation of specific loss estimates for problem loans. Qualitative factors
include existing general economic and business conditions in our market areas as
well as the duration of the current business cycle. Changes in any of the
factors mentioned could have a significant impact on our calculation of the
ALLL. Our ALLL policy and the judgments, estimates and economic assumptions
involved are described in greater detail in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation” of our
2008 Annual Report on Form 10-K.
Valuation
and Recoverability of Goodwill
Goodwill
represented $95.5 million of our $3.02 billion in total assets and $411.9
million in total shareholders’ equity as of June 30, 2009. Goodwill
is assigned to reporting units for purposes of impairment
testing. The Company has three reporting units: retail banking,
commercial banking, and private banking. The products and services of
companies previously acquired are comparable to the Company’s retail banking
operations. Accordingly, all of the Company’s goodwill is assigned to
the retail banking reporting unit. We review our goodwill for
impairment annually, during the third quarter. Goodwill of a
reporting unit is also tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Such indicators
may include, among others: a significant adverse change in legal factors or in
the general business climate; significant decline in our stock price and market
capitalization; unanticipated competition; the testing for recoverability of a
significant asset group within a reporting unit; and an adverse action or
assessment by a regulator. Any adverse change in these factors could
have a significant impact on the recoverability of goodwill and could have a
material impact on our consolidated financial statements.
When
required, the goodwill impairment test involves a two-step
process. We first test goodwill for impairment by comparing the fair
value of the retail banking reporting unit with its carrying
amount. If the fair value of the retail banking reporting unit
exceeds the carrying amount of the reporting unit, goodwill is not deemed to be
impaired, and no further testing would be necessary. If the carrying
amount of the retail banking reporting unit were to exceed the fair value of the
reporting unit, we would perform a second test to measure the amount of
impairment loss, if any. To measure the amount of any impairment
loss, we would determine the implied fair value of goodwill in the same manner
as if the retail banking reporting unit were being acquired in a business
combination. Specifically, we would allocate the fair value of the
retail banking reporting unit to all of the assets and liabilities of the
reporting unit in a hypothetical calculation that would determine the implied
fair value of goodwill. If the implied fair value of goodwill is less
than the recorded goodwill, we would record an impairment charge for the
difference.
The
accounting estimates related to our goodwill require us to make considerable
assumptions about fair values. Our assumptions regarding fair values
require significant judgment about economic factors, industry factors and
technology considerations, as well as our views regarding the growth and
earnings prospects of the retail banking unit. Changes in these
judgments, either individually or collectively, may have a significant effect on
the estimated fair values.
During the
fourth quarter of 2008, due to the poor overall economic conditions, declines in
our stock price as well as financial stocks in general, and a challenging
operating environment for the financial services industry, we determined a
triggering event had occurred and we conducted an interim impairment test of our
goodwill. Based on the results of the test, we determined no goodwill
impairment charges were required for the year ended December 31,
2008. Valuation methodologies and material assumptions utilized for
our annual and interim impairment tests conducted in 2008 are described in
greater detail in the “Goodwill” section of this discussion. At June
30, 2009, management concluded there were no more likely than not indicators of
goodwill impairment.
OVERVIEW
Earnings
Summary
The
Company reported a net loss for the second quarter of $5.5 million and a $6.6
million net loss applicable to common shareholders or $(0.37) per diluted common
share, compared to net income of $1.9 million or $0.11 per diluted share for the
second quarter of 2008. Net loss applicable to common shareholders
for 2009 is net of the preferred stock dividend of $961,000 and the accretion of
the preferred stock discount totaling $140,000. The net loss for the
period was primarily attributable to the large increase in the provision for
loan losses in the second quarter of 2009 reflective of the level of net
charge-offs and the continued deterioration in credit quality as evidenced by
the elevated level of nonperforming assets. Return on average assets
and return on average common equity were (0.73%) and (7.73%), respectively, for
the second quarter of 2009, compared with returns of 0.24% and 2.19%,
respectively for the same period of 2008.
The
Company reported a net loss for the first six months of 2009 of $4.0 million and
a $6.2 million net loss applicable to common shareholders or $(0.35) per diluted
common share, compared to net income applicable to common shareholders of $12.8
million or $0.71 per diluted share for the first six months of
2008. Net loss applicable to common shareholders for 2009 is net of
the preferred stock dividend of $1.9 million and the accretion of the preferred
stock discount totaling $272,000. Net income applicable to common
shareholders for 2008 includes an allocation of dividends and undistributed
earnings of $126,000 resulting from application of the two-class method of
calculating earnings per share. The decline in net income from the
prior year was primarily attributable to the large increase in the provision for
loan losses in the first six months of 2009 reflective of the level of net
charge-offs and the continued deterioration in credit quality. Return
on average assets and return on average equity were (0.27%) and (3.63%),
respectively, for the first six months of 2009, compared with returns of 0.82%
and 7.37%, respectively for the same period of 2008. As stated above,
the Company’s results for the first six months of 2009 declined from the same
period in 2008, primarily as a result of a provision for loan and lease losses
of $32.0 million.
Revenue
(net interest income plus noninterest income) for the three months ended June
30, 2009 was $35.5 million, 10% lower than the same period in
2008. The decrease was primarily driven by lower interest earned on
our loan portfolio due to the decline in interest rates and loans outstanding
from the second quarter 2008 as well as from the redemption of Visa and
Mastercard shares and the receipt of life insurance proceeds in
2008.
Revenue
for the first six months ended June 30, 2009 was $70.4 million, reflecting a 12%
decrease in noninterest income driven primarily by gains on sales of investment
securities, proceeds from the redemption of Visa and Mastercard shares and the
receipt of life insurance proceeds in the same period of last year.
Total
noninterest expense in the quarter ended June 30, 2009 was $25.3 million, an 8%
increase from the second quarter of 2008. Regulatory premiums, legal
and professional fees and data processing costs increased $2.1 million, $254,000
and $220,000, respectively over the same period in 2008.
Total
noninterest expense in the first six months of 2009 was $48.5 million, or 3%
higher than in the first six months of 2008, principally due to higher
regulatory premiums and legal and professional fees and data processing
costs. These increases were mitigated by reductions in compensations
and benefits of $1.6 million.
The
provision for loan and lease losses for the second quarter of 2009 was $21.0
million compared with $15.4 million for the second quarter of
2008. The additional provision is due to the continued decline in
real estate values stemming from the weakness in the current economy and
non-accrual loans of $136.1 million at June 30, 2009 compared to $72.3 million
at June 30, 2008. The provision increased the Company’s total
allowance for loan and lease losses to 2.31% of net loans at June 30, 2009 from
1.91% at year-end 2008 and 1.83% at June 30, 2008. Net charge-offs
for the current quarter were $16.4 million compared to $1.5 million for the
second quarter of 2008.
The
provision for loan and lease losses for the first six months of 2009 was $32.0
million compared with $17.4 million for the first six months of
2008. Net charge-offs for the first six months of 2009 were $25.9
million as compared with $2.3 million for the first six months of
2008.
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 the actions of regulatory
authorities.
Net
Interest Income
For the
three months ended June 30, 2009 we experienced a slight decrease in our net
interest margin when compared to the same period in 2008. This
decrease resulted primarily from a decline in the yield on earning
assets. For the second quarter of 2009 interest income decreased 20%
while interest expense decreased 50%, when compared to the same period in
2008. The decrease in interest income and interest expense for the
period is primarily due to rate decreases on both interest-earning assets and
interest-bearing liabilities. For the six months ended June 30, 2009
interest income decreased 23% over the same period in 2008 whereas interest
expense decreased 53%.
The
following table sets forth the average balances of all major categories of
interest-earning assets and interest-bearing liabilities, the total dollar
amounts of interest income on interest-earning assets and interest expense on
interest-bearing liabilities, the average yield earned on interest-earning
assets and average rate paid on interest-bearing liabilities by category and in
total net interest income and net interest margin.
|
|
Three
months ended June 30,
|
|
|
Three
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
(in
thousands)
|
|
Balances
(1)
|
|
|
Earned
/ Paid
|
|
|
Rate
|
|
|
Balances
(1)
|
|
|
Earned
/ Paid
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net (1) (2)
|
|
$ |
2,159,415 |
|
|
$ |
29,359 |
|
|
|
5.45 |
% |
|
$ |
2,297,661 |
|
|
$ |
37,437 |
|
|
|
6.55 |
% |
Securities
(2)
|
|
|
554,270 |
|
|
|
7,426 |
|
|
|
5.37 |
% |
|
|
584,780 |
|
|
|
8,172 |
|
|
|
5.62 |
% |
Interest-earning
deposits with banks and federal funds sold
|
|
|
14,401 |
|
|
|
9 |
|
|
|
0.24 |
% |
|
|
20,008 |
|
|
|
95 |
|
|
|
1.91 |
% |
Total
interest-earning assets
|
|
|
2,728,086 |
|
|
$ |
36,794 |
|
|
|
5.41 |
% |
|
|
2,902,449 |
|
|
$ |
45,704 |
|
|
|
6.33 |
% |
Other
earning assets
|
|
|
49,247 |
|
|
|
|
|
|
|
|
|
|
|
47,780 |
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
247,158 |
|
|
|
|
|
|
|
|
|
|
|
232,648 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,024,491 |
|
|
|
|
|
|
|
|
|
|
$ |
3,182,877 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
720,458 |
|
|
$ |
4,118 |
|
|
|
2.29 |
% |
|
$ |
798,844 |
|
|
$ |
7,369 |
|
|
|
3.71 |
% |
Savings
accounts
|
|
|
133,815 |
|
|
|
88 |
|
|
|
0.26 |
% |
|
|
115,889 |
|
|
|
103 |
|
|
|
0.36 |
% |
Interest-bearing
demand
|
|
|
462,433 |
|
|
|
551 |
|
|
|
0.48 |
% |
|
|
456,298 |
|
|
|
1,459 |
|
|
|
1.29 |
% |
Money
market accounts
|
|
|
533,487 |
|
|
|
1,117 |
|
|
|
0.84 |
% |
|
|
579,093 |
|
|
|
2,530 |
|
|
|
1.76 |
% |
Total
interest-bearing deposits
|
|
|
1,850,193 |
|
|
|
5,874 |
|
|
|
1.27 |
% |
|
|
1,950,124 |
|
|
|
11,461 |
|
|
|
2.36 |
% |
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
|
|
172,770 |
|
|
|
700 |
|
|
|
1.63 |
% |
|
|
313,763 |
|
|
|
1,995 |
|
|
|
2.56 |
% |
Securities
sold under agreements to repurchase
|
|
|
25,000 |
|
|
|
119 |
|
|
|
1.91 |
% |
|
|
25,000 |
|
|
|
118 |
|
|
|
1.89 |
% |
Other
borrowings and interest-bearing liabilities
|
|
|
161 |
|
|
|
0 |
|
|
|
0.50 |
% |
|
|
5,122 |
|
|
|
46 |
|
|
|
3.64 |
% |
Long-term
subordinated debt
|
|
|
25,626 |
|
|
|
306 |
|
|
|
4.80 |
% |
|
|
25,547 |
|
|
|
429 |
|
|
|
6.76 |
% |
Total
interest-bearing liabilities
|
|
|
2,073,750 |
|
|
$ |
6,999 |
|
|
|
1.35 |
% |
|
|
2,319,556 |
|
|
$ |
14,049 |
|
|
|
2.44 |
% |
Noninterest-bearing
deposits
|
|
|
487,192 |
|
|
|
|
|
|
|
|
|
|
|
463,101 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
45,588 |
|
|
|
|
|
|
|
|
|
|
|
45,361 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
417,961 |
|
|
|
|
|
|
|
|
|
|
|
354,859 |
|
|
|
|
|
|
|
|
|
Total
liabilities & shareholders' equity
|
|
$ |
3,024,491 |
|
|
|
|
|
|
|
|
|
|
$ |
3,182,877 |
|
|
|
|
|
|
|
|
|
Net
interest income (2)
|
|
|
|
|
|
$ |
29,795 |
|
|
|
|
|
|
|
|
|
|
$ |
31,655 |
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.38 |
% |
|
|
|
|
|
|
|
|
|
|
4.39 |
% |
(1)
|
Nonaccrual
loans have been included in the tables as loans carrying a zero yield.
Interest reversals for the second quarter ended June 30, 2009 related to
nonaccrual loans totaled $750,000. Amortized net deferred loan
fees were included in the interest income calculations. The amortization
of net deferred loan fees was $788,000 and $984,000 for the three months
ended June 30, 2009 and 2008
respectively.
|
(2)
|
Tax-exempt
income is calculated on a tax equivalent basis, based on a marginal tax
rate of 35%.
|
|
|
Six
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
(in
thousands)
|
|
Balances
(1)
|
|
|
Earned
/ Paid
|
|
|
Rate
|
|
|
Balances
(1)
|
|
|
Earned
/ Paid
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net (1) (2)
|
|
$ |
2,188,500 |
|
|
$ |
59,268 |
|
|
|
5.48 |
% |
|
$ |
2,301,125 |
|
|
$ |
78,825 |
|
|
|
6.89 |
% |
Securities
(2)
|
|
|
548,867 |
|
|
|
14,767 |
|
|
|
5.44 |
% |
|
|
583,418 |
|
|
|
16,472 |
|
|
|
5.68 |
% |
Interest-earning
deposits with banks and federal funds sold
|
|
|
13,678 |
|
|
|
16 |
|
|
|
0.23 |
% |
|
|
19,767 |
|
|
|
244 |
|
|
|
2.48 |
% |
Total
interest-earning assets
|
|
|
2,751,045 |
|
|
$ |
74,051 |
|
|
|
5.44 |
% |
|
|
2,904,310 |
|
|
$ |
95,541 |
|
|
|
6.62 |
% |
Other
earning assets
|
|
|
48,999 |
|
|
|
|
|
|
|
|
|
|
|
47,470 |
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
241,040 |
|
|
|
|
|
|
|
|
|
|
|
232,665 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,041,084 |
|
|
|
|
|
|
|
|
|
|
$ |
3,184,445 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
734,875 |
|
|
$ |
9,019 |
|
|
|
2.48 |
% |
|
$ |
821,845 |
|
|
$ |
16,457 |
|
|
|
4.03 |
% |
Savings
accounts
|
|
|
130,384 |
|
|
|
202 |
|
|
|
0.31 |
% |
|
|
115,378 |
|
|
|
217 |
|
|
|
0.38 |
% |
Interest-bearing
demand
|
|
|
465,715 |
|
|
|
1,230 |
|
|
|
0.53 |
% |
|
|
457,581 |
|
|
|
3,579 |
|
|
|
1.57 |
% |
Money
market accounts
|
|
|
528,648 |
|
|
|
2,315 |
|
|
|
0.89 |
% |
|
|
582,305 |
|
|
|
6,043 |
|
|
|
2.09 |
% |
Total
interest-bearing deposits
|
|
|
1,859,622 |
|
|
|
12,766 |
|
|
|
1.39 |
% |
|
|
1,977,109 |
|
|
|
26,296 |
|
|
|
2.67 |
% |
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
|
|
193,784 |
|
|
|
1,465 |
|
|
|
1.53 |
% |
|
|
298,908 |
|
|
|
4,577 |
|
|
|
3.08 |
% |
Securities
sold under agreements to repurchase
|
|
|
25,000 |
|
|
|
236 |
|
|
|
1.91 |
% |
|
|
22,115 |
|
|
|
260 |
|
|
|
2.36 |
% |
Other
borrowings and interest-bearing liabilities
|
|
|
204 |
|
|
|
1 |
|
|
|
0.56 |
% |
|
|
5,188 |
|
|
|
106 |
|
|
|
4.11 |
% |
Long-term
subordinated debt
|
|
|
25,618 |
|
|
|
657 |
|
|
|
5.18 |
% |
|
|
25,537 |
|
|
|
916 |
|
|
|
7.21 |
% |
Total
interest-bearing liabilities
|
|
|
2,104,228 |
|
|
$ |
15,125 |
|
|
|
1.45 |
% |
|
|
2,328,857 |
|
|
$ |
32,155 |
|
|
|
2.78 |
% |
Noninterest-bearing
deposits
|
|
|
471,532 |
|
|
|
|
|
|
|
|
|
|
|
457,099 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
46,472 |
|
|
|
|
|
|
|
|
|
|
|
45,906 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
418,852 |
|
|
|
|
|
|
|
|
|
|
|
352,583 |
|
|
|
|
|
|
|
|
|
Total
liabilities & shareholders' equity
|
|
$ |
3,041,084 |
|
|
|
|
|
|
|
|
|
|
$ |
3,184,445 |
|
|
|
|
|
|
|
|
|
Net
interest income (2)
|
|
|
|
|
|
$ |
58,926 |
|
|
|
|
|
|
|
|
|
|
$ |
63,386 |
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.32 |
% |
|
|
|
|
|
|
|
|
|
|
4.39 |
% |
(1)
|
Nonaccrual
loans have been included in the tables as loans carrying a zero yield.
Interest reversals for the six months ended June 30, 2009 related to
nonaccrual loans totaled $1.4 million. Amortized net deferred
loan fees were included in the interest income calculations. The
amortization of net deferred loan fees was $1.4 million and $2.1 million
for the six months ended June 30, 2009 and 2008
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 second quarter of 2009, the Company added $21 million to its provision for
loan and lease losses, compared to $15.4 million for the same period in
2008. The elevated provision is principally due to the continued
decline in real estate values resulting from the current economic
environment. The additional provision increased the Company’s total
allowance for loan losses to 2.31% of net loans at June 30,
2009. Comparing second quarter 2009 to the first quarter of
2009, the provision for loan and lease losses increased $10.0 million or
91%. See the discussion under “Nonperforming Assets” for
details related to the non-accrual loans.
Noninterest
Income
Noninterest
income for the second quarter of 2009 was $7.0 million, compared to noninterest
income of $9.3 million for the same period last year. The change was
primarily a result of the $1.1 million redemption of Visa and Mastercard shares
during the second quarter of 2008 as well as a reduction of $797,000 in other
noninterest income items. The reduction in other noninterest income
is primarily driven by the receipt of life insurance proceeds in 2008 of
$612,000 from the death of a former officer covered by BOLI. Removing
the impact of these non-recurring amounts, noninterest income for the second
quarter 2009 declined $627,000 over the same period in 2008. This
decline in noninterest income was the result of a decrease of $282,000 in
merchant card services fees driven primarily by reduced transaction
volume. In addition, decreases totaling $208,000 in other noninterest
income items such as mortgage banking fees and cash management fees contributed
to the decline in noninterest income. These declines were also driven
primarily by reduced transaction volumes and reduced values of assets under
management.
For the
six months ended June 30, 2009, noninterest income decreased $5.5 million, or
28%, compared to the same period in 2008. The decrease in noninterest
income is primarily due to the $3.0 million redemption of Visa and Mastercard
shares and the $882,000 gain on the sale of investment securities recorded in
the first quarter of 2008. In addition, as described above, other
noninterest income decreased $612,000 as a result of the life insurance proceeds
received in 2008.
Noninterest
Expense
Noninterest
expense for the second quarter of 2009 was $25.3 million, an 8% increase from
$23.4 million a year earlier. This increase is due primarily to
significantly higher FDIC premium assessment rates as well as the accrual of
$1.4 million for the special assessment imposed by the FDIC on all insured
depository institutions and increased data processing expenses. The
increased assessment rate as well as the special assessment is the result of
losses incurred by the Deposit Insurance Fund and not directly related to the
Company’s performance. Removing the impact of the increased
regulatory premiums noninterest expense declined slightly as compared to the
same period in 2008. Data processing expenses increased $220,000, or
28%, in the second quarter of 2009 as compared to the same period last
year. The increase is the result of our decision to outsource certain
aspects of our data processing. We were able to offset a portion of the
increased data processing expense by not increasing our staffing levels in this
area, not replacing aging equipment or purchasing new equipment.
Total
noninterest expense for the first six months of 2009 increased $1.6 million, or
3%, as compared to the same period in 2008. As described above, this
increase is primarily due to increases in regulatory premium assessments of $2.7
million compared to the same period in 2008. Decreases in
compensation and employee benefits of $1.6 million, occupancy expenses of
$476,000 and other expenses of $880,000 compared to the same period last year
were offset by increased legal and professional fees of $1.3
million. Legal and professional fees increased due to increased loan
collection activities in the current period as well as the first six months of
the prior period benefiting from a recovery of $889,000 related to our Visa
litigation reserve.
The
following table presents selected items included in other noninterest expense
and the associated change from period to period:
|
|
Three
months ended
|
|
|
|
|
|
Six
months ended
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
June
30,
|
|
|
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease) Amount
|
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease) Amount
|
|
Core
deposit intangible amortization ("CDI")
|
|
$ |
271 |
|
|
$ |
296 |
|
|
$ |
(25 |
) |
|
$ |
541 |
|
|
$ |
592 |
|
|
$ |
(51 |
) |
Software
support & maintenance
|
|
|
159 |
|
|
|
168 |
|
|
|
(9 |
) |
|
|
321 |
|
|
|
377 |
|
|
|
(56 |
) |
Telephone
& network communications
|
|
|
351 |
|
|
|
410 |
|
|
|
(59 |
) |
|
|
710 |
|
|
|
809 |
|
|
|
(99 |
) |
Federal
Reserve Bank processing fees
|
|
|
94 |
|
|
|
116 |
|
|
|
(22 |
) |
|
|
176 |
|
|
|
227 |
|
|
|
(51 |
) |
Supplies
|
|
|
242 |
|
|
|
366 |
|
|
|
(124 |
) |
|
|
431 |
|
|
|
629 |
|
|
|
(198 |
) |
Postage
|
|
|
319 |
|
|
|
390 |
|
|
|
(71 |
) |
|
|
630 |
|
|
|
751 |
|
|
|
(121 |
) |
Investor
relations
|
|
|
91 |
|
|
|
90 |
|
|
|
1 |
|
|
|
174 |
|
|
|
141 |
|
|
|
33 |
|
Travel
|
|
|
90 |
|
|
|
140 |
|
|
|
(50 |
) |
|
|
179 |
|
|
|
234 |
|
|
|
(55 |
) |
ATM
Network
|
|
|
146 |
|
|
|
144 |
|
|
|
2 |
|
|
|
288 |
|
|
|
343 |
|
|
|
(55 |
) |
Sponsorships
and charitable contributions
|
|
|
193 |
|
|
|
145 |
|
|
|
48 |
|
|
|
338 |
|
|
|
303 |
|
|
|
35 |
|
Directors
fees
|
|
|
105 |
|
|
|
95 |
|
|
|
10 |
|
|
|
213 |
|
|
|
230 |
|
|
|
(17 |
) |
Employee
expenses
|
|
|
86 |
|
|
|
141 |
|
|
|
(55 |
) |
|
|
188 |
|
|
|
322 |
|
|
|
(134 |
) |
Insurance
|
|
|
116 |
|
|
|
124 |
|
|
|
(8 |
) |
|
|
232 |
|
|
|
244 |
|
|
|
(12 |
) |
CRA
partnership investment expense (1)
|
|
|
103 |
|
|
|
218 |
|
|
|
(115 |
) |
|
|
190 |
|
|
|
346 |
|
|
|
(156 |
) |
Miscellaneous
|
|
|
813 |
|
|
|
698 |
|
|
|
115 |
|
|
|
1,568 |
|
|
|
1,511 |
|
|
|
57 |
|
Total
other noninterest expense
|
|
$ |
3,179 |
|
|
$ |
3,541 |
|
|
$ |
(362 |
) |
|
$ |
6,179 |
|
|
$ |
7,059 |
|
|
$ |
(880 |
) |
(1)
|
The
amounts shown represent pass-through losses from our interests in certain
low-income housing related limited partnerships. As a result of these
interests we receive federal low-income housing tax credits available
under the Internal Revenue Code. For the six months ended June 30, 2009,
$256,000 of such credits was taken as a reduction in our current period
income tax expense. In addition, our taxable income was decreased by
approximately $67,000 for the six-month period ended June 30, 2009 as a
result of the tax benefit associated with this investment
expense.
|
In
managing our business, we review the efficiency ratio, on a fully
taxable-equivalent basis, 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 any gains and losses arising from
nonrecurring transactions] was 63.79% for the second quarter 2009 and 63.69% for
the first six months of 2009, compared to 59.31% and 60.77% for the second
quarter and first six months of 2008, respectively. Due to the low
interest rate environment revenues declined faster than noninterest expense
resulting in an increase in the efficiency ratio.
Income
Taxes
We
recorded an income tax benefit of $5.3 million and $6.1 million for the second
quarter and first six months of 2009, compared with a benefit of $1.1 million
and a provision expense of $2.8 million for the same periods in 2008. Our effective tax rate
differs from the statutory tax rate due to our nontaxable income generated from
tax-exempt municipal bonds, investments in bank owned life insurance, and low
income housing credits. For additional information, please
refer to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
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 accounting principles generally accepted in
the United States. 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 diversification of loan types
within our portfolio. However, we are not immune to the current
instability in the real estate markets and construction related
industries. Accordingly, we will continue to be diligent in our risk
management practices and maintain, what we believe, are adequate reserves for
probable 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 the Company’s loan portfolio by type of loan for the dates
indicated:
|
|
June
30,
|
|
|
%
of
|
|
|
December
31,
|
|
|
%
of
|
|
(in
thousands)
|
|
2009
|
|
|
Total
|
|
|
2008
|
|
|
Total
|
|
Commercial
business
|
|
$ |
789,166 |
|
|
|
37.2 |
% |
|
$ |
810,922 |
|
|
|
36.3 |
% |
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
56,494 |
|
|
|
2.7 |
% |
|
|
57,237 |
|
|
|
2.6 |
% |
Commercial
and five or more family residential properties
|
|
|
857,181 |
|
|
|
40.4 |
% |
|
|
862,595 |
|
|
|
38.7 |
% |
Total
real estate
|
|
|
913,675 |
|
|
|
43.1 |
% |
|
|
919,832 |
|
|
|
41.3 |
% |
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
154,299 |
|
|
|
7.3 |
% |
|
|
209,682 |
|
|
|
9.4 |
% |
Commercial
and five or more family residential properties
|
|
|
56,124 |
|
|
|
2.7 |
% |
|
|
81,176 |
|
|
|
3.6 |
% |
Total
real estate construction
|
|
|
210,423 |
|
|
|
10.0 |
% |
|
|
290,858 |
|
|
|
13.0 |
% |
Consumer
|
|
|
210,457 |
|
|
|
9.9 |
% |
|
|
214,753 |
|
|
|
9.6 |
% |
Subtotal
|
|
|
2,123,721 |
|
|
|
100.2 |
% |
|
|
2,236,365 |
|
|
|
100.2 |
% |
Less:
Deferred loan fees
|
|
|
(4,278 |
) |
|
|
-0.2 |
% |
|
|
(4,033 |
) |
|
|
-0.2 |
% |
Total
loans
|
|
$ |
2,119,443 |
|
|
|
100.0 |
% |
|
$ |
2,232,332 |
|
|
|
100.0 |
% |
Loans
Held for Sale
|
|
$ |
2,272 |
|
|
|
|
|
|
$ |
1,964 |
|
|
|
|
|
Total loans declined $112.9 million, or 5%, from year-end
2008. The reduction in total loans was driven primarily by decreases
in real estate construction related loans. During the period, the
Company’s exposure to such loans has been reduced through a combination of
conversion to permanent loans, loan payoffs and pay-downs as well as loan
charge-offs.
Commercial Loans: We are
committed to providing competitive commercial lending in our primary market
areas. Management expects a continued focus within 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. Those
residential loans are secured by properties located within our primary market
areas, and typically have loan-to-value ratios of 80% or lower.
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. Underwriting guidelines for
these loans vary by loan type but include loan-to-value limits, term limits and
loan advance limits, as applicable.
Our
underwriting guidelines for commercial and five-or-more family residential real
estate construction loans generally require that the loan-to-value ratio not
exceed 75% and stabilized debt coverage ratios (net operating income divided by
annual debt servicing) of 1.2 or better. As noted above,
underwriting standards can be influenced by competition and other factors.
However, we endeavor to maintain the highest practical underwriting standards
while balancing the need to remain competitive in our lending
practices.
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) in most cases
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 collectability 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.
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:
|
|
June
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
Commercial
business
|
|
$ |
12,198 |
|
|
$ |
2,976 |
|
Real
estate:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
1,879 |
|
|
|
905 |
|
Commercial
and five or more family residential real estate
|
|
|
24,256 |
|
|
|
5,710 |
|
Total
real estate
|
|
|
26,135 |
|
|
|
6,615 |
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
65,168 |
|
|
|
69,668 |
|
Commercial
and five or more family residential real estate
|
|
|
22,099 |
|
|
|
25,752 |
|
Total
real estate construction
|
|
|
87,267 |
|
|
|
95,420 |
|
Consumer
|
|
|
2,167 |
|
|
|
1,152 |
|
Total
nonaccrual loans
|
|
|
127,767 |
|
|
|
106,163 |
|
Restructured
loans:
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
-
- |
|
|
|
587 |
|
Total
nonperforming loans
|
|
|
127,767 |
|
|
|
106,750 |
|
Other
real estate owned
|
|
|
8,369 |
|
|
|
2,874 |
|
Total
nonperforming assets
|
|
$ |
136,136 |
|
|
$ |
109,624 |
|
The
percent of nonperforming assets to period-end assets at June 30, 2009 was 4.51%
compared to 3.54% for December 31, 2008. Real estate
construction loans continue to be the primary component of nonperforming assets,
representing $87.3 million, or 64%, of nonperforming
assets. Commercial real estate loans account for another $24.3
million, or 19% of non-performing assets.
The
commercial real estate nonperforming assets are primarily centered in
condominium development loans of approximately $14.0 million and retail property
loans of approximately $9.5 million. The increase in the Commercial
Real Estate category reflects the continuing weakness in this sector with
increased nonperforming loans secured by office, retail and warehouse
properties.
In the
residential construction portfolio there was a decrease in nonperforming loans
of $4.5 million from December 31, 2008. The decrease in this sector
of the nonperforming loans portfolio primarily stems from net transfers of $4.0
million into the OREO category. OREO properties acquired from
nonperforming residential construction loans comprise $6.9 million of the $8.4
million in OREO at June 30, 2009, up from $2.9 million at December 31,
2008.
As
real estate market values continued to decline, the Company charged down loans
realizing charge-offs before recoveries of $26.5 million for the six months
ended June 30, 2009. These charge-offs included additional
write-downs of $11.4 million on loans previously charged down. In
addition, loans of $58.3 million were placed on nonaccrual during the six months
ended June 30, 2009.
Allowance
for Loan and Lease Losses
We
maintain an allowance for loan and lease losses (“ALLL”) to absorb losses
inherent in the loan portfolio. The size of the ALLL is determined through
quarterly assessments of the probable estimated losses in the loan portfolio.
Our methodology for making such assessments and determining the adequacy of the
ALLL includes the following key elements:
|
1.
|
General
valuation allowance consistent with generally accepted accounting
principles related to accounting for
contingencies.
|
|
2.
|
Criticized/classified
loss reserves on specific relationships. Specific allowances for
identified problem loans are determined in accordance with generally
accepted accounting principles related to accounting by creditors for
impairment of a loan.
|
|
3.
|
The
unallocated allowance provides for other credit losses inherent in our
loan portfolio that may not have been contemplated in the general and
specific components of the allowance. This unallocated amount generally
comprises less than 5% of the allowance. The unallocated amount is
reviewed periodically based on trends in credit losses, the results of
credit reviews and overall economic
trends.
|
On a
quarterly basis our Chief Credit Officer reviews with Executive Management and
the Board of Directors the various additional factors that management considers
when determining the adequacy of the ALLL, including economic and business
condition reviews. Factors which influenced management’s judgment in determining
the amount of the additions to the ALLL charged to operating expense include the
following as of the applicable balance sheet dates:
|
1.
|
Existing
general economic and business conditions affecting our market
place
|
|
2.
|
Credit
quality trends, including trends in nonperforming
loans
|
|
4.
|
Seasoning
of the loan portfolio
|
|
5.
|
Bank
regulatory examination results
|
|
6.
|
Findings
of internal credit examiners
|
|
7.
|
Duration
of current business cycle
|
The ALLL
is increased by provisions for loan and lease losses (“provision”) charged to
expense, and is reduced by loans charged off, net of recoveries. While we
believe the best information available is used by us to determine the ALLL,
changes in market conditions could result in adjustments to the ALLL, affecting
net income, if circumstances differ from the assumptions used in determining the
ALLL.
At June
30, 2009, our allowance for loan and lease losses (“ALLL”) was $48.9 million, or
2.31% of total loans (excluding loans held for sale) and 38% of nonperforming
loans and 36% of nonperforming assets. This compares with an allowance of $42.8
million, or 1.91% of the total loan portfolio (excluding loans held for sale),
40% of nonperforming loans and 39% of nonperforming assets at December 31,
2008.
The
following table provides an analysis of the Company’s allowance for loan and
lease losses at the dates and the periods indicated:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
44,249 |
|
|
$ |
27,914 |
|
|
$ |
42,747 |
|
|
$ |
26,599 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
(96 |
) |
|
|
-
- |
|
|
|
(96 |
) |
|
|
-
- |
|
Residential
construction, land & acquisitions
|
|
|
(9,884 |
) |
|
|
(580 |
) |
|
|
(16,168 |
) |
|
|
(687 |
) |
Commercial
business
|
|
|
(750 |
) |
|
|
-
- |
|
|
|
(3,286 |
) |
|
|
(359 |
) |
Commercial
real estate
|
|
|
(5,378 |
) |
|
|
(505 |
) |
|
|
(6,082 |
) |
|
|
(505 |
) |
Consumer
|
|
|
(689 |
) |
|
|
(603 |
) |
|
|
(872 |
) |
|
|
(1,352 |
) |
Total
charge-offs
|
|
|
(16,797 |
) |
|
|
(1,688 |
) |
|
|
(26,504 |
) |
|
|
(2,903 |
) |
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
-
- |
|
|
|
-
- |
|
|
|
68 |
|
|
|
-
- |
|
Residential
construction, land & acquisitions
|
|
|
52 |
|
|
|
16 |
|
|
|
91 |
|
|
|
16 |
|
Commercial
business
|
|
|
362 |
|
|
|
72 |
|
|
|
391 |
|
|
|
104 |
|
Commercial
real estate
|
|
|
-
- |
|
|
|
4 |
|
|
|
22 |
|
|
|
304 |
|
Consumer
|
|
|
14 |
|
|
|
56 |
|
|
|
65 |
|
|
|
178 |
|
Total
recoveries
|
|
|
428 |
|
|
|
148 |
|
|
|
637 |
|
|
|
602 |
|
Net
charge-offs
|
|
|
(16,369 |
) |
|
|
(1,540 |
) |
|
|
(25,867 |
) |
|
|
(2,301 |
) |
Provision
charged to expense
|
|
|
21,000 |
|
|
|
15,350 |
|
|
|
32,000 |
|
|
|
17,426 |
|
Ending
balance
|
|
$ |
48,880 |
|
|
$ |
41,724 |
|
|
$ |
48,880 |
|
|
$ |
41,724 |
|
Total
loans, net at end of period (1)
|
|
$ |
2,119,443 |
|
|
$ |
2,275,719 |
|
|
$ |
2,119,443 |
|
|
$ |
2,275,719 |
|
Allowance
for loan losses to period-end loans
|
|
|
2.31 |
% |
|
|
1.83 |
% |
|
|
2.31 |
% |
|
|
1.83 |
% |
(1)
|
Excludes
loans held for sale
|
The
Company’s specific allowance for loan and lease losses (“ALLL”) related to
impaired loans at June 30, 2009 did not increase at the same rate as our
non-performing and impaired loans primarily because the value of collateral
securing those loans exceeded the carrying value of the loans or, similarly, the
carrying value of the loan reflected a partial charge-off to the market value of
collateral (less costs to sell).
The
Company measures impairment on impaired loans by using discounted cash flows,
except when it is determined that the primary (remaining) source of repayment
for the loan is the liquidation of the underlying collateral. In these cases,
the current fair value of the collateral, reduced by costs to sell, will be used
in place of discounted cash flows. As a final alternative, the
observable market price of the loan may be used to assess
impairment. Predominately, the Company uses the fair value of
collateral approach based upon a reliable valuation.
The following
table summarizes impaired loan financial data at June 30, 2009, December 31,
2008 and June 30, 2008:
|
|
Jun
30,
|
|
|
Dec
31,
|
|
in
millions
|
|
2009
|
|
|
2008
|
|
Impaired
loans
|
|
$ |
127.8 |
|
|
$ |
106.8 |
|
Impaired
loans with specific allocations
|
|
$ |
31.7 |
|
|
$ |
8.3 |
|
Amount
of the specific allocations
|
|
$ |
5.6 |
|
|
$ |
1.2 |
|
The
Company completes a quarterly review of non-performing and impaired loans and,
based upon that review, will record the loan at the lower of cost or market
(less costs to sell) by recording a charge-off to the allowance for loan and
lease losses (“ALLL”) or by designating a specific reserve per accounting
principles generally accepted in the United States.
Generally, the Company will record the charge-off rather than
designate a specific reserve. As a result, the carrying amount of
non-performing and impaired loans may not exceed the value of the underlying
collateral. This process enables the Company to adequately reserve
for non-performing loans within the ALLL.
When a
loan secured by real estate migrates to non-performing and impaired status and
it does not have a market valuation less than one year old, the
Company secures an updated market valuation by a third party
appraiser that is reviewed by the Company’s on staff appraiser. Subsequently,
the asset will be appraised annually by a third party appraiser or the Company’s
on staff appraiser. The evaluation may occur more frequently
if management determines that there has been increased market
deterioration within a specific geographical location. Upon receipt
and verification of the market valuation, the Company will record the loan at
the lower of cost or market (less costs to sell) by recording a charge-off to
the allowance for loan and lease losses (“ALLL”) or by designating a specific
reserve in accordance with accounting principles generally accepted in the
United States.
At June 30,
2009 and March 31, 2009, the Company had $112 million in non-performing and
impaired loans secured. There were fifty nine relationships that were
non-performing and impaired at June 30, 2009, of which fifty one were secured by
real estate. At the end of the first quarter 2009, there were
fifty six non-performing and impaired loan relationships, of which forty nine
were secured by real estate. Nine of the non-performing and impaired
loan relationships secured by real estate had charge-offs exceeding
$500,000 during the second quarter of 2009, representing $13.0 million, or over
75%, of the quarter’s net charge-offs. Of these losses, $7.9 million
stem from updated appraisals completed and reviewed in the second
quarter. During the first quarter of 2009, seven of the
non-performing and impaired loan relationships secured by real estate had
charge-offs exceeding $500,000 representing $7.2 million, or over 70%, of the
quarter’s net charge-offs. Of these losses, $1.5 million resulted
from updated appraisals completed and reviewed during the first quarter of 2009,
$2.3 million was the result of an appraisal review and an analysis of the Bank’s
lien position and $1.0 million was the result of a note sale.
The Company’s
ALLL reserve analysis accounts for increases and decreases in 0 to 90 day past
dues by increasing or decreasing the reserve percentage factor related to
changes in past due loans. The loans that are over 90 days past
due are automatically transferred to non performing and are analyzed under the
accounting procedure mentioned above.
In
addition to the ALLL, we maintain an allowance for unfunded loan commitments and
letters of credit. We report this allowance as a liability 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 June
30, 2009 and December 31, 2008, our allowance for unfunded loan commitments
and letters of credit was $575,000 and $500,000, respectively.
Securities
All of
our securities are classified as available for sale and carried at fair value.
These securities are used by the Company as a component of its balance sheet
management strategies. From time to time securities may be sold to
reposition the portfolio in response to strategies developed by the Company’s
asset liability committee. 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.
At June
30, 2009, the market value of securities available for sale had a net unrealized
gain, net of tax, of $6.5 million compared to an unrealized gain, net of tax, of
$2.5 million at December 31, 2008. The change in market value of
securities available for sale is due primarily to fluctuations in interest
rates. The Company does not consider those investment securities with
an unrealized loss to be other than temporarily impaired at June 30, 2009.
If
an other than temporary impairment exists, the charge to earnings is limited to
the amount of credit loss if we do not intend to sell the security, and it is
more-likely-than-not that we will not be required to sell the security, before
recovery of the security’s amortized cost basis. Any remaining
difference between fair value and amortized cost is recognized in other
comprehensive income, net of applicable taxes. If the Company intends
to sell the security the entire difference between fair value and amortized cost
is charged to earnings.
The
following table sets forth our securities portfolio by type for the dates
indicated:
|
|
June
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise preferred stock
|
|
$ |
496 |
|
|
$ |
488 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
346,344 |
|
|
|
341,838 |
|
State
and municipal securities
|
|
|
198,602 |
|
|
|
185,653 |
|
Other
securities
|
|
|
962 |
|
|
|
939 |
|
Total
|
|
$ |
546,404 |
|
|
$ |
528,918 |
|
Goodwill
Goodwill
is assigned to reporting units for purposes of impairment
testing. The Company has three reporting units: retail banking,
commercial banking, and private banking. The products and services of
companies previously acquired are comparable to the Company’s retail banking
operations. Accordingly, all of the Company’s goodwill is assigned to
the retail banking reporting unit. In 2008, the Company performed its
annual assessment for potential impairment of goodwill as of July 31 and an
interim assessment for potential impairment as of November 30. In
each assessment, we estimated fair value using three approaches:
·
|
Allocation of corporate
value: the allocation of corporate value approach applies the
aggregate market value of a company and divides it among the reporting
units based on a common financial measure such as assets or
earnings. This type of allocation methodology is most effective
when the reporting units of the company are highly similar. In
the Company’s situation, the operations of the reporting units are
different. Nearly all of the deposit operations and some
lending operations are contained within the retail banking reporting unit
while the commercial banking and private banking reporting units are
almost exclusively lending operations. Accordingly, management
utilizes the results of this approach for reasonableness and the
calculated corporate value is not divided among the reporting
units.
|
A key
assumption in this approach is the control premium applied to the aggregate
market value. A control premium is utilized as the value of a company
from the perspective of a controlling interest is generally higher than the
widely quoted market price per share. The Company’s control premium assumption
was calculated utilizing data recorded by Mergerstat for acquisitions of
publicly traded bank and thrift organizations occurring over representative time
periods. The average premium paid to acquire control of these
entities was 30%. Applying the 30% control premium to the Company’s
minority market capitalization at July 31, 2008 results in an implied corporate
value of $355.8 million which exceeds the equity of the Company of $341.0
million. Applying the same control premium to the Company’s minority
market capitalization at November 30, 2008 results in an implied corporate value
of $313.5 million which is below the equity of the Company of $409.7
million.
·
|
Discounted cash flow:
the discounted cash flow approach uses a reporting unit’s projection of
future cash flows that is discounted using a weighted-average cost of
capital that reflects current market conditions. While the
discounted cash flow method is generally considered the most technically
accurate valuation method, the calculations are highly dependent upon
assumptions. We used a build-up approach to develop the
discount rate utilized in this valuation approach. The
following table details elements of the discount rates at July 31, 2008
and November 30, 2008:
|
|
|
Jul
31,
|
|
|
Nov
30,
|
|
Elements
of the Discount Rate
|
|
2008
|
|
|
2008
|
|
Risk
free rate
|
|
|
4.63 |
% |
|
|
3.71 |
% |
Equity
risk premium
|
|
|
7.10 |
% |
|
|
7.10 |
% |
Industry
premium
|
|
|
-1.61 |
% |
|
|
0.00 |
% |
Size
premium
|
|
|
3.88 |
% |
|
|
3.88 |
% |
|
|
|
14 |
% |
|
|
15 |
% |
In
addition to the discount rates above, we assumed loan growth rates of 0% in year
one and 5% in year two increasing ratably to 8% in year five. We assumed deposit
growth rates of 2% in year one and 5% in year two increasing ratably to 8% in
year five. We assumed net charge-offs to total loans of 1.00% in year
one, 0.50% in year two, and 0.25% in years three through five. At
July 31, 2008, we assumed a constant equity to asset ratio of 7.80% throughout
the five year forecast. At November 30, 2008, as a result of our
preferred stock issuance under the U.S. Treasury’s TARP Capital Purchase
Program, we assumed a constant equity to asset ratio of 11.00% throughout the
five year forecast.
At July
31, 2008, had we decreased the discount factor by excluding the combined
industry and size premiums, the fair value of the retail banking reporting unit
would have increased by $30.6 million. Conversely, had we increased
the discount factor to 15.61% by excluding the industry discount, the fair value
of the retail banking reporting unit would have decreased by $19.6
million.
·
|
Comparable market
statistics: the comparable market statistics approach estimates the
value of the Company by comparing it to trading multiples involving
similar companies. Key assumptions include the control premium
of 30% as described above. For comparative purposes, we
selected 9 publically traded banking and thrift companies in Oregon and
Washington with total assets between $1.0 and $10.0
billion. Our analysis factored in variances between the Company
and the peer group. These variances included the Company’s
slightly lower net interest margin, better nonperforming assets to total
assets ratio, and a higher allowance for loan loss reserves to total loans
ratio. For the purposes of this analysis we determined a price / tangible
book ratio of 1.7 times was appropriate at July 31, 2008 and a ratio of
1.3 times at November 30, 2008.
|
The
following table shows the fair value, carrying amount and goodwill for the
retail banking reporting unit at each of the assessment dates in
2008:
|
|
Retail
Banking Reporting Unit (Pro Forma)
|
|
|
|
July
31, 2008
|
|
|
November
30, 2008
|
|
Tangible
book value
|
|
$ |
195,153,538 |
|
|
$ |
204,250,118 |
|
Goodwill
|
|
|
96,116,000 |
|
|
|
95,518,672 |
|
Carrying
value:
|
|
$ |
291,269,538 |
|
|
$ |
299,768,790 |
|
Fair
Value:
|
|
|
|
|
|
|
|
|
Discounted
cash flow
|
|
$ |
306,182,998 |
|
|
$ |
262,000,000 |
|
Comp.
market statistics
|
|
$ |
331,761,014 |
|
|
$ |
265,525,154 |
|
Given the
results of the step one test, management concluded there was no indication of
impairment to goodwill at July 31, 2008. Further, because in all
cases the implied fair value was greater than the carrying value at July 31,
2008, management did not assign a particular weighting to the individual methods
during the annual test. The results of the step one test at
November 30, 2008 indicated a potential impairment to
goodwill. Because the implied fair value under step one was less than
the carrying value at November 30, 2008, management assigned an equal weighting
to the discounted cash flow and comparable market statistics approaches during
the interim test and moved to the second step of impairment
testing.
For the
purpose of valuing the retail banking unit’s loan portfolio the Company
considered the discounted cash flow and comparable market statistics approaches.
We selected the comparable market statistics approach because we felt it was the
best method for accurately matching the characteristics of the loan portfolio
with the transaction prices occurring in the market between willing buyers and
sellers. The most consistently available data on sales of loan
portfolios comes from the FDIC. They are an active participant in loan sale
transactions and have consistently provided data on their sale transactions.
While many of the assets sold by the FDIC represent troubled loans, their loan
pools are segregated by performing, sub-performing and non-performing assets
with each transaction identified according to asset quality. We
utilized FDIC loan sales data from 87 portfolios sold during the first 11 months
of 2008. We utilized a 3% valuation discount for our performing loans
compared to a weighted average discount of 9% for the FDIC portfolio
sales. We utilized valuation discounts ranging from 38-73% for our
sub-performing and non-performing loans compared to a weighted average discount
range of 34-74% for the FDIC portfolio sales. As of November 30, 2008
the retail banking reporting unit held net loans of $852.3 million with a
fair value of $791.4 million representing a discount of 7%.
During
the course of our analysis we evaluated potential intangible assets that had not
previously been recognized. We evaluated our trademark and determined
that it contained no discernable value. We considered the value of
our core deposit base. Our analysis indicated an estimated core
deposit intangible fair value of $22.3 million compared to a recorded book value
of $3.8 million.
Management
developed reasonable assumptions with the assistance of the third party
valuation specialist Upon the conclusion of the engagement a report
summarizing the valuation alternatives contemplated, the results of the analysis
performed, and the conclusions reached, was generated. The type of
the valuation report received was a “summary report” as
described
in AICPA Statement on Standards for Valuation Services No.1, Valuation of a
Business, Business Ownership Interest, Security, or Intangible
Asset. Management’s review of the report resulted in general follow
up questions which were addressed during scheduled conference calls between
management and the valuation specialist. These follow up questions
did not result in any change in the conclusion that impairment to the Company’s
goodwill asset did not exist as of the valuation date. As a result of
our second step analysis, our goodwill asset had an implied fair value of $105
million at November 30, 2008.
The
calculated fair value of the loan portfolio has the biggest potential to
significantly impact the results of the second step
analysis. Management determined that a valuation of 93% of book value
was reasonable. Based upon the worsening economic conditions and the significant
illiquidity within the credit markets, a larger discount would have increased
the implied fair value of goodwill.
In prior
years management performed an analysis comparing the Company’s book value to its
market capitalization. The Company’s policy is to utilize the market
capitalization approach for determining the likelihood of a potential impairment
of its goodwill assets. However, as the Company’s market
capitalization approaches book value, management’s analysis for the potential
impairment of goodwill becomes more rigorous. In 2008, due to the
reduction in the Company’s market capitalization and assumed fair value compared
to the prior year, management engaged a third party valuation specialist to
assist the Company with its tests for potential goodwill
impairment. Other than the additional analysis resulting from the
Company’s reduced market capitalization, assumptions and methodologies used for
valuing goodwill in the current period have not changed from prior
periods.
Liquidity
Liquidity
is measured by the Company's ability to raise cash when it needs it at a
reasonable cost and with a minimum of loss. We must be capable of
meeting all obligations to our customers at any time and, therefore, the active
management of our liquidity position is critical.
Given the
uncertain timing of our customers' needs as well as the Company's desire to take
advantage of earnings enhancement opportunities, we must have adequate sources
of on and off balance sheet funds available that can be utilized in times of
need. Accordingly, in addition to the liquidity provided by cash
flows, liquidity must be supplemented with additional sources such as credit
lines with the Federal Home Loan Bank of Seattle (“FHLB”), the Federal Reserve
Bank of San Francisco (“FRB”) and other correspondent institutions.
We may
use other funding alternatives, including:
• Wholesale
and retail repurchase agreements;
• Brokered
certificates of deposit
When
purchasing securities and originating loans, we must consider both their
marketability and the Company’s ability to collateralize advances and borrowings
with these instruments. There can be a significant cost associated
with carrying excess liquidity; we endeavor to avoid unnecessary expense and
opportunity loss in this regard. We view our liquidity measurements
as critical components of developing prudent and effective deposit pricing and
investment strategies.
Sources
of Funds
Our
primary sources of funds are customer deposits. Additionally, we utilize
advances from the FHLB, borrowings from the FRB, 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,
money market accounts and certificates of deposit less than $100,000) decreased
slightly from year-end 2008 while certificates of deposit greater than $100,000
decreased $70.7 million, or 21%, from year-end 2008.
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 June 30, 2009
brokered and other wholesale
deposits (excluding public deposits) totaled $152.2 million, or 6% of total
deposits, compared to $102.1 million, or 4% of total deposits, at year-end 2008.
The brokered deposits have varied maturities.
The
following table sets forth the Company’s deposit base by type of product for the
dates indicated:
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
June
30, 2008
|
|
(in
thousands)
|
|
Balance
|
|
|
%
of
Total
|
|
|
Balance
|
|
|
%
of
Total
|
|
|
Balance
|
|
|
%
of
Total
|
|
Core
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and other non-interest bearing
|
|
$ |
491,617 |
|
|
|
20.9 |
% |
|
$ |
466,078 |
|
|
|
19.6 |
% |
|
$ |
480,612 |
|
|
|
20.0 |
% |
Interest
bearing demand
|
|
|
456,388 |
|
|
|
19.4 |
% |
|
|
519,124 |
|
|
|
21.8 |
% |
|
|
445,798 |
|
|
|
18.6 |
% |
Money
market
|
|
|
576,594 |
|
|
|
24.5 |
% |
|
|
530,065 |
|
|
|
22.3 |
% |
|
|
580,535 |
|
|
|
24.2 |
% |
Savings
|
|
|
134,631 |
|
|
|
5.7 |
% |
|
|
122,076 |
|
|
|
5.1 |
% |
|
|
118,145 |
|
|
|
4.9 |
% |
Certificates
of deposit less than $100,000
|
|
|
273,541 |
|
|
|
11.6 |
% |
|
|
303,704 |
|
|
|
12.7 |
% |
|
|
308,166 |
|
|
|
12.8 |
% |
Total
core deposits
|
|
|
1,932,771 |
|
|
|
82.1 |
% |
|
|
1,941,047 |
|
|
|
81.5 |
% |
|
|
1,933,256 |
|
|
|
80.6 |
% |
Certificates
of deposit greater than $100,000
|
|
|
268,308 |
|
|
|
11.4 |
% |
|
|
338,971 |
|
|
|
14.2 |
% |
|
|
399,950 |
|
|
|
16.7 |
% |
Wholesale
certificates of deposit (CDARS®)
|
|
|
92,035 |
|
|
|
3.9 |
% |
|
|
39,903 |
|
|
|
1.7 |
% |
|
|
-
- |
|
|
|
0.0 |
% |
Wholesale
certificates of deposit
|
|
|
60,212 |
|
|
|
2.6 |
% |
|
|
62,230 |
|
|
|
2.6 |
% |
|
|
65,718 |
|
|
|
2.7 |
% |
Total
deposits
|
|
$ |
2,353,326 |
|
|
|
100.0 |
% |
|
$ |
2,382,151 |
|
|
|
100.0 |
% |
|
$ |
2,398,924 |
|
|
|
100.0 |
% |
Borrowings
We rely
on FHLB advances and FRB borrowings as another source of both short and
long-term funding. FHLB advances and FRB borrowings are secured by bonds within
our investment portfolio, real estate secured loans and commercial
loans. At June 30, 2009, we had FHLB advances and FRB borrowings of
$161.0 million, compared to $200.0 million at December 31,
2008.
We also
utilize wholesale repurchase agreements as a supplement to our funding sources.
Our wholesale repurchase agreements are secured by mortgage-backed securities.
At June 30, 2009 and December 31, 2008 we had repurchase agreements of $25
million. Management anticipates that we will continue to rely on FHLB
advances, FRB borrowings, 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 4.62% at June 30, 2009.
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 the 2007 Town Center Bancorp
acquisition, the Company assumed an additional $3.0 million in floating rate
trust preferred obligations; these debentures had a rate of 4.88% at June 30,
2009. 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 $25.6 million
at June 30, 2009 and December 31, 2008. 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 had a $20.0 million line of credit with a large commercial bank with an
interest rate indexed to LIBOR. The outstanding balance on the line of credit
was $0 at June 30, 2009 and $100,000 December 31, 2008. The line matured on June
30, 2009 and the Company chose not to renew it.
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 June 30, 2009, we had
commitments to extend credit of $634.9 million compared to $703.3 million at
December 31, 2008.
Capital
Resources
Shareholders’
equity at June 30, 2009 was $411.9 million, down from $415.4 million at
December 31, 2008. Shareholders’ equity was 13.6% and 13.4% of total
period-end assets at June 30, 2009 and December 31, 2008,
respectively.
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 preferred stock, 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 June 30, 2009 and December 31, 2008.
|
|
Company
|
|
|
Columbia
Bank
|
|
|
Requirements
|
|
|
|
6/30/2009
|
|
|
12/31/2008
|
|
|
6/30/2009
|
|
|
12/31/2008
|
|
|
Adequately
capitalized
|
|
|
Well-Capitalized
|
|
Total
risk-based capital ratio
|
|
|
14.61 |
% |
|
|
14.25 |
% |
|
|
12.55 |
% |
|
|
11.21 |
% |
|
|
8 |
% |
|
|
10 |
% |
Tier
1 risk-based capital ratio
|
|
|
13.35 |
% |
|
|
12.99 |
% |
|
|
11.29 |
% |
|
|
9.96 |
% |
|
|
4 |
% |
|
|
6 |
% |
Leverage
ratio
|
|
|
11.22 |
% |
|
|
11.27 |
% |
|
|
9.53 |
% |
|
|
8.64 |
% |
|
|
4 |
% |
|
|
5 |
% |
The
Company filed a shelf registration statement with the SEC on October 17, 2008
for the potential sale of up to $100 million of common or preferred
stock. The Company monitors the capital markets for appropriate
opportunities to enhance the Company’s capital position.
Stock
Repurchase Program
In March
2002 the Board of Directors approved a common 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 June
30, 2009 we have repurchased 64,788 shares of common stock in this current stock
repurchase program, none of which was repurchased in the period covered by this
report. Due to our participation in the U.S. Treasury’s (“Treasury”) Capital
Purchase Program, we would first have to obtain approval from the Treasury
before commencing any common stock repurchases under this plan.
Non-GAAP
Financial Measures
|
In
addition to capital ratios defined by banking regulators, the Company considers
various measures when evaluating capital utilization and adequacy,
including:
·
|
Tangible
common equity to tangible assets,
and
|
·
|
Tangible
common equity to risk-weighted
assets.
|
The
Company believes these measures are important because they reflect the level of
capital available to withstand unexpected market
conditions. Additionally, presentation of these measures allows
readers to compare certain aspects of the Company’s capitalization to other
organizations. These ratios differ from capital measures defined by
banking regulators principally in that the numerator excludes shareholders’
equity associated with preferred securities, the nature and extent of which
varies across organizations. Additionally, these measures present
capital adequacy inclusive and exclusive of accumulated other comprehensive
income. These calculations are intended to complement the capital
ratios defined by banking regulators for both absolute and comparative
purposes.
Because
generally accepted accounting principles (“GAAP”) do not include capital ratio
measures, the Company believes there are no comparable GAAP financial measures
to these tangible common equity ratios. The following table
reconciles the Company’s calculation of these measures to amounts reported under
GAAP.
Despite
the importance of these measures to the Company, there are no standardized
definitions for them and, as a result, the Company’s calculations may not be
comparable with other organizations. Also, there may be limits in the
usefulness of these measures to investors. As a result, the Company
encourages readers to consider its consolidated financial statements in their
entirety and not to rely on any single financial measure.
|
|
Jun
30
|
|
|
Mar
31
|
|
|
Dec
31
|
|
|
Sep
30
|
|
|
Jun
30
|
|
in
thousands
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
Shareholders'
equity
|
|
|
411,871 |
|
|
|
415,717 |
|
|
|
415,385 |
|
|
|
336,435 |
|
|
|
344,270 |
|
Preferred
stock
|
|
|
(74,015 |
) |
|
|
(73,875 |
) |
|
|
(73,743 |
) |
|
|
-
- |
|
|
|
-
- |
|
Goodwill
|
|
|
(95,519 |
) |
|
|
(95,519 |
) |
|
|
(95,519 |
) |
|
|
(95,519 |
) |
|
|
(96,116 |
) |
Core
deposit intangible
|
|
|
(5,368 |
) |
|
|
(5,638 |
) |
|
|
(5,908 |
) |
|
|
(6,179 |
) |
|
|
(6,458 |
) |
Tangible
common equity (a)
|
|
|
236,969 |
|
|
|
240,685 |
|
|
|
240,215 |
|
|
|
234,737 |
|
|
|
241,696 |
|
Total
assets
|
|
|
3,021,857 |
|
|
|
3,045,757 |
|
|
|
3,097,079 |
|
|
|
3,104,980 |
|
|
|
3,169,607 |
|
Goodwill
|
|
|
(95,519 |
) |
|
|
(95,519 |
) |
|
|
(95,519 |
) |
|
|
(95,519 |
) |
|
|
(96,116 |
) |
Core
deposit intangible
|
|
|
(5,368 |
) |
|
|
(5,638 |
) |
|
|
(5,908 |
) |
|
|
(6,179 |
) |
|
|
(6,458 |
) |
Tangible
assets (b)
|
|
|
2,920,970 |
|
|
|
2,944,600 |
|
|
|
2,995,652 |
|
|
|
3,003,282 |
|
|
|
3,067,033 |
|
Risk-weighted
assets, determined in accordance with prescribed regulatory requirements
(c)
|
|
|
2,456,839 |
|
|
|
2,529,251 |
|
|
|
2,567,346 |
|
|
|
2,563,277 |
|
|
|
2,616,842 |
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
common equity (a)/(b)
|
|
|
8.11 |
% |
|
|
8.17 |
% |
|
|
8.02 |
% |
|
|
7.82 |
% |
|
|
7.88 |
% |
Tangible
common equity to risk-weighted assets (a)/(c)
|
|
|
9.65 |
% |
|
|
9.52 |
% |
|
|
9.36 |
% |
|
|
9.16 |
% |
|
|
9.24 |
% |
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 June 30, 2009, 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, 2008. For additional information,
refer to “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” in the Company’s 2008 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.
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.
We
cannot accurately predict the effect of the national economic recession on our
future results of operations or market price of our stock.
The
national economy and the financial services sector in particular are currently
facing challenges of a scope unprecedented in recent history. No one
can predict the severity or duration of this downturn. We cannot
accurately predict the severity or duration of the current economic downturn,
which has adversely impacted the markets we serve. Any further
deterioration in the economies of the nation as a whole or in our markets would
have an adverse effect, which could be material, on our business, financial
condition, results of operations and prospects, and could also cause the market
price of our stock to decline. While it is impossible to predict how
long these conditions may exist, the economic downturn could continue to present
risks for some time for the industry and our company.
The
current economic recession in the market areas we serve may continue to
adversely impact our earnings and could increase our credit risk associated with
our loan portfolio.
Substantially
all of our loans are to businesses and individuals in Washington and Oregon, and
a continuing decline in the economies of these market areas could have a
material adverse effect on our business, financial condition, results of
operations and prospects. A series of large Puget Sound-based
businesses have implemented substantial employee layoffs and scaled back plans
for future growth. Additionally, acquisitions and consolidations have
resulted in substantial employee layoffs, along with a significant increase in
office space availability in downtown Seattle. Oregon has also seen a
similar pattern of large layoffs in major metropolitan areas and a continued
decline in housing prices. A further deterioration in the market
areas we serve could result in the following consequences, any of which could
have an adverse impact, which could be material, on our business, financial
condition, results of operations and prospects:
·
|
loan
delinquencies may increase further;
|
·
|
problem
assets and foreclosures may
increase;
|
·
|
collateral
for loans made may decline further in value, in turn reducing
customers’ borrowing power, reducing the value of assets and collateral
associated with existing loans;
|
·
|
certain
securities within our investment portfolio could become other than
temporarily impaired, requiring a write down through earnings to fair
value thereby reducing equity; and
|
·
|
low
cost or non-interest bearing deposits may
decrease.
|
Our
loan portfolio mix, which has a concentration of loans secured by real estate,
could result in increased credit risk in an economic recession.
Our loan
portfolio is concentrated in commercial real estate and commercial business
loans. These types of loans, as well as real estate construction
loans and land development loans, acquisition and development loans related to
the for sale housing industry, generally are viewed as having more risk of
default than residential real estate loans or certain other types of loans or
investments. In fact, the FDIC has issued pronouncements alerting
banks of its concern about heavy loan concentrations. Because our
loan portfolio contains a significant number of construction, commercial
business and commercial real estate loans with relatively large balances, the
deterioration of one or a few of these loans may cause a significant increase in
our non-performing loans. An increase in non-performing loans could
result in a loss of earnings from these loans, an increase in the provision for
loan losses, or an increase in loan charge-offs, which could have an adverse
impact on our results of operations and financial condition.
A further
downturn in the economies or real estate values in the markets we serve could
have a material adverse effect on both borrowers’ ability to repay their loans
and the value of the real property securing such loans. Our ability
to recover on defaulted loans would then be diminished, and we would be more
likely to suffer losses on defaulted loans.
Our
Allowance for Loan and Lease Losses (“ALLL”) may not be adequate to cover future
loan losses, which could adversely affect earnings.
We
maintain an ALLL in an amount that we believe is adequate to provide for losses
inherent in our portfolio. While we strive to carefully monitor
credit quality and to identify loans that may become non-performing, at any time
there are loans in the portfolio that could result in losses that have not been
identified as non-performing or potential problem loans. We cannot be
sure that we will be able to identify deteriorating loans before they become
non-performing assets, or that we will be able to limit losses on those loans
that have been identified. As a result, future significant increases
to the ALLL may be necessary. Additionally, future increases to the
ALLL may be required based on changes in the composition of the loans comprising
the portfolio, deteriorating values in underlying collateral (most of which
consists of real estate) and changes in the financial condition of borrowers,
such as may result from changes in economic conditions, or as a result of
incorrect assumptions by management in determining the
ALLL. Additionally, banking regulators, as an integral part of their
supervisory function, periodically review our ALLL. These regulatory
agencies may require us to increase the ALLL which could have a negative effect
on our financial condition and results of operation.
Nonperforming
assets take significant time to resolve and adversely affect our results of
operations and financial condition.
Our
nonperforming assets adversely affect our net income in various
ways. Until economic and market conditions improve, we expect to
continue to incur additional losses relating to an increase in nonperforming
loans. We do not record interest income on non-accrual loans, thereby
adversely affecting our income, and increasing loan administration
costs. When we receive collateral through foreclosures and similar
proceedings, we are required to mark the related loan to the then fair market
value of the collateral, which may result in a loss. An increase in
the level of nonperforming assets also increases our risk profile and may impact
the capital levels our regulators believe is appropriate in light of such
risks. We utilize various techniques such as loan sales, workouts,
and restructurings to manage our problem assets. Decreases in the
value of these problem assets, the underlying collateral, or in the borrowers’
performance or financial condition, could adversely affect our business, results
of operations and financial condition. In addition, the resolution of
nonperforming assets requires significant commitments of time from management
and staff, which can be detrimental to performance of their other
responsibilities. There can be no assurance that we will not
experience further increases in nonperforming loans in the future.
Fluctuating
interest rates can adversely affect our profitability.
Our
profitability is dependent to a large extent upon net interest income, which is
the difference (or “spread”) between the interest earned on loans, securities
and other interest-earning assets and the interest paid on deposits, borrowings,
and other interest-bearing liabilities. Because of the differences in
maturities and repricing characteristics of our interest-earning assets and
interest-bearing liabilities, changes in interest rates do not produce
equivalent changes in interest income earned on interest-earning assets and
interest paid on interest-bearing liabilities. Accordingly,
fluctuations in interest rates could adversely affect our interest rate spread,
and, in turn, our profitability.
The
FDIC has increased insurance premiums to restore and maintain the federal
deposit insurance fund, which has increased our costs and could adversely affect
our business.
The FDIC
recently adopted a final rule revising its risk-based assessment system,
effective April 1, 2009. The changes to the assessment system involve
adjustments to the risk-based calculation of an institution’s unsecured debt,
secured liabilities and brokered deposits. The potential increase in
FDIC insurance premiums could have a significant impact on
Columbia.
On May
22, 2009, the FDIC has imposed a special deposit insurance assessment of 5 basis
points on all insured institutions. This emergency assessment will be
calculated based on the insured institution’s assets at June 30, 2009, and
collected on September 30, 2009. Based on our June 30, 2009 assets
subject to the FDIC assessment, the special assessment will amount to
approximately $1.4 million. This special assessment is in addition to
the regular quarterly risk-based assessment. The FDIC has announced
that an additional special assessment in 2009 of up to 5 basis points is
probable.
The FDIC
deposit insurance fund may suffer additional losses in the future due to bank
failures. There can be no assurance that there will not be additional
significant deposit insurance premium increases in order to restore the
insurance fund’s reserve ratio.
We
cannot predict the effect of recently enacted and possible future federal
legislation on the U. S. economy and the banking industry; there can be no
assurance that these measures will successfully address the current recessionary
conditions.
In October 2008, Congress enacted the
Emergency Economic Stabilization Act of 2008 (“EESA”), which provided the
Treasury with broad authority to implement action intended to help restore
stability and liquidity to the U.S. financial markets. Pursuant to
the EESA, the Treasury has the ability to purchase or insure up to $700 billion
in troubled assets held by financial institutions under the TARP. In
October 2008, the Treasury announced it would initially purchase equity stakes
in financial institutions under the CPP of up to $350 billion of the $700
billion authorized under the TARP legislation. Columbia is
participating in the CPP. The EESA also increased
the amount of deposit account insurance from $100,000 to $250,000 effective
until December 31, 2013.
In early
2009, the Treasury also announced the Financial Stability Plan which, among
other things, provides a new capital program called the Capital Assistance
Program, establishing a public-private investment fund for the purchase of
troubled assets, and expands the Term Asset-Backed Securities Loan
Facility. The Treasury also recently announced plans to create a
federal Consumer Financial Protection Agency. This legislation is in
the early stages, and it is not possible to predict whether such legislation
will be enacted. Due to the recessionary condition of the national
economy, it is possible that additional legislation affecting the banking
industry may be enacted in the near future. The full effect of
legislation recently enacted and broad legislation that may be enacted in the
near future on the national economy and financial institutions, particularly on
mid-sized institutions like us, cannot now be predicted. There can be
no assurance that these measures will successfully address the current
recessionary conditions.
A
continued tightening of the credit markets and credit market volatility may make
it difficult to maintain adequate funding for loan growth, which could adversely
affect our earnings.
A
continued tightening of the credit market and the inability to maintain adequate
liquidity to fund continued loan growth may negatively affect asset growth and,
therefore, our earnings capability. In addition to deposit growth and
payments of principal and interest received on loans and investment securities,
we also rely on borrowing lines with the Federal Home Loan Bank of Seattle
(“FHLB”) and the Federal Reserve Bank of San Francisco to fund
loans. However, the FHLB has discontinued the repurchase of its stock
and discontinued the distribution of dividends. Based on the
foregoing, there can be no assurance the FHLB will have sufficient resources to
continue to fund our borrowings at their current levels. In the event
of a further downturn in the economy, particularly in the housing market, these
funding resources could be negatively affected, which could limit the funds
available to us making it difficult for us to maintain adequate funding for loan
growth. In addition, our customers’ ability to raise capital and
refinance maturing obligations could be adversely affected, resulting in a
further unfavorable impact on our business, financial condition and results of
operations.
If
the goodwill we have recorded in connection with acquisitions becomes impaired,
it could have an adverse impact on our earnings and capital.
Accounting
standards require that we account for acquisitions using the purchase method of
accounting. Under purchase accounting, if the purchase price of an
acquired company exceeds the fair value of its net assets, the excess is carried
on the acquirer’s balance sheet as goodwill. In accordance with
generally accepted accounting principles, our goodwill is evaluated for
impairment on an annual basis or more frequently if events or circumstances
indicate that a potential impairment exists. Such evaluation is based
on a variety of factors, including the quoted price of our common stock, market
prices of common stock of other banking organizations, common stock trading
multiples, discounted cash flows, and data from comparable
acquisitions. There can be no assurance that future evaluations of
goodwill will not result in impairment and ensuing write-down, which could be
material, resulting in an adverse impact on our earnings and
capital.
Our
ability to access markets for funding and to acquire and retain customers could
be adversely affected by the deterioration of other financial institutions or
the financial services industry’s reputation.
Reputation
risk is the risk to liquidity, earnings and capital arising from negative
publicity regarding the financial services industry. The financial
services industry continues to be featured in negative headlines about the
global credit crisis and the resulting stabilization legislation enacted by the
U.S. federal government. These reports can be damaging to the
industry’s image and potentially erode consumer confidence in insured financial
institutions, such as our banking subsidiary.
We
may grow through future acquisitions, which could, in some circumstances,
adversely affect our profitability measures.
We may
engage in selected acquisitions of financial institutions in the future, which
may require the issuance of additional common stock. Any such
acquisitions and related issuances of stock may have a dilutive effect on
earnings per
share and
the percentage ownership of current shareholders. There are risks
associated with our acquisition strategy that could adversely impact our
profitability. These risks include, among others, incorrectly
assessing the asset quality of a particular institution being acquired,
encountering greater than anticipated costs of incorporating acquired businesses
into our company, and being unable to profitably deploy funds acquired in an
acquisition. Furthermore, we cannot provide any assurance as to the
extent to which we can continue to grow through acquisitions.
Substantial
competition in our market areas could adversely affect us.
Commercial
banking is a highly competitive business. We compete with other
commercial banks, savings and loan associations, credit unions, finance,
insurance and other non-depository companies operating in our market
areas. We also experience competition, especially for deposits, from
internet-based banking institutions, which have grown rapidly in recent
years. We are subject to substantial competition for loans and
deposits from other financial institutions. Some of our competitors
are not subject to the same degree of regulation and restriction as we
are. Some of our competitors have greater financial resources than we
do. Some of our competitors have severe liquidity issues, which could
impact the pricing of deposits in our marketplace. If we are unable
to effectively compete in our market areas, our business, results of operations
and prospects could be adversely affected.
We
operate in a highly regulated environment and may be adversely affected by
changes in federal, state and local laws and regulations, including rules and
policies applicable to participants in the CPP.
We are
subject to extensive regulation, supervision and examination by federal and
state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on us and
our operations. Additional legislation and regulations that could
significantly affect our powers, authority and operations may be enacted or
adopted in the future, which could have a material adverse effect on our
financial condition and results of operations. The rules and polices
applicable to recipients of capital under CPP have been significantly revised
and supplemented since the inception of that program, and continue to
evolve. Further, our regulators have significant discretion and
authority to prevent or remedy unsafe or unsound practices or violations of laws
by financial institutions and holding companies in the performance of their
supervisory and enforcement duties. The exercise of regulatory
authority generally may have a negative impact, which may be material, on our
results of operations and financial condition.
None.
None.
The
company held its annual shareholders meeting on April 22, 2009. The
following is a brief description and vote count of the proposals voted upon at
the annual meeting.
Proposal
1. ELECTION
OF DIRECTORS
Nominee
|
|
Votes
"For"
|
|
Votes
"Withheld"
|
Melanie
J. Dressel
|
|
14,983,095
|
|
223,748
|
|
|
|
|
|
John
P. Folsom
|
|
14,951,303
|
|
255,541
|
|
|
|
|
|
Frederick
M. Goldberg
|
|
14,900,635
|
|
306,209
|
|
|
|
|
|
Thomas
M. Hulbert
|
|
14,909,678
|
|
297,166
|
|
|
|
|
|
Thomas
L. Matson, Sr.
|
|
14,873,215
|
|
333,628
|
|
|
|
|
|
Daniel
C. Regis
|
|
14,974,446
|
|
232,398
|
|
|
|
|
|
Donald
Rodman
|
|
14,875,199
|
|
331,645
|
|
|
|
|
|
William
T. Weyerhaeuser
|
|
14,989,993
|
|
216,850
|
|
|
|
|
|
James
M. Will
|
|
14,940,204
|
|
266,640
|
Proposal
2.
|
AMENDMENT
TO AMENDED AND RESTATED STOCK OPTION AND EQUITY COMPENSATION
PLAN
|
Shares
Voted "For"
|
|
Shares
Voted "Against"
|
|
Abstentions
|
10,465,500
|
|
921,289
|
|
96,856
|
Proposal
3. AMENDMENT
TO EMPLOYEE STOCK PURCHASE PLAN
Shares
Voted "For"
|
|
Shares
Voted "Against"
|
|
Abstentions
|
10,978,770
|
|
412,078
|
|
92,797
|
Proposal
4. ADVISORY
(NON-BINDING) VOTE ON EXECUTIVE COMPENSATION
Shares
Voted "For"
|
|
Shares
Voted "Against"
|
|
Abstentions
|
13,933,048
|
|
1,141,128
|
|
132,667
|
Proposal
5. RATIFICATION
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Shares
Voted "For"
|
|
Shares
Voted "Against"
|
|
Abstentions
|
15,063,626
|
|
93,146
|
|
50,071
|
As
reported in Item 4 above, on April 22, 2009, the Company’s shareholders approved
an amendment to the Amended and Restated Stock Option and Equity Compensation
Plan to increase the number of shares authorized for issuance pursuant to awards
under the plan by 700,000.
4.1
|
Certificate
of Designations of Columbia Banking System, Inc. with respect to Fixed
Rate Cumulative Perpetual Preferred Stock, Series A dated November 18,
2008 (1)
|
|
|
10.1
|
Amended
and Restated Executive Supplemental Compensation Agreement dated as of May
27, 2009 among the Company, Columbia State Bank and Melanie J. Dressel
(2)
|
|
|
10.2
|
Amended
and Restated Executive Supplemental Compensation Agreement dated as of May
27, 2009 among the Company, Columbia State Bank and Gary R. Schminkey
(3)
|
|
|
10.3
|
Amended
and Restated Executive Supplemental Compensation Agreement dated as of May
27, 2009 among the Company, Columbia State Bank and Mark W. Nelson
(4)
|
|
|
10.4
|
Amended
and Restated Stock Option and Equity Compensation Plan
(5)
|
|
|
10.5
|
Amended
and Restated Employee Stock Purchase Plan (6)
|
|
|
10.6
|
Form
of Waiver of Executive Compensation Agreement (7)
|
|
|
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
|
(1)
|
Incorporated
by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K
filed November 21, 2008
|
(2)
|
Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed June 2, 2009
|
(3)
|
Incorporated
by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K
filed June 2, 2009
|
(4)
|
Incorporated
by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K
filed June 2, 2009
|
(5)
|
Incorporated
by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement
(File No. 333-160370) filed July 1,
2009
|
(6)
|
Incorporated
by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement
(File No. 333-160371) filed July 1,
2009
|
(7)
|
Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed November 21, 2008
|
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:
July 31, 2009
|
|
By
|
/s/
MELANIE J. DRESSEL
|
|
|
|
|
Melanie
J. Dressel
|
|
|
|
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
Date:
July 31, 2009
|
|
By
|
/s/
GARY R. SCHMINKEY
|
|
|
|
|
Gary
R. Schminkey
|
|
|
|
|
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial Officer)
|
|
|
|
|
Date:
July 31, 2009
|
|
By
|
/s/
CLINT E. STEIN
|
|
|
|
|
Clint
E. Stein
|
|
|
|
|
Senior
Vice President and
Chief
Accounting Officer
(Principal
Accounting Officer)
|
INDEX
TO EXHIBITS
4.1
|
Certificate
of Designations of Columbia Banking System, Inc. with respect to Fixed
Rate Cumulative Perpetual Preferred Stock, Series A dated November 18,
2008 (1)
|
|
|
10.1
|
Amended
and Restated Executive Supplemental Compensation Agreement dated as of May
27, 2009 among the Company, Columbia State Bank and Melanie J. Dressel
(2)
|
|
|
10.2
|
Amended
and Restated Executive Supplemental Compensation Agreement dated as of May
27, 2009 among the Company, Columbia State Bank and Gary R. Schminkey
(3)
|
|
|
10.3
|
Amended
and Restated Executive Supplemental Compensation Agreement dated as of May
27, 2009 among the Company, Columbia State Bank and Mark W. Nelson
(4)
|
|
|
10.4
|
Amended
and Restated Stock Option and Equity Compensation Plan
(5)
|
|
|
10.5
|
Amended
and Restated Employee Stock Purchase Plan (6)
|
|
|
10.6
|
Form
of Waiver of Executive Compensation Agreement (7)
|
|
|
|
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
|
(1)
|
Incorporated
by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K
filed November 21, 2008
|
(2)
|
Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed June 2, 2009
|
(3)
|
Incorporated
by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K
filed June 2, 2009
|
(4)
|
Incorporated
by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K
filed June 2, 2009
|
(5)
|
Incorporated
by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement
(File No. 333-160370) filed July 1,
2009
|
(6)
|
Incorporated
by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement
(File No. 333-160371) filed July 1,
2009
|
(7)
|
Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed November 21, 2008
|