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, 2008.
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to .
Commission
File Number 0-20288
COLUMBIA
BANKING SYSTEM, INC.
(Exact
name of 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, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
|
The
number of shares of common stock outstanding at July 31, 2008 was
18,151,288
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|
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Page
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Item 1.
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1
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2
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3
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4
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5
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Item 2.
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12
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Item 3.
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25
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Item 4.
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25
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Item 1.
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26
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Item 1A.
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26
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Item 2.
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27
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Item 3.
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27
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Item 4.
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28
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Item 5.
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28
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Item 6.
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29
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30
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL
STATEMENTS
Columbia
Banking System, Inc.
(Unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
thousands except per share)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
37,334 |
|
|
$ |
36,224 |
|
|
$ |
78,637 |
|
|
$ |
70,254 |
|
Taxable
securities
|
|
|
4,895 |
|
|
|
4,657 |
|
|
|
9,875 |
|
|
|
9,442 |
|
Tax-exempt
securities
|
|
|
1,999 |
|
|
|
1,960 |
|
|
|
4,000 |
|
|
|
3,920 |
|
Federal
funds sold and deposits in banks
|
|
|
95 |
|
|
|
414 |
|
|
|
244 |
|
|
|
785 |
|
Total
interest income
|
|
|
44,323 |
|
|
|
43,255 |
|
|
|
92,756 |
|
|
|
84,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
11,461 |
|
|
|
13,617 |
|
|
|
26,296 |
|
|
|
25,776 |
|
Federal
Home Loan Bank advances
|
|
|
1,995 |
|
|
|
2,484 |
|
|
|
4,577 |
|
|
|
5,663 |
|
Long-term
obligations
|
|
|
429 |
|
|
|
513 |
|
|
|
916 |
|
|
|
1,020 |
|
Other
borrowings
|
|
|
164 |
|
|
|
946 |
|
|
|
366 |
|
|
|
1,544 |
|
Total
interest expense
|
|
|
14,049 |
|
|
|
17,560 |
|
|
|
32,155 |
|
|
|
34,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
|
30,274 |
|
|
|
25,695 |
|
|
|
60,601 |
|
|
|
50,398 |
|
Provision
for loan and lease losses
|
|
|
15,350 |
|
|
|
329 |
|
|
|
17,426 |
|
|
|
967 |
|
Net
interest income after provision for loan and lease losses
|
|
|
14,924 |
|
|
|
25,366 |
|
|
|
43,175 |
|
|
|
49,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
3,738 |
|
|
|
3,293 |
|
|
|
7,306 |
|
|
|
6,252 |
|
Merchant
services fees
|
|
|
2,162 |
|
|
|
2,124 |
|
|
|
4,078 |
|
|
|
4,093 |
|
Redemption
of Visa and Mastercard shares
|
|
|
1,066 |
|
|
|
- |
|
|
|
3,028 |
|
|
|
- |
|
Gain
on sale of investment securities, net
|
|
|
- |
|
|
|
- |
|
|
|
882 |
|
|
|
- |
|
Bank
owned life insurance ("BOLI")
|
|
|
549 |
|
|
|
451 |
|
|
|
1,054 |
|
|
|
877 |
|
Other
|
|
|
1,790 |
|
|
|
873 |
|
|
|
3,114 |
|
|
|
1,696 |
|
Total
noninterest income
|
|
|
9,305 |
|
|
|
6,741 |
|
|
|
19,462 |
|
|
|
12,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
12,348 |
|
|
|
10,848 |
|
|
|
25,744 |
|
|
|
22,206 |
|
Occupancy
|
|
|
3,199 |
|
|
|
2,945 |
|
|
|
6,458 |
|
|
|
5,782 |
|
Merchant
processing
|
|
|
904 |
|
|
|
884 |
|
|
|
1,770 |
|
|
|
1,707 |
|
Advertising
and promotion
|
|
|
637 |
|
|
|
657 |
|
|
|
1,218 |
|
|
|
1,204 |
|
Data
processing
|
|
|
783 |
|
|
|
553 |
|
|
|
1,598 |
|
|
|
1,120 |
|
Legal
and professional fees
|
|
|
765 |
|
|
|
687 |
|
|
|
714 |
|
|
|
1,510 |
|
Taxes,
licenses and fees
|
|
|
796 |
|
|
|
703 |
|
|
|
1,547 |
|
|
|
1,316 |
|
Net
gain on sale of other real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
(23 |
) |
|
|
- |
|
Other
|
|
|
3,935 |
|
|
|
2,989 |
|
|
|
7,895 |
|
|
|
5,823 |
|
Total
noninterest expense
|
|
|
23,367 |
|
|
|
20,266 |
|
|
|
46,921 |
|
|
|
40,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
862 |
|
|
|
11,841 |
|
|
|
15,716 |
|
|
|
21,681 |
|
Provision
(benefit) for income taxes
|
|
|
(1,074 |
) |
|
|
3,297 |
|
|
|
2,803 |
|
|
|
5,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
1,936 |
|
|
$ |
8,544 |
|
|
$ |
12,913 |
|
|
$ |
15,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.11 |
|
|
$ |
0.53 |
|
|
$ |
0.72 |
|
|
$ |
0.98 |
|
Diluted
|
|
$ |
0.11 |
|
|
$ |
0.53 |
|
|
$ |
0.72 |
|
|
$ |
0.97 |
|
Dividends
paid per common share
|
|
$ |
0.17 |
|
|
$ |
0.17 |
|
|
$ |
0.34 |
|
|
$ |
0.32 |
|
Weighted
average number of common shares outstanding
|
|
|
17,898 |
|
|
|
16,126 |
|
|
|
17,874 |
|
|
|
16,115 |
|
Weighted
average number of diluted common shares outstanding
|
|
|
18,021 |
|
|
|
16,258 |
|
|
|
17,998 |
|
|
|
16,261 |
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
Columbia
Banking System, Inc.
(Unaudited)
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
|
$ |
97,076 |
|
|
$ |
82,735 |
|
Interest-earning
deposits with banks
|
|
|
|
|
8,552 |
|
|
|
11,240 |
|
Federal
funds sold
|
|
|
|
|
10,000 |
|
|
|
- |
|
Total
cash and cash equivalents
|
|
|
|
|
115,628 |
|
|
|
93,975 |
|
Securities
available for sale at fair value (amortized cost of $554,547 and $558,685,
respectively)
|
|
|
|
|
549,755 |
|
|
|
561,366 |
|
Federal
Home Loan Bank stock at cost
|
|
|
|
|
17,260 |
|
|
|
11,607 |
|
Loans
held for sale
|
|
|
|
|
3,323 |
|
|
|
4,482 |
|
Loans,
net of deferred loan fees of ($3,867) and ($3,931),
respectively
|
|
|
|
2,275,719 |
|
|
|
2,282,728 |
|
Less:
allowance for loan and lease losses
|
|
|
|
|
41,724 |
|
|
|
26,599 |
|
Loans,
net
|
|
|
|
|
2,233,995 |
|
|
|
2,256,129 |
|
Interest
receivable
|
|
|
|
|
12,289 |
|
|
|
14,622 |
|
Premises
and equipment, net
|
|
|
|
|
60,558 |
|
|
|
56,122 |
|
Other
real estate owned
|
|
|
|
|
- |
|
|
|
181 |
|
Goodwill
|
|
|
|
|
96,116 |
|
|
|
96,011 |
|
Core
deposit intangible, net
|
|
|
|
|
6,458 |
|
|
|
7,050 |
|
Other
assets
|
|
|
|
|
74,225 |
|
|
|
77,168 |
|
Total
Assets
|
|
|
|
$ |
3,169,607 |
|
|
$ |
3,178,713 |
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
|
|
$ |
480,612 |
|
|
$ |
468,237 |
|
Interest-bearing
|
|
|
|
|
1,918,312 |
|
|
|
2,029,824 |
|
Total
deposits
|
|
|
|
|
2,398,924 |
|
|
|
2,498,061 |
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
|
|
|
329,000 |
|
|
|
257,670 |
|
Securities
sold under agreements to repurchase
|
|
|
|
|
25,000 |
|
|
|
- |
|
Other
borrowings
|
|
|
|
|
5,107 |
|
|
|
5,061 |
|
Total
short-term borrowings
|
|
|
|
|
359,107 |
|
|
|
262,731 |
|
Long-term
subordinated debt
|
|
|
|
|
25,561 |
|
|
|
25,519 |
|
Other
liabilities
|
|
|
|
|
41,745 |
|
|
|
50,671 |
|
Total
liabilities
|
|
|
|
|
2,825,337 |
|
|
|
2,836,982 |
|
Commitments
and contingent liabilities (note 10)
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock (no par value)
|
|
|
|
|
- |
|
|
|
- |
|
Authorized,
2 million shares; none outstanding
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
December
31,
|
|
|
|
|
|
|
|
|
|
2008
|
2007
|
|
|
|
|
|
|
|
|
Common
Stock (no par value)
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares
|
63,034
|
63,034
|
|
|
|
|
|
|
|
|
Issued
and outstanding
|
18,111
|
17,953
|
|
|
228,826 |
|
|
|
226,550 |
|
Retained
earnings
|
|
|
|
|
114,810 |
|
|
|
110,169 |
|
Accumulated
other comprehensive income
|
|
|
|
|
634 |
|
|
|
5,012 |
|
Total
shareholders' equity
|
|
|
|
|
344,270 |
|
|
|
341,731 |
|
Total
Liabilities and Shareholders' Equity
|
|
|
|
$ |
3,169,607 |
|
|
$ |
3,178,713 |
|
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
|
CONSOLIDATED
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Columbia
Banking System, Inc.
(Unaudited)
|
|
Common Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Number
of
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
(in
thousands)
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
Balance
at January 1, 2007
|
|
|
16,060 |
|
|
$ |
166,763 |
|
|
$ |
89,037 |
|
|
$ |
(3,453 |
) |
|
$ |
252,347 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
15,827 |
|
|
|
- |
|
|
|
15,827 |
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss from securities, net of reclassification
adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,063 |
) |
|
|
(4,063 |
) |
Net
unrealized loss from cash flow hedging instruments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(813 |
) |
|
|
(813 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,951 |
|
Issuance
of stock under stock option and other plans
|
|
|
64 |
|
|
|
986 |
|
|
|
- |
|
|
|
- |
|
|
|
986 |
|
Stock
award compensation expense
|
|
|
42 |
|
|
|
368 |
|
|
|
- |
|
|
|
- |
|
|
|
368 |
|
Stock
option compensation expense
|
|
|
- |
|
|
|
92 |
|
|
|
- |
|
|
|
- |
|
|
|
92 |
|
Tax
benefit associated with stock-based compensation
|
|
|
- |
|
|
|
192 |
|
|
|
- |
|
|
|
- |
|
|
|
192 |
|
Cash
dividends paid on common stock
|
|
|
- |
|
|
|
- |
|
|
|
(5,163 |
) |
|
|
- |
|
|
|
(5,163 |
) |
Balance
at June 30, 2007
|
|
|
16,166 |
|
|
$ |
168,401 |
|
|
$ |
99,701 |
|
|
$ |
(8,329 |
) |
|
$ |
259,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
17,953 |
|
|
$ |
226,550 |
|
|
$ |
110,169 |
|
|
$ |
5,012 |
|
|
$ |
341,731 |
|
Cumulative
effect of change in accounting principle (note 2)
|
|
|
- |
|
|
|
- |
|
|
|
(2,137 |
) |
|
|
- |
|
|
|
(2,137 |
) |
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
unrealized gain from cash flow hedging instruments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
438 |
|
|
|
438 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,535 |
|
Issuance
of stock under stock option and other plans
|
|
|
93 |
|
|
|
1,399 |
|
|
|
- |
|
|
|
- |
|
|
|
1,399 |
|
Stock
award compensation expense
|
|
|
65 |
|
|
|
739 |
|
|
|
- |
|
|
|
- |
|
|
|
739 |
|
Tax
benefit associated with stock-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 |
|
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
|
Columbia
Banking System, Inc.
(Unaudited)
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
Income
|
|
$ |
12,913 |
|
|
$ |
15,827 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
17,426 |
|
|
|
967 |
|
Deferred
income tax benefit
|
|
|
(429 |
) |
|
|
(960 |
) |
Excess
tax benefit from stock-based compensation
|
|
|
(138 |
) |
|
|
(192 |
) |
Stock-based
compensation expense
|
|
|
739 |
|
|
|
460 |
|
Depreciation,
amortization and accretion
|
|
|
3,363 |
|
|
|
3,043 |
|
Net
realized gain on sale of securities
|
|
|
(882 |
) |
|
|
- |
|
Net
realized gain on sale of other real estate and fixed
assets
|
|
|
(119 |
) |
|
|
(2 |
) |
Net
change in:
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
1,159 |
|
|
|
(1,618 |
) |
Interest
receivable
|
|
|
2,333 |
|
|
|
(800 |
) |
Interest
payable
|
|
|
(2,184 |
) |
|
|
1,159 |
|
Other
assets
|
|
|
(1,431 |
) |
|
|
(614 |
) |
Other
liabilities
|
|
|
(7,750 |
) |
|
|
(266 |
) |
Net
cash provided by operating activities
|
|
|
25,000 |
|
|
|
17,004 |
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of securities available for sale
|
|
|
(76,907 |
) |
|
|
(2,388 |
) |
Proceeds
from sales of securities available for sale
|
|
|
51,358 |
|
|
|
- |
|
Proceeds
from principal repayments and maturities of securities available for
sale
|
|
|
30,105 |
|
|
|
29,554 |
|
Proceeds
from maturities of securities held to maturity
|
|
|
- |
|
|
|
250 |
|
Loans
originated and acquired, net of principal collected
|
|
|
3,717 |
|
|
|
(150,510 |
) |
Purchases
of premises and equipment
|
|
|
(7,019 |
) |
|
|
(2,691 |
) |
Proceeds
from disposal of premises and equipment
|
|
|
114 |
|
|
|
196 |
|
Purchase
of FHLB stock
|
|
|
(5,653 |
) |
|
|
- |
|
Proceeds
from termination of cash flow hedging instruments
|
|
|
8,093 |
|
|
|
- |
|
Proceeds
from sales of other real estate and other personal property
owned
|
|
|
204 |
|
|
|
- |
|
Net
cash provided by(used in) investing activities
|
|
|
4,012 |
|
|
|
(125,589 |
) |
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase(decrease) in deposits
|
|
|
(99,137 |
) |
|
|
93,974 |
|
Proceeds
from Federal Home Loan Bank advances
|
|
|
1,491,268 |
|
|
|
1,635,250 |
|
Repayment
from Federal Home Loan Bank advances
|
|
|
(1,419,938 |
) |
|
|
(1,679,350 |
) |
Net
increase in repurchase agreement borrowings
|
|
|
25,000 |
|
|
|
50,000 |
|
Net
increase(decrease) in other borrowings
|
|
|
46 |
|
|
|
(149 |
) |
Cash
dividends paid on common stock
|
|
|
(6,135 |
) |
|
|
(5,163 |
) |
Proceeds
from issuance of common stock
|
|
|
1,399 |
|
|
|
986 |
|
Excess
tax benefit from stock-based compensation
|
|
|
138 |
|
|
|
192 |
|
Net
cash provided by(used in) financing activities
|
|
|
(7,359 |
) |
|
|
95,740 |
|
Increase(decrease)
in cash and cash equivalents
|
|
|
21,653 |
|
|
|
(12,845 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
93,975 |
|
|
|
104,344 |
|
Cash
and cash equivalents at end of period
|
|
$ |
115,628 |
|
|
$ |
91,499 |
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
34,339 |
|
|
$ |
32,844 |
|
Cash
paid for income tax
|
|
$ |
8,652 |
|
|
$ |
6,550 |
|
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
|
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
|
Columbia
Banking System, Inc.
1.
Basis of Presentation and Significant Accounting Policies
(a)
|
Basis
of Presentation
|
The
interim unaudited consolidated condensed financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for condensed interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial
information and footnotes have been omitted or condensed. The consolidated
condensed financial statements include the accounts of the Company, and its
wholly owned banking 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 consolidated financial statements and results of
operations presented in this report on Form 10-Q include financial information
for Mountain Bank Holding Company and Town Center Bancorp, which were merged
into Columbia Bank in the third quarter of 2007. The results of
operations for the six months ended June 30, 2008 are not necessarily indicative
of results to be anticipated for the year ending December 31, 2008. The
accompanying interim unaudited consolidated condensed financial statements
should be read in conjunction with the financial statements and related notes
contained in the Company’s 2007 Annual Report on Form 10-K.
(b)
|
Significant
Accounting Policies
|
The
significant accounting policies used in preparation of our consolidated
financial statements are disclosed in our 2007 Annual Report on Form 10-K. There
have not been any other changes in our significant accounting policies compared
to those contained in our 2007 10-K disclosure for the year ended
December 31, 2007.
2.
Accounting Pronouncements Recently Issued or Adopted
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). This statement identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (“GAAP”) in the United States (the GAAP
hierarchy). This Statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning
of Present Fairly
in Conformity With Generally Accepted Accounting
Principles. Adoption of SFAS 162 is not expected to have any
effect on the Company’s financial condition or results of
operations.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS 161”). This Statement requires enhanced disclosures about an
entity’s derivative and hedging activities and is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company plans to apply the enhanced disclosure
provisions of SFAS 161 to all derivative and hedging activities.
On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value
Measurements. SFAS 157 defines fair value, establishes a
framework for measuring fair value under accounting principles generally
accepted in the United States of America, and expands disclosures about fair
value measurement. For further information, see Note 6 of the Notes
to Unaudited Consolidated Condensed Financial Statements.
On
January 1, 2008, the Company began applying the consensus reached by the
Emerging Issues Task Force in Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (“EITF 06-4”). EITF 06-4 provides recognition
guidance regarding liabilities and related compensation costs for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. The Company recognized the
effects of applying the consensus through a change in accounting principle with
a cumulative-effect charge to retained earnings of $2.1 million, net of income
taxes of $1.2 million. During the second quarter of 2008 the Company
entered into transactions whereby certain current and former officers of the
Company agreed to terminate the split-dollar portion of their bank owned life
insurance policies in exchange for individual life insurance
policies. In the second quarter of 2008 the Company recognized the
net effect of those transactions as a reduction of compensation expense totaling
$107,000.
3.
Earnings per share
The
following table sets forth the computation of basic and diluted earnings per
share for the six months ended June 30, 2008 and 2007 (in thousands, except
for per share data):
|
|
For
The Three Months Ended
|
|
|
For
The Six Months Ended
|
|
(in
thousands except per share)
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
Net
Income
|
|
$ |
1,936 |
|
|
$ |
8,544 |
|
|
$ |
12,913 |
|
|
$ |
15,827 |
|
Weighted
average common shares outstanding (for basic calculation)
|
|
|
17,898 |
|
|
|
16,126 |
|
|
|
17,874 |
|
|
|
16,115 |
|
Dilutive
effect of outstanding common stock options and nonvested restricted
shares
|
|
|
123 |
|
|
|
132 |
|
|
|
124 |
|
|
|
146 |
|
Weighted
average common stock and common equivalent shares outstanding (for diluted
calculation)
|
|
|
18,021 |
|
|
|
16,258 |
|
|
|
17,998 |
|
|
|
16,261 |
|
Earnings
per common share - basic
|
|
$ |
0.11 |
|
|
$ |
0.53 |
|
|
$ |
0.72 |
|
|
$ |
0.98 |
|
Earnings
per common share - diluted
|
|
$ |
0.11 |
|
|
$ |
0.53 |
|
|
$ |
0.72 |
|
|
$ |
0.97 |
|
Potential
dilutive shares are excluded from the computation of earnings per share if their
effect is anti-dilutive. For the three and six month periods ended June 30,
2008, there were 36,981 anti-dilutive shares outstanding related to options to
acquire common stock. There were no anti-dilutive shares outstanding
related to options to acquire common stock for the same periods last
year.
4.
Dividends
On
January 24, 2008, the Company declared a quarterly cash dividend of $0.17
per share, payable on February 20, 2008 to shareholders of record as of the
close of business on February 6, 2008. On April 24, 2008, the Company
declared a quarterly cash dividend of $0.17 per share, payable on May 21,
2008, to shareholders of record at the close of business May 7, 2008.
Subsequent to quarter end, on July 24, 2008, the Company declared a quarterly
cash dividend of $0.17 per share, payable on August 20, 2008, to shareholders of
record at the close of business August 6, 2008. The payment of cash
dividends is subject to Federal regulatory requirements for capital levels and
other restrictions. In addition, the cash dividends paid by Columbia Bank 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. In addition, the provision for
loan and lease losses is included in the “Other” category. On April
1, 2008, the Bank of Astoria banking subsidiary was merged into the Columbia
Bank banking subsidiary. This change in internal organizational
structure also changes the composition of the Company’s reportable
segments. Accordingly, segment results for the Bank of Astoria are
now included in the Retail Banking segment. Prior period segment
reporting has been restated to reflect this change.
The
Company generates segment results that include balances directly attributable to
business line activities. The financial results of each segment are derived from
the Company’s general ledger system. Overhead, including sales and back office
support functions and other indirect expenses are not allocated to the major
lines of business. Goodwill resulting from business combinations is included in
the Retail Banking segment. Since the Company is not specifically organized
around lines of business, most reportable segments comprise more than one
operating activity.
The
principal activities conducted by commercial banking are the origination of
commercial business 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, 2008 the Company implemented a more robust internal funds transfer
pricing methodology. Internal funds transfer pricing refers to the
process we utilize to give an earnings credit to a branch or revenue center for
the deposit funds they generate while providing an earnings charge to the
centers that use deposit funds to make loans. The implementation of
this methodology changed the basis of measurement for segment net interest
income as presented in the tables below. Generally, this methodology
had the effect of increasing net interest income for the commercial banking
segment with a corresponding decrease in net interest income for the retail
banking segment. The increase in net interest
income
for the commercial banking segment is driven primarily by the earnings credit
for deposit funds generated within that segment. In prior years, the
retail banking segment benefited from the earnings credit for deposit funds
generated by the commercial banking segment. Segment net interest
income after provision for loan and lease losses for the current quarter is not
directly comparable to the same line item in the first quarter of last year as
the prior quarter cannot practicably be restated.
The
organizational structure of the Company and its business line financial results
are not necessarily comparable with information from other financial
institutions. Financial highlights by lines of business are as
follows:
Condensed
Statements of Income:
|
|
Three
Months Ended June 30, 2008
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
13,088 |
|
|
$ |
14,556 |
|
|
$ |
2,630 |
|
|
$ |
30,274 |
|
Provision
for loan and lease losses
|
|
|
|
|
|
|
|
|
|
|
(15,350 |
) |
|
|
(15,350 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
13,088 |
|
|
|
14,556 |
|
|
|
(12,720 |
) |
|
|
14,924 |
|
Noninterest
income
|
|
|
829 |
|
|
|
2,321 |
|
|
|
6,155 |
|
|
|
9,305 |
|
Noninterest
expense
|
|
|
(3,271 |
) |
|
|
(7,901 |
) |
|
|
(12,195 |
) |
|
|
(23,367 |
) |
Income
(loss) before income taxes
|
|
|
10,646 |
|
|
|
8,976 |
|
|
|
(18,760 |
) |
|
|
862 |
|
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,074 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,936 |
|
Total
assets
|
|
$ |
1,460,556 |
|
|
$ |
1,057,061 |
|
|
$ |
651,990 |
|
|
$ |
3,169,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2007
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
6,947 |
|
|
$ |
19,043 |
|
|
$ |
(295 |
) |
|
$ |
25,695 |
|
Provision
for loan and lease losses
|
|
|
|
|
|
|
|
|
|
|
(329 |
) |
|
|
(329 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
6,947 |
|
|
|
19,043 |
|
|
|
(624 |
) |
|
|
25,366 |
|
Noninterest
income
|
|
|
725 |
|
|
|
2,023 |
|
|
|
3,993 |
|
|
|
6,741 |
|
Noninterest
expense
|
|
|
(2,575 |
) |
|
|
(6,553 |
) |
|
|
(11,138 |
) |
|
|
(20,266 |
) |
Income
(loss) before income taxes
|
|
|
5,097 |
|
|
|
14,513 |
|
|
|
(7,769 |
) |
|
|
11,841 |
|
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,297 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,544 |
|
Total
assets
|
|
$ |
1,354,301 |
|
|
$ |
667,325 |
|
|
$ |
639,320 |
|
|
$ |
2,660,946 |
|
|
|
Six
Months Ended June 30, 2008
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
26,720 |
|
|
$ |
30,607 |
|
|
$ |
3,274 |
|
|
$ |
60,601 |
|
Provision
for loan and lease losses
|
|
|
|
|
|
|
|
|
|
|
(17,426 |
) |
|
|
(17,426 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
26,720 |
|
|
|
30,607 |
|
|
|
(14,152 |
) |
|
|
43,175 |
|
Noninterest
income
|
|
|
2,002 |
|
|
|
4,565 |
|
|
|
12,895 |
|
|
|
19,462 |
|
Noninterest
expense
|
|
|
(5,967 |
) |
|
|
(17,099 |
) |
|
|
(23,855 |
) |
|
|
(46,921 |
) |
Income
(loss) before income taxes
|
|
|
22,755 |
|
|
|
18,073 |
|
|
|
(25,112 |
) |
|
|
15,716 |
|
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,803 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,913 |
|
Total
assets
|
|
$ |
1,460,556 |
|
|
$ |
1,057,061 |
|
|
$ |
651,990 |
|
|
$ |
3,169,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2007
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
13,403 |
|
|
$ |
37,782 |
|
|
$ |
(787 |
) |
|
$ |
50,398 |
|
Provision
for loan and lease losses
|
|
|
|
|
|
|
|
|
|
|
(967 |
) |
|
|
(967 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
13,403 |
|
|
|
37,782 |
|
|
|
(1,754 |
) |
|
|
49,431 |
|
Noninterest
income
|
|
|
1,360 |
|
|
|
3,895 |
|
|
|
7,663 |
|
|
|
12,918 |
|
Noninterest
expense
|
|
|
(5,378 |
) |
|
|
(12,759 |
) |
|
|
(22,531 |
) |
|
|
(40,668 |
) |
Income
(loss) before income taxes
|
|
|
9,385 |
|
|
|
28,918 |
|
|
|
(16,622 |
) |
|
|
21,681 |
|
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,854 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,827 |
|
Total
assets
|
|
$ |
1,354,301 |
|
|
$ |
667,325 |
|
|
$ |
639,320 |
|
|
$ |
2,660,946 |
|
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 values as of June 30, 2008 by level within the fair
value hierarchy. As required by SFAS 157, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
thousands)
|
|
June
30, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ |
549,755 |
|
|
$ |
20,238 |
|
|
$ |
529,517 |
|
|
$ |
- |
|
Interest
rate swap agreements
|
|
$ |
3,151 |
|
|
$ |
- |
|
|
$ |
3,151 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
3,151 |
|
|
$ |
- |
|
|
$ |
3,151 |
|
|
$ |
- |
|
7.
Comprehensive Income (Loss)
The
components of comprehensive income (loss) are as follows:
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Net
income as reported
|
|
$ |
1,936 |
|
|
$ |
8,544 |
|
Unrealized
loss from securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding loss from available for sale securities arising during
the period, net of tax of $3,712 and $3,782
|
|
|
(6,737 |
) |
|
|
(6,851 |
) |
Reclassification
adjustment of net (gain)loss from sale of available for sale securities
included in income, net of tax of $0 and $0
|
|
|
- |
|
|
|
- |
|
Net
unrealized loss from securities, net of reclassification
adjustment
|
|
|
(6,737 |
) |
|
|
(6,851 |
) |
Unrealized
loss from cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Net
unrealized loss from cash flow hedging instruments arising during the
period, net of tax of $0 and $480
|
|
|
- |
|
|
|
(881 |
) |
Reclassification
adjustment of net (gain)loss included in income, net of tax of $124 and
$(5)
|
|
|
(225 |
) |
|
|
10 |
|
Net
unrealized loss from cash flow hedging instruments
|
|
|
(225 |
) |
|
|
(871 |
) |
Total
comprehensive income (loss)
|
|
$ |
(5,026 |
) |
|
$ |
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Net
income as reported
|
|
$ |
12,913 |
|
|
$ |
15,827 |
|
Unrealized
loss from securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding loss from available for sale securities arising during
the period, net of tax of $2,345 and $2,267
|
|
|
(4,245 |
) |
|
|
(4,063 |
) |
Reclassification
adjustment of net gain from sale of available for sale securities included
in income, net of tax of $311 and $0
|
|
|
(571 |
) |
|
|
- |
|
Net
unrealized loss from securities, net of reclassification
adjustment
|
|
|
(4,816 |
) |
|
|
(4,063 |
) |
Unrealized
gain(loss) from cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Net
unrealized gain(loss) from cash flow hedging instruments arising during
the period, net of tax of $(425) and $451
|
|
|
739 |
|
|
|
(826 |
) |
Reclassification
adjustment of net (gain)loss included in income, net of tax of $166 and
$(7)
|
|
|
(301 |
) |
|
|
13 |
|
Net
unrealized gain(loss) from cash flow hedging instruments
|
|
|
438 |
|
|
|
(813 |
) |
Total
comprehensive income
|
|
$ |
8,535 |
|
|
$ |
10,951 |
|
8.
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, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
27,914 |
|
|
$ |
20,819 |
|
|
$ |
26,599 |
|
|
$ |
20,182 |
|
Provision
charged to expense
|
|
|
15,350 |
|
|
|
329 |
|
|
|
17,426 |
|
|
|
967 |
|
Loans
charged off
|
|
|
(1,688 |
) |
|
|
(175 |
) |
|
|
(2,903 |
) |
|
|
(326 |
) |
Recoveries
|
|
|
148 |
|
|
|
366 |
|
|
|
602 |
|
|
|
516 |
|
Ending
balance
|
|
$ |
41,724 |
|
|
$ |
21,339 |
|
|
$ |
41,724 |
|
|
$ |
21,339 |
|
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)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
349 |
|
|
$ |
339 |
|
|
$ |
349 |
|
|
$ |
339 |
|
Net
changes in the allowance for unfunded commitments and letters of
credit
|
|
|
110 |
|
|
|
- |
|
|
|
110 |
|
|
|
- |
|
Ending
balance
|
|
$ |
459 |
|
|
$ |
339 |
|
|
$ |
459 |
|
|
$ |
339 |
|
9.
Goodwill and Intangible Assets
The
Company had $96 million in goodwill at June 30, 2008 and December 31, 2007.
At June 30, 2008 and December 31, 2007, the Company had a core deposit
intangible (“CDI”) asset of $6.5 million and $7.1 million, respectively. In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,
goodwill is not amortized but is reviewed for potential impairment at the
reporting unit level during the third quarter on an annual basis and between
annual tests if events or circumstances indicate a potential impairment. An
impairment loss is recorded to the extent that the carrying amount of goodwill
exceeds its implied fair value. The CDI is evaluated for impairment if events
and circumstances indicate a possible impairment. The CDI is amortized on an
accelerated basis over an estimated life of approximately 10 years. Amortization
expense related to the CDI was $296,000 and $96,000 for the three months ended
June 30, 2008 and June 30, 2007 and $592,000 and $192,000 for the six months
ended June 30, 2008 and June 30, 2007, respectively. The CDI amortization
expense is included in other noninterest expense on the consolidated condensed
statements of income.
10.
Commitments and Contingent Liabilities
On March
18, 2008 Visa, Inc. (“Visa”) completed its initial public offering (“IPO”). On
March 31, 2008 Visa funded a litigation escrow account with $3.0 billion from
the IPO proceeds. Based on the Company’s Visa USA membership percentage, the
expected economic benefit to the Company from this escrow account is $889,200.
Accordingly, the Company recognized a recapture of previously accrued legal
expense of $889,200. This recapture is included in the legal and professional
services line item of the consolidated condensed statements of income and is a
reduction of the $1.8 million Visa litigation liability the Company accrued
during the fourth quarter of 2007. The Company’s remaining Visa litigation
reserve of approximately $888,000, which is included in other liabilities on the
consolidated condensed balance sheets, will be subject to ongoing review and
adjusted accordingly as information on Visa’s litigation matters
emerges.
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, 2007 audited
consolidated financial statements and its accompanying notes included in our
recent Annual Report on Form 10-K. In the following discussion, unless otherwise
noted, references to increases or decreases in average balances in items of
income and expense for a particular period and balances at a particular date
refer to the comparison with corresponding amounts for the period or date one
year earlier.
NOTE
REGARDING FORWARD LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q may be deemed to include forward looking
statements, which management believes to be a benefit to
shareholders. These forward looking statements describe management’s
expectations regarding future events and developments such as future operating
results, growth in loans and deposits, continued success of our style of banking
and the strength of the local economy. The words “will,” “believe,” “expect,”
“should,” and “anticipate” and words of similar construction are intended in
part to help identify forward looking statements. Future events are difficult to
predict, and the expectations described above are necessarily subject to risk
and uncertainty that may cause actual results to differ materially and
adversely. In addition to discussions about risks and uncertainties set forth
from time to time in our filings with the SEC, factors that may cause actual
results to differ materially from those contemplated by such forward looking
statements include, among others, the following possibilities: (1) local
and national economic conditions are less favorable than expected or have a more
direct and pronounced effect on us than expected and adversely affect our
ability to continue internal growth at historical rates and maintain the quality
of our earning assets; (2) a continued decline in the housing/real estate
market; (3) changes in interest rates significantly reduce interest margins and
negatively affect funding sources; (4) deterioration of credit quality that
could, among other things, increase defaults and delinquency risks in the
Company’s loan portfolios (5) projected business increases following
strategic expansion activities are lower than expected; (6) competitive
pressure among financial institutions increases significantly;
(7) legislation or regulatory requirements or changes adversely affect the
businesses in which we are engaged; and (8) our ability to realize the
efficiencies we expect to receive from our investments in personnel,
acquisitions and infrastructure.
CRITICAL
ACCOUNTING POLICIES
Management
has identified the accounting policies related to the allowance for loan and
lease losses as critical to an understanding of our financial statements. These
policies and related estimates are discussed in “Item 7. Management Discussion
and Analysis of Financial Condition and Results of Operation” under the heading
“Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters
of Credit” in our 2007 Annual Report on Form 10-K. There have not been any
material changes in our critical accounting policies relating to the allowance
for loan and lease losses as compared to those disclosed in our 2007 Annual
Report on Form 10-K.
OVERVIEW
Note: The
second quarter and first six months of 2007 financial information does not
include the results of Mountain Bank Holding Company and Town Center Bancorp,
which were both acquired on July 23, 2007.
Earnings
Summary
The
Company reported net income for the second quarter of $1.9 million or $.11 per
diluted share, compared to $8.5 million or $.53 per diluted share for the second
quarter of 2007. Return on average assets and return on average
equity were 0.24% and 2.19%, respectively, for the second quarter of 2008,
compared with returns of 1.29% and 13.04%, respectively for the same period of
2007. The Company’s results for the second quarter of 2008 declined
from the same period in 2007, as a result of a provision for loan and lease
losses of $15.4 million as discussed below. The results of the second
quarter of 2008 reflect the financial consolidation of Mountain Bank Holding
Company and Town Center Bancorp, which were both acquired on July 23, 2007;
accordingly, the financial information for the second quarter of 2007 does not
include the results of the two organizations.
The
Company reported net income of $12.9 million for the first six months of 2008 or
$.72 per diluted share, compared with $15.8 million or $.97 per diluted share
for the first six months of 2007. Return on average assets and return
on average equity were .82% and 7.37%, respectively, for the first six months of
2008, compared with returns of 1.22% and 12.29%, respectively for the first six
months of 2007. As stated above, the Company’s results for the first
six months of 2008 declined from the same period in 2007, as a result of a
provision for loan and lease losses of $17.4 million as
discussed
below. The
results of the first six months reflect the financial consolidation of Mountain
Bank Holding Company and Town Center Bancorp, which were both acquired on July
23, 2007; accordingly, the financial information for the first six months of
2007 does not include the results of the two organizations.
Revenue
(net interest income plus noninterest income) for the three months ended June
30, 2008 was $39.6 million, or 22%, higher than the same period in
2007. The increase reflected a 38% increase in noninterest income
driven primarily by proceeds from the redemption of MasterCard International
shares totaling $1.1 million, increased service charges and other fees, and the
receipt of life insurance proceeds received in connection with the death of a
former officer covered by a bank owned life insurance policy. Net
interest income increased 18% from the prior year driven primarily by growth in
earning assets. Excluding the $1.1 million gain arising from the
redemption of the MasterCard shares, revenue was $38.5 million, or 19%, higher
than the same period last year.
Revenue
(net interest income plus noninterest income) for the first six months of 2008
was $80.1 million, or 26%, higher than the first six months of 2007, reflecting
a 51% increase in noninterest income driven primarily by gains on the sale of
investment securities, proceeds from the redemption of Visa and MasterCard
shares and increased service charges and other fees. Net interest
income increased 20% from the prior year driven primarily by growth in earning
assets. Excluding the $882,000 gain arising from the sale of
investment securities and the $3.0 million gain from the Visa and MasterCard’s
IPO, revenue was $76.2 million, or 20%, higher than the same period last
year.
Total
noninterest expense in the quarter ended June 30, 2008 was $23.4 million, or
15%, higher than in the second quarter of 2007, principally due to higher
compensation costs and other expenses. The higher compensation costs
and other expenses were driven in part by the 2007 acquisitions and the
expansion of the retail branch and professional lending team.
Total
noninterest expense in the first six months of 2008 was $46.9 million, or 15%,
higher than in the first six months of 2007, principally due to higher operating
costs from investments in personnel, branches and data
processing. These increases were mitigated by a partial reversal,
totaling $889,000, of legal expenses related to certain Visa litigation
previously accrued in the fourth quarter of 2007.
The
provision for loan and lease losses for the second quarter of 2008 was $15.4
million compared with $329,000 for the second quarter of 2007. The
additional provision is due to the weakness in the for-sale housing industry
resulting from the slowing economic environment and non-accrual loans increasing
to $71.7 million at June 30, 2008 compared to $14.0 million at December 31, 2007
and $14.4 million at March 31, 2008. The provision increased the
Company’s total allowance for loan and lease losses to 1.83% of net loans at
June 30, 2008. Net charge-offs for the current quarter were $1.5
million compared to net recoveries of $191,000 for the second quarter of
2007.
The
provision for loan and lease losses for the first six months of 2008 was $17.4
million compared with $967,000 for the first six months of 2007. Net
charge-offs for the first six months of 2008 were $2.3 million as compared with
net recoveries of $190,000 for the first six months of 2007.
RESULTS
OF OPERATIONS
Our
results of operations are dependent to a large degree on our net interest
income. We also generate noninterest income through service charges and fees,
merchant services fees, and bank owned life insurance. Our operating expenses
consist primarily of compensation and employee benefits, occupancy, merchant
card processing, data processing and legal and professional fees. Like most
financial institutions, our interest income and cost of funds are affected
significantly by general economic conditions, particularly changes in market
interest rates, and by government policies and actions of regulatory
authorities.
Note: The
first six months of 2007 financial information does not include the results of
Mountain Bank Holding Company and Town Center Bancorp, which were both acquired
on July 23, 2007.
Net
Interest Income
For the
three months ended June 30, 2008 we experienced a slight increase in our net
interest margin when compared to the same period in 2007. This
increase resulted primarily from decreased funding costs. For the
second quarter of 2008 interest income increased 2% while interest expense
decreased 20%, when compared to the same period in 2007. The increase
in interest income for the period is primarily due to increased loan volume
whereas the decrease in interest expense
is
primarily due to rate decreases on interest bearing deposits and borrowed
funds. For the six months ended June 30, 2008 interest income
increased 10% over the same period in 2007 whereas interest expense decreased
5%. Similar to the quarterly results, the increase in interest income
in the first half of the year was driven primarily by loan growth and the
decrease in interest expense driven by rate decreases on interest bearing
deposits and borrowed funds.
The
following tables set forth the average balances of all major categories of
interest-earning assets and interest-bearing liabilities, the total dollar
amounts of interest income on interest-earning assets and interest expense on
interest-bearing liabilities, the average yield earned on interest-earning
assets and average rate paid on interest-bearing liabilities by category and in
total, net interest income and net interest margin.
|
|
Three
months ending June 30,
|
|
|
Three
months ending June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
(in
thousands)
|
|
Balances
(1)
|
|
|
Earned
/ Paid
|
|
|
Rate
|
|
|
Balances
(1)
|
|
|
Earned
/ Paid
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net (2)
|
|
$ |
2,297,661 |
|
|
$ |
37,437 |
|
|
|
6.55 |
% |
|
$ |
1,846,163 |
|
|
$ |
36,224 |
|
|
|
7.87 |
% |
Securities
(2)
|
|
|
584,780 |
|
|
|
8,172 |
|
|
|
5.62 |
% |
|
|
582,378 |
|
|
|
7,692 |
|
|
|
5.30 |
% |
Interest-earning
deposits with banks and federal funds sold
|
|
|
20,008 |
|
|
|
95 |
|
|
|
1.91 |
% |
|
|
32,062 |
|
|
|
414 |
|
|
|
5.18 |
% |
Total
interest-earning assets
|
|
|
2,902,449 |
|
|
$ |
45,704 |
|
|
|
6.33 |
% |
|
|
2,460,603 |
|
|
$ |
44,330 |
|
|
|
7.23 |
% |
Other
earning assets
|
|
|
47,780 |
|
|
|
|
|
|
|
|
|
|
|
39,196 |
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
232,648 |
|
|
|
|
|
|
|
|
|
|
|
155,064 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,182,877 |
|
|
|
|
|
|
|
|
|
|
$ |
2,654,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
798,844 |
|
|
$ |
7,369 |
|
|
|
3.71 |
% |
|
$ |
604,307 |
|
|
$ |
6,613 |
|
|
|
4.39 |
% |
Savings
accounts
|
|
|
115,889 |
|
|
|
103 |
|
|
|
0.36 |
% |
|
|
105,089 |
|
|
|
109 |
|
|
|
0.42 |
% |
Interest-bearing
demand and money market accounts
|
|
|
1,035,391 |
|
|
|
3,989 |
|
|
|
1.55 |
% |
|
|
960,729 |
|
|
|
6,894 |
|
|
|
2.88 |
% |
Total
interest-bearing deposits
|
|
|
1,950,124 |
|
|
|
11,461 |
|
|
|
2.36 |
% |
|
|
1,670,125 |
|
|
|
13,616 |
|
|
|
3.27 |
% |
Federal
Home Loan Bank advances
|
|
|
313,763 |
|
|
|
1,995 |
|
|
|
2.56 |
% |
|
|
180,952 |
|
|
|
2,485 |
|
|
|
5.51 |
% |
Securities
sold under agreements to repurchase
|
|
|
25,000 |
|
|
|
118 |
|
|
|
1.89 |
% |
|
|
70,000 |
|
|
|
945 |
|
|
|
5.41 |
% |
Other
borrowings and interest-bearing liabilities
|
|
|
5,122 |
|
|
|
46 |
|
|
|
3.64 |
% |
|
|
263 |
|
|
|
2 |
|
|
|
2.60 |
% |
Long-term
subordinated debt
|
|
|
25,547 |
|
|
|
429 |
|
|
|
6.76 |
% |
|
|
22,401 |
|
|
|
512 |
|
|
|
9.17 |
% |
Total
interest-bearing liabilities
|
|
|
2,319,556 |
|
|
$ |
14,049 |
|
|
|
2.44 |
% |
|
|
1,943,741 |
|
|
$ |
17,560 |
|
|
|
3.62 |
% |
Noninterest-bearing
deposits
|
|
|
463,101 |
|
|
|
|
|
|
|
|
|
|
|
420,148 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
45,361 |
|
|
|
|
|
|
|
|
|
|
|
28,069 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
354,859 |
|
|
|
|
|
|
|
|
|
|
|
262,905 |
|
|
|
|
|
|
|
|
|
Total
liabilities & shareholders' equity
|
|
$ |
3,182,877 |
|
|
|
|
|
|
|
|
|
|
$ |
2,654,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (2)
|
|
|
|
|
|
$ |
31,655 |
|
|
|
|
|
|
|
|
|
|
$ |
26,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
|
|
4.36 |
% |
(1)
|
Nonaccrual
loans have been included in the tables as loans carrying a zero yield.
Interest reversals for the second quarter ended June 30, 2008 related to
nonaccrual loans totaled $335,000. Excluding the impact of
interest reversals, net interest margin for the quarter would have been
4.43%. Amortized net deferred loan fees were included in the
interest income calculations. The amortization of net deferred loan fees
was $984,000 and $706,000 for the three months ended June 30, 2008
and 2007, respectively.
|
(2)
|
Tax-exempt
income is calculated on a tax equivalent basis, based on a marginal tax
rate of 35%.
|
|
|
Six
months ending June 30,
|
|
|
Six
months ending June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Earned/
|
|
|
Average
|
|
|
Average
|
|
|
Earned/
|
|
|
Average
|
|
(in
thousands)
|
|
Balances
(1)
|
|
|
Paid
|
|
|
Rate
|
|
|
Balances
(1)
|
|
|
Paid
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net (2)
|
|
$ |
2,301,125 |
|
|
$ |
78,825 |
|
|
|
6.89 |
% |
|
$ |
1,806,150 |
|
|
$ |
70,254 |
|
|
|
7.84 |
% |
Securities
(2)
|
|
|
583,418 |
|
|
|
16,472 |
|
|
|
5.68 |
% |
|
|
590,122 |
|
|
|
15,512 |
|
|
|
5.30 |
% |
Interest-earning
deposits with banks and federal funds sold
|
|
|
19,767 |
|
|
|
244 |
|
|
|
2.48 |
% |
|
|
30,404 |
|
|
|
785 |
|
|
|
5.20 |
% |
Total
interest-earning assets
|
|
|
2,904,310 |
|
|
$ |
95,541 |
|
|
|
6.62 |
% |
|
|
2,426,676 |
|
|
$ |
86,551 |
|
|
|
7.19 |
% |
Other
earning assets
|
|
|
47,470 |
|
|
|
|
|
|
|
|
|
|
|
38,987 |
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
232,665 |
|
|
|
|
|
|
|
|
|
|
|
154,971 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,184,445 |
|
|
|
|
|
|
|
|
|
|
$ |
2,620,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
821,845 |
|
|
$ |
16,457 |
|
|
|
4.03 |
% |
|
$ |
580,748 |
|
|
$ |
12,454 |
|
|
|
4.32 |
% |
Savings
accounts
|
|
|
115,378 |
|
|
|
217 |
|
|
|
0.38 |
% |
|
|
107,139 |
|
|
|
218 |
|
|
|
0.41 |
% |
Interest-bearing
demand and money market accounts
|
|
|
1,039,886 |
|
|
|
9,622 |
|
|
|
1.86 |
% |
|
|
941,178 |
|
|
|
13,103 |
|
|
|
2.81 |
% |
Total
interest-bearing deposits
|
|
|
1,977,109 |
|
|
|
26,296 |
|
|
|
2.67 |
% |
|
|
1,629,065 |
|
|
|
25,775 |
|
|
|
3.19 |
% |
Federal
Home Loan Bank advances
|
|
|
298,908 |
|
|
|
4,577 |
|
|
|
3.08 |
% |
|
|
206,953 |
|
|
|
5,664 |
|
|
|
5.52 |
% |
Securities
sold under agreements to repurchase
|
|
|
22,115 |
|
|
|
260 |
|
|
|
2.36 |
% |
|
|
57,293 |
|
|
|
1,540 |
|
|
|
5.42 |
% |
Other
borrowings and interest-bearing liabilities
|
|
|
5,188 |
|
|
|
106 |
|
|
|
4.11 |
% |
|
|
308 |
|
|
|
4 |
|
|
|
2.62 |
% |
Long-term
subordinated debt
|
|
|
25,537 |
|
|
|
916 |
|
|
|
7.21 |
% |
|
|
22,392 |
|
|
|
1,020 |
|
|
|
9.18 |
% |
Total
interest-bearing liabilities
|
|
|
2,328,857 |
|
|
$ |
32,155 |
|
|
|
2.78 |
% |
|
|
1,916,011 |
|
|
$ |
34,003 |
|
|
|
3.58 |
% |
Noninterest-bearing
deposits
|
|
|
457,099 |
|
|
|
|
|
|
|
|
|
|
|
416,886 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
45,906 |
|
|
|
|
|
|
|
|
|
|
|
28,120 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
352,583 |
|
|
|
|
|
|
|
|
|
|
|
259,617 |
|
|
|
|
|
|
|
|
|
Total
liabilities & shareholders' equity
|
|
$ |
3,184,445 |
|
|
|
|
|
|
|
|
|
|
$ |
2,620,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (2)
|
|
|
|
|
|
$ |
63,386 |
|
|
|
|
|
|
|
|
|
|
$ |
52,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
|
|
4.37 |
% |
(1)
|
Nonaccrual
loans have been included in the tables as loans carrying a zero yield.
Interest reversals for the six months ended June 30, 2008 related to
nonaccrual loans totaled $418,000. Excluding the impact of
interest reversals, net interest margin for the six month period would
have been 4.42%. Amortized net deferred loan fees were included
in the interest income calculations. The amortization of net deferred loan
fees was $2.1 million and $1.3 million for the six months ended
June 30, 2008 and 2007,
respectively.
|
(2)
|
Tax-exempt
income is calculated on a tax equivalent basis, based on a marginal tax
rate of 35%.
|
Provision
for Loan and Lease Losses
During
the second quarter of 2008, the Company allocated $15.4 million to its provision
for loan and lease losses, compared to $329,000 for the same period in
2007. For the six months ended June 30, 2008, the Company allocated
$17.4 million to its provision for loan and lease losses, compared to $967,000
for the first half of 2007. The additional provision is due to the
weakness in the for-sale housing industry resulting from the slowing economic
environment and an increase in non-accrual loans. The increased
provision will increase the Company’s total allowance for loan losses to 1.83%
of net loans at June 30, 2008. See the discussion under “Nonperforming Assets” for
details related to the non-accrual loans.
Noninterest
Income
Noninterest
income increased $2.6 million, or 38%, to $9.3 million for the second quarter of
2008 from $6.7 million for the second quarter of 2007. The increase in
noninterest income is primarily due to pre-tax income of $1.1 million from the
redemption of shares of MasterCard International shares obtained in connection
with its 2006 initial public offering and $612,364 of pre-tax income from the
receipt of insurance proceeds from the death of a former officer covered by
BOLI. In addition, service charges and other fees increased
$445,000, or 14%, during the second quarter of 2008 as compared to the same
period in 2007. This increase is the result of a change in the
Company’s deposit account fee structure in conjunction with an increase in the
number of deposit accounts, primarily due to the third quarter 2007
acquisitions.
For the
six months ended June 30, 2008, noninterest income increased $6.5 million, or
51%, compared to the same period in 2007. The increase in noninterest
income is primarily due to the gain on the redemption of Visa and MasterCard
shares of $3.0 million and a gain on the sale of investment securities of
$882,000. In addition, service charges and other fees increased $1.1
million, or 17% during the first six months of 2008 as compared to the same
period in 2007 reflecting a change in our deposit account fee structure in
conjunction with an increase in the number of deposit accounts.
Noninterest
Expense
Total
noninterest expense increased $3.1 million, or 15%, for the second quarter of
2008 from $20.3 million for the second quarter of 2007. This increase
is primarily a result of increased salary expense as a result of the third
quarter 2007 acquisitions and the expansion of the retail branch and
professional lending teams. Regulatory premiums in the current
quarter increased $328,000 from the same period one year ago. This
increase is due to the fact that, in the prior year period, we benefited from a
federal deposit insurance premium credit which offset the majority of federal
deposit insurance premiums due. Based upon recent events and the
state of the economy, it is likely that the Federal Deposit Insurance
Corporation may increase federal deposit insurance premiums in the near
future. Depending on circumstances, this increase may be relatively
significant and will add to our cost of operations. Finally, data
processing expenses and core deposit intangible expense increased $230,000 and
$200,000 compared to the same period in 2007 primarily as a result of the 2007
third quarter acquisitions.
Total
noninterest expense for the first six months of 2008 increased $6.3 million, or
15%, as compared to the same period in 2007. This increase is due primarily
to increased compensation and employee benefits and other expense increases as
discussed above. Regulatory premiums were $728,000 higher for the
first six months of 2008 than in the same period last year. As noted
above, this increase relates to a credit we received in 2007 which offset the
majority of FDIC premiums due. Finally, occupancy expenses increased
$676,000 from the first half of 2007, primarily due to the third quarter
acquisitions and two new branch locations opened during the fourth quarter
2007.
The
following table presents selected items included in other noninterest expense
and the associated change from period to period:
|
|
Three
months ended
|
|
|
Increase
|
|
|
Six
months ended
|
|
|
Increase
|
|
|
|
June
30,
|
|
|
(Decrease)
|
|
|
June
30,
|
|
|
(Decrease)
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
Core
deposit intangible amortization ("CDI")
|
|
$ |
296 |
|
|
$ |
96 |
|
|
$ |
200 |
|
|
$ |
592 |
|
|
$ |
192 |
|
|
$ |
400 |
|
Software
support & maintenance
|
|
|
168 |
|
|
|
209 |
|
|
|
(41 |
) |
|
|
377 |
|
|
|
389 |
|
|
|
(12 |
) |
Telephone
& network communications
|
|
|
410 |
|
|
|
277 |
|
|
|
133 |
|
|
|
809 |
|
|
|
550 |
|
|
|
259 |
|
Federal
Reserve Bank processing fees
|
|
|
116 |
|
|
|
127 |
|
|
|
(11 |
) |
|
|
227 |
|
|
|
240 |
|
|
|
(13 |
) |
Supplies
|
|
|
366 |
|
|
|
289 |
|
|
|
77 |
|
|
|
629 |
|
|
|
577 |
|
|
|
52 |
|
Postage
|
|
|
390 |
|
|
|
280 |
|
|
|
110 |
|
|
|
751 |
|
|
|
571 |
|
|
|
180 |
|
Investor
relations
|
|
|
90 |
|
|
|
83 |
|
|
|
7 |
|
|
|
141 |
|
|
|
158 |
|
|
|
(17 |
) |
Travel
|
|
|
140 |
|
|
|
120 |
|
|
|
20 |
|
|
|
234 |
|
|
|
199 |
|
|
|
35 |
|
ATM
Network
|
|
|
144 |
|
|
|
153 |
|
|
|
(9 |
) |
|
|
343 |
|
|
|
290 |
|
|
|
53 |
|
Sponsorships
and charitable contributions
|
|
|
145 |
|
|
|
169 |
|
|
|
(24 |
) |
|
|
303 |
|
|
|
256 |
|
|
|
47 |
|
Regulatory
premiums
|
|
|
394 |
|
|
|
66 |
|
|
|
328 |
|
|
|
836 |
|
|
|
108 |
|
|
|
728 |
|
Directors
fees
|
|
|
95 |
|
|
|
105 |
|
|
|
(10 |
) |
|
|
230 |
|
|
|
215 |
|
|
|
15 |
|
Employee
expenses
|
|
|
141 |
|
|
|
149 |
|
|
|
(8 |
) |
|
|
322 |
|
|
|
320 |
|
|
|
2 |
|
Insurance
|
|
|
124 |
|
|
|
109 |
|
|
|
15 |
|
|
|
244 |
|
|
|
219 |
|
|
|
25 |
|
Losses
on CRA investments (1)
|
|
|
218 |
|
|
|
107 |
|
|
|
111 |
|
|
|
346 |
|
|
|
288 |
|
|
|
58 |
|
Miscellaneous
|
|
|
698 |
|
|
|
650 |
|
|
|
48 |
|
|
|
1,511 |
|
|
|
1,251 |
|
|
|
260 |
|
Total
other noninterest expense
|
|
$ |
3,935 |
|
|
$ |
2,989 |
|
|
$ |
946 |
|
|
$ |
7,895 |
|
|
$ |
5,823 |
|
|
$ |
2,072 |
|
(1)
|
A
substantial portion, $256,000 for the six months ended June 30, 2008, of
these losses is offset by credits taken as a reduction in our current
period income tax expense.
|
In
managing our business, we review the efficiency ratio, on a fully
taxable-equivalent basis (see definition in table below), which is not defined
in accounting principles generally accepted in the United States. Our
efficiency ratio [noninterest expense divided by the sum of net interest income
and noninterest income on a tax equivalent basis, excluding any gains and losses
arising from nonrecurring transactions] was 59.31% for the second quarter 2008
and was 60.77% for the first six months of 2008, compared to 60.04% and 61.68%
for the second quarter and first six months of 2007, respectively. The second
quarter change in the efficiency ratio is due to the increase in net interest
income driven primarily by the drop in interest expense.
The
following table presents a reconciliation of the financial data utilized to
calculate the efficiency ratio (a non-GAAP financial measure) to the same
measures calculated and presented in accordance with GAAP:
Reconciliation
of Financial Data to GAAP Financial Measures
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
interest income (1)
|
|
$ |
30,274 |
|
|
$ |
25,695 |
|
|
$ |
60,601 |
|
|
$ |
50,398 |
|
Tax
equivalent adjustment for non-taxable loan and investment securities
interest income (2)
|
|
|
1,381 |
|
|
|
1,075 |
|
|
|
2,785 |
|
|
|
2,150 |
|
Adjusted
net interest income
|
|
$ |
31,655 |
|
|
$ |
26,770 |
|
|
$ |
63,386 |
|
|
$ |
52,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
$ |
9,305 |
|
|
$ |
6,741 |
|
|
$ |
19,462 |
|
|
$ |
12,918 |
|
Gain
on sale of investment securities, net
|
|
|
- |
|
|
|
- |
|
|
|
(882 |
) |
|
|
- |
|
Redemption
of Visa and Mastercard shares
|
|
|
(1,066 |
) |
|
|
- |
|
|
|
(3,028 |
) |
|
|
- |
|
Death
benefit proceeds on former officer covered by BOLI
|
|
|
(612 |
) |
|
|
- |
|
|
|
(612 |
) |
|
|
- |
|
Tax
equivalent adjustment for BOLI income (2)
|
|
|
295 |
|
|
|
243 |
|
|
|
567 |
|
|
|
472 |
|
Adjusted
noninterest income
|
|
$ |
7,922 |
|
|
$ |
6,984 |
|
|
$ |
15,507 |
|
|
$ |
13,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
$ |
23,367 |
|
|
$ |
20,266 |
|
|
$ |
46,921 |
|
|
$ |
40,668 |
|
Net
gain on sale of OREO
|
|
|
|
|
|
|
- |
|
|
|
23 |
|
|
|
- |
|
BOLI
policy swap net income
|
|
|
107 |
|
|
|
|
|
|
|
107 |
|
|
|
|
|
Reversal
of previously accrued Visa litigation expense
|
|
|
- |
|
|
|
- |
|
|
|
889 |
|
|
|
- |
|
Adjusted
noninterest expense
|
|
$ |
23,474 |
|
|
$ |
20,266 |
|
|
$ |
47,940 |
|
|
$ |
40,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio
|
|
|
61.94 |
% |
|
|
62.48 |
% |
|
|
63.46 |
% |
|
|
64.23 |
% |
Efficiency
ratio (fully taxable-equivalent)
|
|
|
59.31 |
% |
|
|
60.04 |
% |
|
|
60.77 |
% |
|
|
61.68 |
% |
Tax
Rate
|
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
(1)
|
Amount
represents net interest income before provision for loan and lease
losses.
|
(2)
|
Fully
taxable-equivalent basis: Non taxable revenue is increased by the
statutory tax rate to recognize the income tax benefit of the income
realized.
|
Income
Taxes
We
recorded an income tax benefit of $1.1 million for the second quarter and an
income tax provision of $2.8 million for the first six months of 2008, compared
with a provision of $3.3 million and $5.9 million for the same periods in 2007.
The effective tax rate for the second quarter of 2008 and 2007 was (125%) and
28%, respectively, as well as 18% and 27% for the six months ended June 30,
2008 and 2007. Our effective tax rate
remains lower than 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. Effective tax rates for the quarter and
six months ended June 30, 2008 are significantly lower than same periods last
year as a result of our nontaxable income being a larger percentage of income
before income taxes. For additional information, refer to the
Company’s annual report on Form 10-K for the year ended December 31,
2007.
Credit
Risk Management
The
extension of credit in the form of loans or other credit products to individuals
and businesses is one of our principal business activities. Our policies and
applicable laws and regulations require risk analysis as well as ongoing
portfolio and credit management. We manage our credit risk through lending limit
constraints, credit review, approval policies, and extensive, ongoing internal
monitoring. We also manage credit risk through diversification of the loan
portfolio by type of loan, type of industry, type of borrower and by limiting
the aggregation of debt limits to a single borrower. In analyzing our existing
portfolio, we review our consumer and residential loan portfolios by their
performance as a pool of loans since no single loan is individually significant
or judged by its risk rating, size, or potential risk of loss. In contrast, the
monitoring process for the commercial business, private banking, real estate
construction, and commercial real estate portfolios includes periodic reviews of
individual loans with risk ratings assigned to each loan and performance judged
on a loan by loan basis. We review these loans to assess the ability of the
borrower to service all of its interest and principal obligations and, as a
result, the risk rating may be adjusted accordingly. In the event that full
collection of principal and interest is not reasonably assured, the loan is
appropriately downgraded and, if warranted, placed on nonaccrual status even
though the loan may be current as to principal and interest payments.
Additionally, we review these types of loans for impairment in accordance with
SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan”.
Impaired loans are
considered
for nonaccrual status and will typically remain as such until all principal and
interest payments are brought current and the prospects for future payments in
accordance with the loan agreement appear relatively certain.
Loan
policies, credit quality criteria, portfolio guidelines and other controls are
established under the guidance of our Chief Credit Officer and approved, as
appropriate, by the Board. Credit Administration, together with the loan
committee, has the responsibility for administering the credit approval process.
As another part of its control process, we use an independent internal credit
review and examination function to provide assurance that loans and commitments
are made and maintained as prescribed by our credit policies. This includes a
review of documentation when the loan is initially extended and subsequent
monitoring to assess continued performance and proper risk
assessment.
We have diversification of loan types
within our portfolio. However, we are not immune to the current
instability in the residential real estate markets and mortgage-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)
|
|
2008
|
|
|
Total
|
|
|
2007
|
|
|
Total
|
|
Commercial
business
|
|
$ |
760,282 |
|
|
|
33.4 |
% |
|
$ |
762,365 |
|
|
|
33.4 |
% |
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
55,504 |
|
|
|
2.4 |
% |
|
|
60,991 |
|
|
|
2.7 |
% |
Commercial
and five or more family residential properties
|
|
|
829,048 |
|
|
|
36.4 |
% |
|
|
852,139 |
|
|
|
37.3 |
% |
Total
real estate
|
|
|
884,552 |
|
|
|
38.8 |
% |
|
|
913,130 |
|
|
|
40.0 |
% |
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
281,848 |
|
|
|
12.4 |
% |
|
|
269,115 |
|
|
|
11.8 |
% |
Commercial
and five or more family residential properties
|
|
|
156,990 |
|
|
|
6.9 |
% |
|
|
165,490 |
|
|
|
7.2 |
% |
Total
real estate construction
|
|
|
438,838 |
|
|
|
19.3 |
% |
|
|
434,605 |
|
|
|
19.0 |
% |
Consumer
|
|
|
195,914 |
|
|
|
8.7 |
% |
|
|
176,559 |
|
|
|
7.8 |
% |
Subtotal
|
|
|
2,279,586 |
|
|
|
100.2 |
% |
|
|
2,286,659 |
|
|
|
100.2 |
% |
Less:
Deferred loan fees
|
|
|
(3,867 |
) |
|
|
-0.2 |
% |
|
|
(3,931 |
) |
|
|
-0.2 |
% |
Total
loans
|
|
$ |
2,275,719 |
|
|
|
100.0 |
% |
|
$ |
2,282,728 |
|
|
|
100.0 |
% |
Loans
Held for Sale
|
|
$ |
3,323 |
|
|
|
|
|
|
$ |
4,482 |
|
|
|
|
|
Loan
growth for the first half of 2008 was primarily from consumer loans, which rose
$19.4 million, or 11% from year-end 2007. Home equity lines of credit
were the primary driver of consumer loan growth. One-to-four family
real estate construction loans contributed an increase of $12.7
million. Commercial business loans declined by $2.1 million and real
estate declined by $28.6 million.
Commercial Loans: We are
committed to providing competitive commercial lending in our primary market
areas. We believe that decreases in commercial lending during the first half of
2008 were due to the slowing of our local economy. Management expects
to see modest growth in its commercial lending products and to emphasize, in
particular, relationship banking with businesses, and business
owners.
Real Estate Loans: These
loans are used to collateralize outstanding advances from the FHLB. Generally,
our policy is to originate residential loans for sale to third parties. Those
residential loans are secured by properties located within our primary market
areas, and typically have loan-to-value ratios of 80% or lower.
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 collectibility of principal or interest.
Generally our policy is to discontinue the accrual of interest on all loans past
due 90 days or more and place them on nonaccrual status. As discussed
below, in the current quarter we also discontinued the accrual of interest on
certain performing loans. The decision to discontinue interest on
these performing loans was based upon our assessment that these borrowers will
be experiencing significant financial challenges in the near future as a result
of an economic downturn centered within their industry and in the markets they
serve. When a loan
is placed on nonaccrual status, any accrued but unpaid interest on that date is
removed from interest income.
At June
30, 2008, total nonperforming assets were $72.3 million, compared to $14.6
million at December 31, 2007 and $15.0 million at March 31, 2008. The
percent of non-performing assets to period-end assets at June 30, 2008 was 2.28%
compared to 0.46% for December 31, 2007 and 0.46% at March 31,
2008.
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)
|
|
2008
|
|
|
2007
|
|
Nonaccrual:
|
|
|
|
|
|
|
Commercial
business
|
|
$ |
2,066 |
|
|
$ |
2,170 |
|
Real
estate:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
79 |
|
|
|
204 |
|
Commercial
and five or more family residential real estate
|
|
|
2,619 |
|
|
|
1,112 |
|
Total
real estate
|
|
|
2,698 |
|
|
|
1,316 |
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
47,360 |
|
|
|
6,005 |
|
Commercial
and five or more family residential real estate
|
|
|
18,080 |
|
|
|
3,676 |
|
Total
real estate construction
|
|
|
65,440 |
|
|
|
9,681 |
|
Consumer
|
|
|
1,526 |
|
|
|
838 |
|
Total
nonaccrual loans
|
|
|
71,730 |
|
|
|
14,005 |
|
Restructured:
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
540 |
|
|
|
456 |
|
Total
nonperforming loans
|
|
|
72,270 |
|
|
|
14,461 |
|
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
|
- |
|
|
|
181 |
|
Other
personal property owned
|
|
|
- |
|
|
|
- |
|
Total
nonperforming assets
|
|
$ |
72,270 |
|
|
$ |
14,642 |
|
The
increase in non-accruals is centered in our real estate construction portfolios,
both one-to-four family residential (“for-sale housing”) and commercial real
estate. During the quarter, the for-sale housing portfolio, which
currently totals $282 million, had an increase in non-accrual loans of
approximately $42 million, bringing the total to about $47
million. This increase primarily is due to seven builder
banking customers whose activities are centered in the Pierce County area in
Washington state and Clackamas County in Portland, Oregon. We have
set aside $7.0 million in specific reserves for these new non-accrual loans,
based on lower anticipated value of some projects.
Market
conditions in both of these counties have declined significantly in the past few
months, and we have seen double-digit declines in year-over-year housing sales
as well as double-digit declines in sales prices for land and
lots. Given these market conditions, combined with the weak financial
performance posted by some of these builders during the second quarter, we
believe some of the builders to whom we have extended credit and who are focused
in these markets will be experiencing significant challenges in the near
future. Accordingly, we have placed $29 million of performing loans
on non-accrual; these loans are included in the $42 million increase in
non-accrual loans mentioned above.
In our
commercial real estate construction portfolio, which is approximately $157
million as of June 30, 2008, we experienced an increase of $14.4 million in
non-accrual loans. The increase in this segment is primarily centered
in our condominium construction portfolio which accounts for approximately $36
million of the total loans outstanding in this portfolio. This
represents a little over $9.0 million of the non-accruals as of June 30,
2008. We have set aside $1.5 million in specific reserves for these
newly-identified non-accrual loans.
We are
continuing to work with our customers to resolve these issues as quickly as
possible; however, given the nature of these types of projects, it is unlikely
they will be resolved in the immediate future. Accordingly, the
current trend of a larger provision for loan losses as compared to prior periods
may continue in the next few quarters dependent upon the economic climate and
our customers’ ability to repay.
Allowance
for Loan and Lease Losses
At June
30, 2008, our allowance for loan and lease losses (“ALLL”) was $41.7 million, or
1.83% of total loans (excluding loans held for sale) and 58% of nonperforming
loans and nonperforming assets. This compares with an allowance of $26.6
million, or 1.17% of the total loan portfolio (excluding loans held for sale),
184% of nonperforming loans and 182% of nonperforming assets at
December 31, 2007.
There
have been no significant changes during the first half of 2008 in estimation
methods or assumptions that affected our methodology for assessing the
appropriateness of the ALLL. Adjustments to the percentages of the allowance
allocated to loan categories are made based on trends with respect to
delinquencies and problem loans within each pool of loans. The Company maintains
a conservative approach to credit quality and will continue to prudently add to
its loan and lease loss allowance as necessary in order to maintain adequate
reserves, factoring in changes and trends in the local and national
economy. Management carefully monitors and evaluates the loan
portfolio and continues to emphasize credit quality and strengthening of its
loan monitoring systems and controls.
In
addition to the ALLL, we maintain an allowance for unfunded loan commitments and
letters of credit. We report this allowance as a component of other liabilities
on our consolidated balance sheet. We determine this amount using estimates of
the probability of the ultimate funding and losses related to those credit
exposures. This methodology is similar to the methodology we use for determining
the adequacy of our ALLL. At June 30, 2008 and December 31, 2007, our
allowance for unfunded loan commitments and letters of credit was $459,000 and
$349,000, respectively.
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)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
27,914 |
|
|
$ |
20,819 |
|
|
$ |
26,599 |
|
|
$ |
20,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential,
construction, land & acquisitions
|
|
|
(580 |
) |
|
|
- |
|
|
|
(687 |
) |
|
|
- |
|
Commercial
business
|
|
|
- |
|
|
|
(98 |
) |
|
|
(359 |
) |
|
|
(194 |
) |
Commercial
real estate
|
|
|
(505 |
) |
|
|
- |
|
|
|
(505 |
) |
|
|
- |
|
Private
banking
|
|
|
(24 |
) |
|
|
- |
|
|
|
(24 |
) |
|
|
- |
|
Consumer
|
|
|
(579 |
) |
|
|
(77 |
) |
|
|
(1,328 |
) |
|
|
(132 |
) |
Total
charge-offs
|
|
|
(1,688 |
) |
|
|
(175 |
) |
|
|
(2,903 |
) |
|
|
(326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential,
construction, land & acquisitions
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
Commercial
business
|
|
|
72 |
|
|
|
311 |
|
|
|
104 |
|
|
|
408 |
|
Commercial
real estate:
|
|
|
4 |
|
|
|
3 |
|
|
|
304 |
|
|
|
12 |
|
Private
banking
|
|
|
12 |
|
|
|
- |
|
|
|
51 |
|
|
|
- |
|
Consumer
|
|
|
44 |
|
|
|
52 |
|
|
|
127 |
|
|
|
96 |
|
Total
recoveries
|
|
|
148 |
|
|
|
366 |
|
|
|
602 |
|
|
|
516 |
|
Net
charge-offs
|
|
|
(1,540 |
) |
|
|
191 |
|
|
|
(2,301 |
) |
|
|
190 |
|
Provision
charged to expense
|
|
|
15,350 |
|
|
|
329 |
|
|
|
17,426 |
|
|
|
967 |
|
Ending
balance
|
|
$ |
41,724 |
|
|
$ |
21,339 |
|
|
$ |
41,724 |
|
|
$ |
21,339 |
|
Total
loans, net at end of period (1)
|
|
$ |
2,275,719 |
|
|
$ |
1,859,592 |
|
|
$ |
2,275,719 |
|
|
$ |
1,859,592 |
|
Allowance
for loan and lease losses to total loans
|
|
|
1.83 |
% |
|
|
1.15 |
% |
|
|
1.83 |
% |
|
|
1.15 |
% |
(1)
Excludes loans held for sale
During
the second quarter of 2008, the Company had net loan charge-offs of $1.5
million, compared to net loan recoveries of $191,000 in the same period of 2007.
For the first six months of 2008, the Company had net loan charge-offs of $2.3
million, compared to net loan recoveries of $190,000 during the same period of
2007.
Securities
All of
our securities are classified as available for sale and carried at fair value.
These securities are used by management as part of our asset/liability
management strategy and may be sold in response to changes in interest rates or
significant prepayment risk. In accordance with our investment strategy,
management monitors market conditions with a view to realize gains on its
available for sale securities portfolio when prudent. During the first six
months of 2008, we recorded a gain on sale of investment securities of
$882,000. The gain resulted from the execution of a strategy to
extend the weighted average life of approximately $50 million of the investment
portfolio. At June 30, 2008, the market value of securities available
for sale had an unrealized loss, net of tax, of $3.1 million compared to an
unrealized gain, net of tax, of
$1.7
million at December 31, 2007. The change in market value of
securities available for sale is due primarily to fluctuations in interest rates
and the effects of the slowing economic environment on certain
government-sponsored enterprises. The Company does not consider these
investment securities to be other than temporarily impaired. If in
the future, however, the impairment is judged to be other than temporary, the
cost basis of the individual impaired securities will be written down to fair
value and the amount of the write-down will be included in earnings as a
realized loss.
|
The
following table sets forth our securities portfolio by type for the dates
indicated:
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise preferred stock
|
|
$ |
20,237 |
|
|
$ |
- |
|
U.S.
government-sponsored enterprise
|
|
|
- |
|
|
|
61,300 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
336,914 |
|
|
|
303,742 |
|
State
and municipal securities
|
|
|
191,665 |
|
|
|
193,965 |
|
Other
securities
|
|
|
939 |
|
|
|
2,359 |
|
Total
|
|
$ |
549,755 |
|
|
$ |
561,366 |
|
Liquidity
and Sources of Funds
Our
primary sources of funds are customer deposits. Additionally, we utilize
advances from the Federal Home Loan Bank of Seattle (the “FHLB”) and wholesale
repurchase agreements to supplement our funding needs. These funds, together
with loan repayments, loan sales, retained earnings, equity and other borrowed
funds are used to make loans, to acquire securities and other assets, and to
fund continuing operations.
Deposit
Activities
Our
deposit products include a wide variety of transaction accounts, savings
accounts and time deposit accounts. Core deposits (demand deposit, savings,
money market accounts and certificates of deposit less than $100,000) decreased
$63.9 million since year-end 2007 while certificate of deposit greater than
$100,000 decreased $28.9 million, or 7%, from year-end 2007.
We have
established a branch system to serve our consumer and business depositors. In
addition, management’s strategy for funding asset growth is to make use of
brokered and other wholesale deposits on an as-needed basis. At June 30, 2008
brokered and other wholesale deposits (excluding public deposits) totaled $65.7
million, or 3% of total deposits, compared to $72.0 million, or 3% of total
deposits, at year-end 2007. 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, 2008
|
|
|
December
31, 2007
|
|
|
June
30, 2007
|
|
(in
thousands)
|
|
Balance
|
|
|
%
of
Total
|
|
|
Balance
|
|
|
%
of
Total
|
|
|
Balance
|
|
|
%
of
Total
|
|
Core
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and other non-interest bearing
|
|
$ |
480,612 |
|
|
|
20.0 |
% |
|
$ |
468,237 |
|
|
|
18.7 |
% |
|
$ |
419,695 |
|
|
|
19.8 |
% |
Interest
bearing demand
|
|
|
445,798 |
|
|
|
18.6 |
% |
|
|
478,596 |
|
|
|
19.2 |
% |
|
|
440,051 |
|
|
|
20.8 |
% |
Money
market
|
|
|
580,535 |
|
|
|
24.2 |
% |
|
|
609,502 |
|
|
|
24.4 |
% |
|
|
509,463 |
|
|
|
24.0 |
% |
Savings
|
|
|
118,145 |
|
|
|
4.9 |
% |
|
|
115,324 |
|
|
|
4.6 |
% |
|
|
102,997 |
|
|
|
4.9 |
% |
Certificates
of deposit less than $100,000
|
|
|
308,166 |
|
|
|
12.9 |
% |
|
|
325,496 |
|
|
|
13.0 |
% |
|
|
253,669 |
|
|
|
12.0 |
% |
Total
core deposits
|
|
|
1,933,256 |
|
|
|
80.6 |
% |
|
|
1,997,155 |
|
|
|
79.9 |
% |
|
|
1,725,875 |
|
|
|
81.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit greater than $100,000
|
|
|
399,950 |
|
|
|
16.7 |
% |
|
|
428,885 |
|
|
|
17.2 |
% |
|
|
330,964 |
|
|
|
15.6 |
% |
Wholesale
certificates of deposit
|
|
|
65,718 |
|
|
|
2.7 |
% |
|
|
72,021 |
|
|
|
2.9 |
% |
|
|
60,486 |
|
|
|
2.9 |
% |
Total
deposits
|
|
$ |
2,398,924 |
|
|
|
100.0 |
% |
|
$ |
2,498,061 |
|
|
|
100.0 |
% |
|
$ |
2,117,325 |
|
|
|
100.0 |
% |
Borrowings
We rely
on FHLB advances as another source of both short and long-term borrowings. FHLB
advances are secured by one-to-four family real estate mortgages and certain
other assets. At June 30, 2008, we had FHLB advances of $329.0 million, compared
to advances of $257.7 million at December 31, 2007.
We also
utilize wholesale repurchase agreements as a supplement to our funding sources.
Wholesale repurchase agreements are secured by mortgage-backed securities. At
June 30, 2008, we had repurchase agreements of $25.0 million compared to $0 at
December 31, 2007. Management anticipates that we will continue to rely on
both FHLB advances and wholesale repurchase agreements in the future, and we
will use those funds primarily to make loans and purchase
securities.
During
2001, the Company, through a special purpose trust (“the Trust”) participated in
a pooled trust preferred offering, whereby the Trust issued $22.0 million of 30
year floating rate capital securities. The capital securities constitute
guaranteed preferred beneficial interests in debentures issued by the Trust. The
debentures had an initial rate of 7.29% and a rate of 6.48% at June 30, 2008.
The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted
quarterly. Through the Trust, we may call the debentures at any time for a
premium and after ten years at par, allowing us to retire the debt early if
market conditions are favorable. Through recent acquisition, the
Company assumed an additional $3.0 million in floating rate trust preferred
obligations; these debentures had a rate of 6.46% at June 30,
2008. The floating rate is based on the 3-month LIBOR plus 3.75% and
is adjusted quarterly.
The trust
preferred obligations are classified as long-term subordinated debt and our
related investment in the Trust is recorded in other assets on the consolidated
balance sheets. The balance of the long-term subordinated debt was $25.6 million
at June 30, 2008 and $25.5 million at December 31, 2007. The subordinated
debt payable to the Trust is on the same interest and payment terms as the trust
preferred obligations issued by the Trust.
Additionally,
we have a $20.0 million line of credit with a large commercial bank with an
interest rate indexed to LIBOR. At both June 30, 2008 and December 31,
2007, $5.0 million was outstanding on the line of credit. Subsequent to
quarter-end, we borrowed the remaining $15.0 million on the line of
credit. The line matures on June 30, 2009 and, if not renewed, any
principle balances outstanding are due at maturity.
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, 2008, we
had commitments to extend credit of $788.8 million compared to $857.6 million at
December 31, 2007.
Capital
Resources
Shareholders’
equity at June 30, 2008 was $344.3 million, up 0.7% from $341.7 million at
December 31, 2007. The increase is due primarily to net income of $12.9
million for the first six months of 2008. Shareholders’ equity was 10.9% and
10.8% of total period-end assets at June 30, 2008, and December 31,
2007, 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 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, 2008 and December 31, 2007.
|
|
Company
|
|
|
Columbia
Bank
|
|
|
Requirements
|
|
|
|
6/30/2008
|
|
|
12/31/2007
|
|
|
6/30/2008
|
|
|
12/31/2007
|
|
|
Adequately
capitalized
|
|
|
Well- capitalized
|
|
Total
risk-based capital ratio
|
|
|
11.43 |
% |
|
|
10.90 |
% |
|
|
11.19 |
% |
|
|
10.49 |
% |
|
|
8 |
% |
|
|
10 |
% |
Tier
1 risk-based capital ratio
|
|
|
10.17 |
% |
|
|
9.87 |
% |
|
|
9.93 |
% |
|
|
9.47 |
% |
|
|
4 |
% |
|
|
6 |
% |
Leverage
ratio
|
|
|
8.64 |
% |
|
|
8.54 |
% |
|
|
8.47 |
% |
|
|
8.23 |
% |
|
|
4 |
% |
|
|
5 |
% |
Stock
Repurchase Program
In March
2002 the Board of Directors approved a stock repurchase program whereby the
Company may systematically repurchase up to 500,000 of its outstanding shares of
Common Stock. The Company may repurchase shares from time to time in the open
market or in private transactions, under conditions which allow such repurchases
to be accretive to earnings while maintaining capital ratios that exceed the
guidelines for a well-capitalized financial institution. As of June 30,
2008 we have repurchased 64,788 shares of common stock in this current stock
repurchase program, none of which was repurchased in the periods covered by this
report.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
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, 2008, based on the measures used to monitor and manage
interest rate risk, there has not been a material change in the Company’s
interest rate risk since December 31, 2007. For additional information,
refer to “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” referenced in the Company’s 2007 Annual Report on Form
10-K.
Evaluation
of Disclosure Controls and Procedures
An
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded
that as of the end of the period covered by this report, our disclosure controls
and procedures are effective in ensuring that the information required to be
disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934 is (i) accumulated and communicated to our management (including the
CEO and CFO) to allow timely decisions regarding required disclosure, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
Changes
in Internal Controls Over Financial Reporting
There was
no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
The
Company and its banking subsidiaries are parties to routine litigation arising
in the ordinary course of business. Management believes that, based on the
information currently known to them, any liabilities arising from such
litigation will not have a material adverse impact on the Company’s financial
condition, results of operations or cash flows.
Our
business exposes us to certain risks. The following is a discussion of what we
currently believe are the most significant risks and uncertainties that may
affect our business, financial condition and future results.
Further
economic downturns in the market areas we serve or a rapidly increasing interest
rate environment could increase the credit risk within the loan
portfolio.
Lending
activities are our largest source of credit risk, which is the risk that a
borrower will fail to meet their obligations in accordance with agreed upon
terms. We manage the credit risk inherent in our loan portfolio through the
establishment of sound underwriting policies and procedures. We maintain an
allowance for loan and lease losses as well as an allowance for unfunded loan
commitments and letters of credit to absorb anticipated future losses. Although
we consider our allowance for loan and lease losses and allowance for unfunded
loan commitments and letters of credit to be adequate at June 30, 2008, a
further downturn in the economy could result in higher delinquencies and
defaults which would negatively impact our financial position. A substantial
portion of the loans in our portfolio are variable rate. While recently we have
been in a decreasing interest rate environment, a rapidly increasing interest
rate environment or inability to access credit or other funding could impair our
borrower’s ability to service the interest portion of their obligations to us.
This could result in decreased net income from increased provisions to the
allowance for loan and lease losses as well as decreased interest income
resulting from an increase in nonaccrual loans.
A
rapid change in interest rates could negatively impact net interest
income.
We are
exposed to interest rate risk, which is the risk that changes in prevailing
interest rates will adversely affect assets, liabilities, capital, income and
expenses at different times or in different amounts. We utilize a number of
measures to monitor and manage interest rate risk, such as income simulations
and interest sensitivity (gap) analyses. A number of factors that impact
interest rates are beyond our control such as general economic conditions as
well as governmental and regulatory policies. We cannot assure you
that we can minimize interest rate risk. The impact of rate changes
to our net interest income is determined by the amount of change and the time
horizon over which change occurs.
Competition.
We face
significant competition from other financial institutions for loans and
deposits. We believe the most significant competitive factor is customer
service, in addition to interest rates offered on loans and paid on deposits,
fee structures, branch locations, and the range of banking services and products
offered. Failure to maintain our service culture could increase the
susceptibility of our customer base to our competitors marketing campaigns and
thwart our efforts to expand our existing customer base.
Failure
to hire or retain management and staff could impede our ability to maintain or
grow earnings.
Maintaining
our current customer base is reliant upon the retention of key management and
personnel across all our business lines. We rely on these talented professionals
to manage lines of business which are critical in the generation of operating
revenue. In addition, the failure to attract new employees critical to the
execution of our expansion plan could result in diminished returns on our
investment in these initiatives.
The
tightening of available liquidity could limit our ability to meet loan demand,
which could adversely affect our earnings.
A
tightening of the credit market and the inability to obtain adequate money to
fund continued loan growth may negatively affect asset growth and, therefore,
earnings capability. In addition to any deposit growth, maturity of
investment securities and loan payments, we rely on certain wholesale funding
sources to fund loans. In the event of a downturn in the economy,
these additional funding sources could be negatively affected which could limit
the funds available to us.
Concentration
in real estate loans.
We have a
high concentration of loans secured by real estate and a continued downturn in
the real estate market, for any reason, could adversely impact our business and
our prospects. Our business activities and credit exposure are
concentrated in loans secured by real estate. A continued decline in
the real estate market could adversely impact our business because the
collateral securing those loans would decrease in value. A downturn
in the local economy could have a material adverse effect both on a borrower’s
ability to repay these loans, as well as the value of the real property held as
collateral. Our ability to recover on defaulted loans by foreclosing
and selling the real estate collateral would then be diminished and we would be
more likely to suffer losses on defaulted loans.
A
significant decline in the Company’s market value could result in an impairment
of goodwill.
Recently,
the Company’s common stock has been trading at a price below its book value,
including goodwill and other intangible assets. If impairment was deemed to
exist, we would be required to write down our assets resulting in a charge to
earnings. For additional discussion see Note 9, “Goodwill and
Intangible Assets” in Part I, Item 1
above.
Allowance
for loan and lease losses may not be adequate to cover actual loan losses, which
could adversely affect earnings and capital.
We
maintain an allowance for loan and lease losses in an amount that is believed
adequate to provide for losses inherent in the portfolio. The size of
the ALLL is determined through quarterly assessments of the probable estimated
losses in the loan portfolio. The ALLL is increased by provisions for
loan and lease losses charged to expense, and is reduced by loans charged off,
net of recoveries. While we believe the best information available is
used by us to determine the ALLL. However, unforeseen market conditions could
result in adjustments to the ALLL, affecting net income and capital, if
circumstances differ from the assumptions used in determining the
ALLL. For additional discussion see “Allowance for Loan and Lease
Losses” in “Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of this report.
Item 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
None.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The
Company held its annual shareholders meeting on April 23, 2008. The
following is a brief description and vote count of the proposals voted upon at
the annual meeting.
Proposal
1.
|
ELECTION
OF DIRECTORS
|
|
All
nine persons nominated were elected to hold office for the ensuing
year.
|
Nominee
|
|
Votes
"For"
|
|
|
Votes
"Withheld"
|
|
Melanie
J. Dressel
|
|
|
15,006,011 |
|
|
|
252,464 |
|
|
|
|
|
|
|
|
|
|
John
P. Folsom
|
|
|
15,008,750 |
|
|
|
249,725 |
|
|
|
|
|
|
|
|
|
|
Frederick
M. Goldberg
|
|
|
15,190,117 |
|
|
|
68,357 |
|
|
|
|
|
|
|
|
|
|
Thomas
M. Hulbert
|
|
|
15,190,678 |
|
|
|
67,797 |
|
|
|
|
|
|
|
|
|
|
Thomas
L. Matson, Sr.
|
|
|
15,182,326 |
|
|
|
76,148 |
|
|
|
|
|
|
|
|
|
|
Daniel
C. Regis
|
|
|
15,165,945 |
|
|
|
92,529 |
|
|
|
|
|
|
|
|
|
|
Donald
Rodman
|
|
|
15,000,628 |
|
|
|
257,846 |
|
|
|
|
|
|
|
|
|
|
William
T. Weyerhaeuser
|
|
|
15,187,386 |
|
|
|
71,089 |
|
|
|
|
|
|
|
|
|
|
James
M. Will
|
|
|
14,294,201 |
|
|
|
964,274 |
|
Proposal
2.
|
RATIFICATION
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTANTS
|
Shares
Voted "For"
|
|
|
Shares
Voted "Against"
|
|
|
Abstentions
|
|
|
14,985,747
|
|
|
|
215,797
|
|
|
|
56,930
|
|
None.
|
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32
|
Certification
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
|
COLUMBIA
BANKING SYSTEM, INC.
|
|
|
|
|
Date:
August 7, 2008
|
|
By
|
/s/
MELANIE J. DRESSEL
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Melanie
J. Dressel
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President
and Chief Executive Officer
(Principal
Executive Officer)
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Date:
August 7, 2008
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By
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/s/
GARY R. SCHMINKEY
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Gary
R. Schminkey
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Executive
Vice President and
Chief
Financial Officer
(Principal
Financial Officer)
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Date:
August 7, 2008
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By
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/s/
CLINT E. STEIN
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Clint
E. Stein
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Senior
Vice President and
Chief
Accounting Officer
(Principal
Accounting Officer)
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