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 September 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 October 31, 2008 was
18,150,965
|
|
|
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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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14
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Item 3.
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22
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Item 4.
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23
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Item 1.
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24
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Item 1A.
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24
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Item 2.
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26
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Item 3.
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26
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Item 4.
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26
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Item 5.
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26
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Item 6.
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27
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28
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PART I - FINANCIAL INFORMATION
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME (LOSS)
Columbia
Banking System, Inc.
(Unaudited)
|
|
Three Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(in
thousands except per share)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
35,590 |
|
|
$ |
42,353 |
|
|
$ |
114,227 |
|
|
$ |
112,607 |
|
Taxable
securities
|
|
|
4,615 |
|
|
|
4,625 |
|
|
|
14,490 |
|
|
|
14,067 |
|
Tax-exempt
securities
|
|
|
1,997 |
|
|
|
2,005 |
|
|
|
5,997 |
|
|
|
5,925 |
|
Federal
funds sold and deposits in banks
|
|
|
135 |
|
|
|
395 |
|
|
|
379 |
|
|
|
1,180 |
|
Total
interest income
|
|
|
42,337 |
|
|
|
49,378 |
|
|
|
135,093 |
|
|
|
133,779 |
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,148 |
|
|
|
16,841 |
|
|
|
36,444 |
|
|
|
42,617 |
|
Federal
Home Loan Bank advances
|
|
|
1,887 |
|
|
|
2,454 |
|
|
|
6,464 |
|
|
|
8,117 |
|
Long-term
obligations
|
|
|
423 |
|
|
|
584 |
|
|
|
1,339 |
|
|
|
1,604 |
|
Other
borrowings
|
|
|
286 |
|
|
|
639 |
|
|
|
652 |
|
|
|
2,183 |
|
Total
interest expense
|
|
|
12,744 |
|
|
|
20,518 |
|
|
|
44,899 |
|
|
|
54,521 |
|
Net
Interest Income
|
|
|
29,593 |
|
|
|
28,860 |
|
|
|
90,194 |
|
|
|
79,258 |
|
Provision
for loan and lease losses
|
|
|
10,500 |
|
|
|
1,231 |
|
|
|
27,926 |
|
|
|
2,198 |
|
Net
interest income after provision for loan and lease losses
|
|
|
19,093 |
|
|
|
27,629 |
|
|
|
62,268 |
|
|
|
77,060 |
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
3,823 |
|
|
|
3,561 |
|
|
|
11,129 |
|
|
|
9,813 |
|
Merchant
services fees
|
|
|
2,081 |
|
|
|
2,251 |
|
|
|
6,159 |
|
|
|
6,344 |
|
Redemption
of Visa and Mastercard shares
|
|
|
- |
|
|
|
- |
|
|
|
3,028 |
|
|
|
- |
|
Gain
on sale of investment securities, net
|
|
|
- |
|
|
|
- |
|
|
|
882 |
|
|
|
- |
|
Loss
on impairment of equity securities
|
|
|
(18,517 |
) |
|
|
- |
|
|
|
(18,517 |
) |
|
|
- |
|
Bank
owned life insurance ("BOLI")
|
|
|
533 |
|
|
|
502 |
|
|
|
1,587 |
|
|
|
1,379 |
|
Other
|
|
|
1,134 |
|
|
|
1,317 |
|
|
|
4,248 |
|
|
|
3,013 |
|
Total
noninterest income
|
|
|
(10,946 |
) |
|
|
7,631 |
|
|
|
8,516 |
|
|
|
20,549 |
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
12,173 |
|
|
|
12,159 |
|
|
|
37,917 |
|
|
|
34,365 |
|
Occupancy
|
|
|
3,248 |
|
|
|
3,241 |
|
|
|
9,706 |
|
|
|
9,023 |
|
Merchant
processing
|
|
|
961 |
|
|
|
880 |
|
|
|
2,731 |
|
|
|
2,587 |
|
Advertising
and promotion
|
|
|
579 |
|
|
|
575 |
|
|
|
1,797 |
|
|
|
1,779 |
|
Data
processing
|
|
|
909 |
|
|
|
743 |
|
|
|
2,507 |
|
|
|
1,863 |
|
Legal
and professional fees
|
|
|
765 |
|
|
|
695 |
|
|
|
1,479 |
|
|
|
2,205 |
|
Taxes,
licenses and fees
|
|
|
720 |
|
|
|
773 |
|
|
|
2,267 |
|
|
|
2,089 |
|
Net
loss (gain) on sale of other real estate owned
|
|
|
4 |
|
|
|
- |
|
|
|
(19 |
) |
|
|
- |
|
Other
|
|
|
4,032 |
|
|
|
3,359 |
|
|
|
11,927 |
|
|
|
9,182 |
|
Total
noninterest expense
|
|
|
23,391 |
|
|
|
22,425 |
|
|
|
70,312 |
|
|
|
63,093 |
|
Income
(loss) before income taxes
|
|
|
(15,244 |
) |
|
|
12,835 |
|
|
|
472 |
|
|
|
34,516 |
|
Provision
(benefit) for income taxes
|
|
|
(6,485 |
) |
|
|
3,579 |
|
|
|
(3,682 |
) |
|
|
9,433 |
|
Net
Income (Loss)
|
|
$ |
(8,759 |
) |
|
$ |
9,256 |
|
|
$ |
4,154 |
|
|
$ |
25,083 |
|
Net
income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.49 |
) |
|
$ |
0.53 |
|
|
$ |
0.23 |
|
|
$ |
1.52 |
|
Diluted
|
|
$ |
(0.49 |
) |
|
$ |
0.53 |
|
|
$ |
0.23 |
|
|
$ |
1.51 |
|
Dividends
paid per common share
|
|
$ |
0.17 |
|
|
$ |
0.17 |
|
|
$ |
0.51 |
|
|
$ |
0.49 |
|
Weighted
average number of common shares outstanding
|
|
|
17,948 |
|
|
|
17,339 |
|
|
|
17,898 |
|
|
|
16,472 |
|
Weighted
average number of diluted common shares outstanding
|
|
|
17,948 |
|
|
|
17,533 |
|
|
|
17,994 |
|
|
|
16,636 |
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
CONSOLIDATED
CONDENSED BALANCE SHEETS
Columbia
Banking System, Inc.
(Unaudited)
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
|
|
$ |
81,555 |
|
|
$ |
82,735 |
|
Interest-earning
deposits with banks
|
|
|
|
|
|
21,849 |
|
|
|
11,240 |
|
Total
cash and cash equivalents
|
|
|
|
|
|
103,404 |
|
|
|
93,975 |
|
Securities
available for sale at fair value (amortized cost of $535,620 and $558,685,
respectively)
|
|
|
|
|
|
536,277 |
|
|
|
561,366 |
|
Federal
Home Loan Bank stock at cost
|
|
|
|
|
|
14,785 |
|
|
|
11,607 |
|
Loans
held for sale
|
|
|
|
|
|
2,890 |
|
|
|
4,482 |
|
Loans,
net of deferred loan fees of ($3,852) and ($3,931),
respectively
|
|
|
|
|
2,216,133 |
|
|
|
2,282,728 |
|
Less:
allowance for loan and lease losses
|
|
|
|
|
|
35,814 |
|
|
|
26,599 |
|
Loans,
net
|
|
|
|
|
|
2,180,319 |
|
|
|
2,256,129 |
|
Interest
receivable
|
|
|
|
|
|
12,980 |
|
|
|
14,622 |
|
Premises
and equipment, net
|
|
|
|
|
|
61,153 |
|
|
|
56,122 |
|
Other
real estate owned
|
|
|
|
|
|
1,288 |
|
|
|
181 |
|
Goodwill
|
|
|
|
|
|
95,519 |
|
|
|
96,011 |
|
Core
deposit intangible, net
|
|
|
|
|
|
6,179 |
|
|
|
7,050 |
|
Other
assets
|
|
|
|
|
|
90,186 |
|
|
|
77,168 |
|
Total
Assets
|
|
|
|
|
$ |
3,104,980 |
|
|
$ |
3,178,713 |
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
|
|
|
$ |
498,815 |
|
|
$ |
468,237 |
|
Interest-bearing
|
|
|
|
|
|
1,857,006 |
|
|
|
2,029,824 |
|
Total
deposits
|
|
|
|
|
|
2,355,821 |
|
|
|
2,498,061 |
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
|
|
|
|
301,000 |
|
|
|
257,670 |
|
Securities
sold under agreements to repurchase
|
|
|
|
|
|
25,000 |
|
|
|
- |
|
Other
borrowings
|
|
|
|
|
|
20,097 |
|
|
|
5,061 |
|
Total
short-term borrowings
|
|
|
|
|
|
346,097 |
|
|
|
262,731 |
|
Long-term
subordinated debt
|
|
|
|
|
|
25,582 |
|
|
|
25,519 |
|
Other
liabilities
|
|
|
|
|
|
41,045 |
|
|
|
50,671 |
|
Total
liabilities
|
|
|
|
|
|
2,768,545 |
|
|
|
2,836,982 |
|
Commitments
and contingent liabilities (note 11)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock (no par value)
|
|
|
|
|
|
- |
|
|
|
- |
|
Authorized,
2 million shares; none outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
Common
Stock (no par value)
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares
|
63,034
|
|
63,034
|
|
|
|
|
|
|
|
|
Issued
and outstanding
|
18,147
|
|
17,953
|
|
|
229,680 |
|
|
|
226,550 |
|
Retained
earnings
|
|
|
|
|
|
102,965 |
|
|
|
110,169 |
|
Accumulated
other comprehensive income
|
|
|
|
|
|
3,790 |
|
|
|
5,012 |
|
Total
shareholders' equity
|
|
|
|
|
|
336,435 |
|
|
|
341,731 |
|
Total
Liabilities and Shareholders' Equity
|
|
|
|
|
$ |
3,104,980 |
|
|
$ |
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
|
|
|
- |
|
|
|
- |
|
|
|
25,083 |
|
|
|
- |
|
|
|
25,083 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain from securities, net of reclassification
adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,911 |
|
|
|
1,911 |
|
Net
unrealized gain from cash flow hedging instruments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
794 |
|
|
|
794 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,788 |
|
Purchase
and retirement of common stock
|
|
|
(65 |
) |
|
|
(2,121 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,121 |
) |
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued to the shareholders of Mountain Bank Holding
Company
|
|
|
993 |
|
|
|
30,327 |
|
|
|
- |
|
|
|
- |
|
|
|
30,327 |
|
Converted
Mountain Bank Holding Company stock options
|
|
|
- |
|
|
|
1,325 |
|
|
|
- |
|
|
|
- |
|
|
|
1,325 |
|
Shares
issued to the shareholders of Town Center Bancorp
|
|
|
705 |
|
|
|
23,869 |
|
|
|
- |
|
|
|
- |
|
|
|
23,869 |
|
Converted
Town Center Bancorp stock options
|
|
|
- |
|
|
|
1,598 |
|
|
|
- |
|
|
|
- |
|
|
|
1,598 |
|
Issuance
of stock under stock option and other plans
|
|
|
139 |
|
|
|
2,098 |
|
|
|
- |
|
|
|
- |
|
|
|
2,098 |
|
Stock
award compensation expense
|
|
|
50 |
|
|
|
573 |
|
|
|
- |
|
|
|
- |
|
|
|
573 |
|
Stock
option compensation expense
|
|
|
- |
|
|
|
137 |
|
|
|
- |
|
|
|
- |
|
|
|
137 |
|
Tax
benefit associated with stock-based compensation
|
|
|
- |
|
|
|
235 |
|
|
|
- |
|
|
|
- |
|
|
|
235 |
|
Cash
dividends paid on common stock
|
|
|
- |
|
|
|
- |
|
|
|
(8,207 |
) |
|
|
- |
|
|
|
(8,207 |
) |
Balance
at September 30, 2007
|
|
|
17,882 |
|
|
$ |
224,804 |
|
|
$ |
105,913 |
|
|
$ |
(748 |
) |
|
$ |
329,969 |
|
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
|
|
|
- |
|
|
|
- |
|
|
|
4,154 |
|
|
|
- |
|
|
|
4,154 |
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss from securities, net of reclassification
adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,302 |
) |
|
|
(1,302 |
) |
Net
unrealized gain from cash flow hedging instruments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80 |
|
|
|
80 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,932 |
|
Issuance
of stock under stock option and other plans
|
|
|
132 |
|
|
|
1,860 |
|
|
|
- |
|
|
|
- |
|
|
|
1,860 |
|
Stock
award compensation expense
|
|
|
62 |
|
|
|
1,040 |
|
|
|
- |
|
|
|
- |
|
|
|
1,040 |
|
Tax
benefit associated with stock-based compensation
|
|
|
- |
|
|
|
230 |
|
|
|
- |
|
|
|
- |
|
|
|
230 |
|
Cash
dividends paid on common stock
|
|
|
- |
|
|
|
- |
|
|
|
(9,221 |
) |
|
|
- |
|
|
|
(9,221 |
) |
Balance
at September 30, 2008
|
|
|
18,147 |
|
|
$ |
229,680 |
|
|
$ |
102,965 |
|
|
$ |
3,790 |
|
|
$ |
336,435 |
|
See
accompanying notes to unaudited consolidated condensed financial
statements.
|
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
Columbia
Banking System, Inc.
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
Income
|
|
$ |
4,154 |
|
|
$ |
25,083 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
27,926 |
|
|
|
2,198 |
|
Deferred
income tax benefit
|
|
|
(12,318 |
) |
|
|
(1,194 |
) |
Excess
tax benefit from stock-based compensation
|
|
|
(230 |
) |
|
|
(235 |
) |
Stock-based
compensation expense
|
|
|
1,040 |
|
|
|
710 |
|
Depreciation,
amortization and accretion
|
|
|
5,389 |
|
|
|
4,607 |
|
Net
realized gain on sale of securities
|
|
|
(882 |
) |
|
|
- |
|
Net
realized gain on sale of other assets
|
|
|
(798 |
) |
|
|
(8 |
) |
Impairment
charge on investment securities
|
|
|
18,517 |
|
|
|
- |
|
Net
change in:
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
1,592 |
|
|
|
(875 |
) |
Interest
receivable
|
|
|
1,642 |
|
|
|
(2,074 |
) |
Interest
payable
|
|
|
(4,591 |
) |
|
|
4,606 |
|
Other
assets
|
|
|
(6,841 |
) |
|
|
3,109 |
|
Other
liabilities
|
|
|
(5,951 |
) |
|
|
(6,994 |
) |
Net
cash provided by operating activities
|
|
|
28,649 |
|
|
|
28,933 |
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of securities available for sale
|
|
|
(86,902 |
) |
|
|
(2,888 |
) |
Proceeds
from sales of securities available for sale
|
|
|
51,358 |
|
|
|
28,467 |
|
Proceeds
from principal repayments and maturities of securities available for
sale
|
|
|
40,328 |
|
|
|
39,033 |
|
Proceeds
from maturities of securities held to maturity
|
|
|
- |
|
|
|
578 |
|
Loans
originated and acquired, net of principal collected
|
|
|
45,605 |
|
|
|
(218,350 |
) |
Purchases
of premises and equipment
|
|
|
(8,838 |
) |
|
|
(4,003 |
) |
Proceeds
from disposal of premises and equipment
|
|
|
115 |
|
|
|
212 |
|
Acquisition
of Mt. Rainier and Town Center, net of cash acquired
|
|
|
- |
|
|
|
(32,429 |
) |
Proceeds
from sales of Federal Reserve Bank stock
|
|
|
- |
|
|
|
310 |
|
Purchase
of FHLB stock
|
|
|
(3,178 |
) |
|
|
- |
|
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
|
|
|
46,785 |
|
|
|
(189,070 |
) |
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase(decrease) in deposits
|
|
|
(142,240 |
) |
|
|
149,758 |
|
Proceeds
from Federal Home Loan Bank advances
|
|
|
1,784,268 |
|
|
|
2,353,626 |
|
Repayment
from Federal Home Loan Bank advances
|
|
|
(1,740,938 |
) |
|
|
(2,315,151 |
) |
Proceeds
from repurchase agreement borrowings
|
|
|
25,000 |
|
|
|
- |
|
Repayment
of repurchase agreement borrowings
|
|
|
- |
|
|
|
(20,000 |
) |
Net
increase in other borrowings
|
|
|
15,036 |
|
|
|
10 |
|
Cash
dividends paid on common stock
|
|
|
(9,221 |
) |
|
|
(8,207 |
) |
Proceeds
from issuance of common stock
|
|
|
1,860 |
|
|
|
2,098 |
|
Repurchase
of common stock
|
|
|
- |
|
|
|
(2,121 |
) |
Excess
tax benefit from stock-based compensation
|
|
|
230 |
|
|
|
235 |
|
Net
cash provided by(used in) financing activities
|
|
|
(66,005 |
) |
|
|
160,248 |
|
Increase
in cash and cash equivalents
|
|
|
9,429 |
|
|
|
111 |
|
Cash
and cash equivalents at beginning of period
|
|
|
93,975 |
|
|
|
104,344 |
|
Cash
and cash equivalents at end of period
|
|
$ |
103,404 |
|
|
$ |
104,455 |
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
49,490 |
|
|
$ |
49,915 |
|
Cash
paid for income tax
|
|
$ |
9,916 |
|
|
$ |
10,490 |
|
Share-based
consideration issued for acquisitions
|
|
$ |
- |
|
|
$ |
57,119 |
|
Loans
transferred to other real estate owned
|
|
$ |
1,288 |
|
|
$ |
- |
|
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 nine months ended September 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
No. 157, Fair Value
Measurements (“SFAS 157”). 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 (loss) per share for the three and
nine months ended September 30, 2008 and 2007 (in thousands, except for per
share data):
|
|
For
The Three Months Ended
|
|
|
For
The Nine Months Ended
|
|
(in
thousands except per share)
|
|
9/30/2008
|
|
|
9/30/2007
|
|
|
9/30/2008
|
|
|
9/30/2007
|
|
Net
Income (Loss)
|
|
$ |
(8,759 |
) |
|
$ |
9,256 |
|
|
$ |
4,154 |
|
|
$ |
25,083 |
|
Weighted
average common shares outstanding (for basic calculation)
|
|
|
17,948 |
|
|
|
17,339 |
|
|
|
17,898 |
|
|
|
16,472 |
|
Dilutive
effect of outstanding common stock options and nonvested restricted
shares
|
|
|
- |
|
|
|
194 |
|
|
|
96 |
|
|
|
164 |
|
Weighted
average common stock and common equivalent shares outstanding
(for
diluted
calculation)
|
|
|
17,948 |
|
|
|
17,533 |
|
|
|
17,994 |
|
|
|
16,636 |
|
Earnings
(loss) per common share - basic
|
|
$ |
(0.49 |
) |
|
$ |
0.53 |
|
|
$ |
0.23 |
|
|
$ |
1.52 |
|
Earnings
(loss) per common share - diluted
|
|
$ |
(0.49 |
) |
|
$ |
0.53 |
|
|
$ |
0.23 |
|
|
$ |
1.51 |
|
Potential
dilutive shares are excluded from the computation of earnings per share if their
effect is anti-dilutive. Anti-dilutive shares outstanding related to options to
acquire common stock for the three and nine month periods ended September 30,
2008 totaled 92,258 and 59,292, respectively. There were no
anti-dilutive shares outstanding related to options to acquire common stock for
the same periods last year.
4.
Dividends
Subsequent
to quarter end, on October 23, 2008, the Company declared a quarterly cash
dividend of $0.07 per share, payable on November 19, 2008, to shareholders of
record at the close of business November 5, 2008. The decision to
reduce the quarterly dividend as compared to recent quarters was based upon the
Board of Directors’ review of the Company’s dividend payout ratio and dividend
yield balanced with the Company’s desire to retain capital. On July
24, 2008, the Company declared a quarterly cash dividend of $.17 per share,
payable on August 20, 2008, to shareholders of record at the close of business
on August 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. 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. 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.
Subsequent
to quarter-end, the Company received preliminary approval from the U.S.
Department of Treasury to receive additional capital by participating in the
Treasury Department’s Capital Purchase Program. As a participant in
the program, Columbia could issue to the U.S. Treasury up to $76.9 million in
senior preferred shares and related warrants. Receipt of the funding
is subject to Columbia’s acceptance of the terms of the agreement, satisfaction
of closing conditions and registration with the Securities and Exchange
Commission. Certain terms of the senior preferred shares restrict the
ability of the Company to repurchase and/or pay dividends on common
stock.
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 and
year-to-date periods is not directly comparable to the same line item for the
same periods of last year as those prior periods 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:
|
|
Three
Months Ended September 30, 2008
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
10,563 |
|
|
$ |
13,198 |
|
|
$ |
5,832 |
|
|
$ |
29,593 |
|
Provision
for loan and lease losses
|
|
|
- |
|
|
|
- |
|
|
|
(10,500 |
) |
|
|
(10,500 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
10,563 |
|
|
|
13,198 |
|
|
|
(4,668 |
) |
|
|
19,093 |
|
Noninterest
income
|
|
|
846 |
|
|
|
2,171 |
|
|
|
(13,963 |
) |
|
|
(10,946 |
) |
Noninterest
expense
|
|
|
(10,610 |
) |
|
|
(14,866 |
) |
|
|
2,085 |
|
|
|
(23,391 |
) |
Income
(loss) before income taxes
|
|
|
799 |
|
|
|
503 |
|
|
|
(16,546 |
) |
|
|
(15,244 |
) |
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,485 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8,759 |
) |
Total
assets
|
|
$ |
1,423,184 |
|
|
$ |
1,015,412 |
|
|
$ |
666,384 |
|
|
$ |
3,104,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
11,893 |
|
|
$ |
17,464 |
|
|
$ |
(497 |
) |
|
$ |
28,860 |
|
Provision
for loan and lease losses
|
|
|
- |
|
|
|
- |
|
|
|
(1,231 |
) |
|
|
(1,231 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
11,893 |
|
|
|
17,464 |
|
|
|
(1,728 |
) |
|
|
27,629 |
|
Noninterest
income
|
|
|
1,067 |
|
|
|
2,353 |
|
|
|
4,211 |
|
|
|
7,631 |
|
Noninterest
expense
|
|
|
(3,341 |
) |
|
|
(7,362 |
) |
|
|
(11,722 |
) |
|
|
(22,425 |
) |
Income
(loss) before income taxes
|
|
|
9,619 |
|
|
|
12,455 |
|
|
|
(9,239 |
) |
|
|
12,835 |
|
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,579 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,256 |
|
Total
assets
|
|
$ |
1,399,262 |
|
|
$ |
1,003,947 |
|
|
$ |
719,535 |
|
|
$ |
3,122,744 |
|
|
|
Nine
Months Ended September 30, 2008
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
37,283 |
|
|
$ |
43,805 |
|
|
$ |
9,106 |
|
|
$ |
90,194 |
|
Provision
for loan and lease losses
|
|
|
- |
|
|
|
- |
|
|
|
(27,926 |
) |
|
|
(27,926 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
37,283 |
|
|
|
43,805 |
|
|
|
(18,820 |
) |
|
|
62,268 |
|
Noninterest
income
|
|
|
2,848 |
|
|
|
6,736 |
|
|
|
(1,068 |
) |
|
|
8,516 |
|
Noninterest
expense
|
|
|
(16,577 |
) |
|
|
(31,965 |
) |
|
|
(21,770 |
) |
|
|
(70,312 |
) |
Income
(loss) before income taxes
|
|
|
23,554 |
|
|
|
18,576 |
|
|
|
(41,658 |
) |
|
|
472 |
|
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,682 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,154 |
|
Total
assets
|
|
$ |
1,423,184 |
|
|
$ |
1,015,412 |
|
|
$ |
666,384 |
|
|
$ |
3,104,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
(in
thousands)
|
|
Commercial
Banking
|
|
|
Retail
Banking
|
|
|
Other
|
|
|
Total
|
|
Net
interest income
|
|
$ |
21,055 |
|
|
$ |
59,537 |
|
|
$ |
(1,334 |
) |
|
$ |
79,258 |
|
Provision
for loan and lease losses
|
|
|
- |
|
|
|
- |
|
|
|
(2,198 |
) |
|
|
(2,198 |
) |
Net
interest income after provision for loan and lease losses
|
|
|
21,055 |
|
|
|
59,537 |
|
|
|
(3,532 |
) |
|
|
77,060 |
|
Noninterest
income
|
|
|
2,427 |
|
|
|
6,249 |
|
|
|
11,873 |
|
|
|
20,549 |
|
Noninterest
expense
|
|
|
(8,719 |
) |
|
|
(20,058 |
) |
|
|
(34,316 |
) |
|
|
(63,093 |
) |
Income
(loss) before income taxes
|
|
|
14,763 |
|
|
|
45,728 |
|
|
|
(25,975 |
) |
|
|
34,516 |
|
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,433 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,083 |
|
Total
assets
|
|
$ |
1,399,262 |
|
|
$ |
1,003,947 |
|
|
$ |
719,535 |
|
|
$ |
3,122,744 |
|
6.
Fair Value Accounting and Measurement
SFAS 157
defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure requirements about fair value. We hold fixed
and variable rate interest bearing securities, investments in marketable equity
securities and certain other financial instruments, which are carried at fair
value. Fair value is determined based upon quoted prices when
available or through the use of alternative approaches, such as matrix or model
pricing, when market quotes are not readily accessible or
available.
The
valuation techniques are based upon observable and unobservable
inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our own market
assumptions. These two types of inputs create the following fair
value hierarchy:
Level 1 –
Quoted prices for identical instruments in active markets that are accessible at
the measurement date.
Level 2 –
Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model
derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level 3 –
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable.
Fair
values are determined as follows:
Certain
preferred stock securities at fair value are priced using quoted prices for
identical instruments in active markets and are classified within level 1 of the
valuation hierarchy.
Other
securities at fair value are priced using matrix pricing based on the
securities’ relationship to other benchmark quoted prices, and under the
provisions of SFAS 157 are considered a Level 2 input method.
Interest
rate swap positions are valued in models, which use as their basis, readily
observable market parameters and are classified within level 2 of the valuation
hierarchy.
The
following table sets forth the Company’s financial assets and liabilities that
were accounted for at fair value on a recurring basis at September 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 at
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
thousands)
|
|
September
30, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ |
536,277 |
|
|
$ |
1,512 |
|
|
$ |
534,765 |
|
|
$ |
- |
|
Interest
rate swap agreements
|
|
$ |
3,703 |
|
|
$ |
- |
|
|
$ |
3,703 |
|
|
$ |
- |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
3,703 |
|
|
$ |
- |
|
|
$ |
3,703 |
|
|
$ |
- |
|
Certain
assets and liabilities are measured at fair value on a nonrecurring basis after
initial recognition such as loans measured for impairment and OREO. The
following methods were used to estimate the fair value of each such class of
financial instrument:
Impaired loans - A
loan is considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of the loan
agreement. Impaired loans are measured by the fair market value of the
collateral less estimated costs to sell.
Other real estate owned -
OREO is real property that the Bank has taken ownership of in partial or full
satisfaction of a loan or loans. OREO is recorded at the lower of the carrying
amount of the loan or fair value less estimated costs to sell. This amount
becomes the property’s new basis. Any write-downs based on the property fair
value less estimated cost to sell at the date of acquisition are charged to the
allowance for loan and lease losses. Management periodically reviews OREO in an
effort to ensure the property is carried at the lower of its new basis or fair
value, net of estimated costs to sell.
The
following table sets forth the Company’s financial assets that were accounted
for at fair value on a nonrecurring basis at September 30, 2008:
|
|
Fair
value at
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
(in
thousands)
|
|
September
30, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Impaired
loans
|
|
$ |
14,453 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
14,453 |
|
Other
real estate owned
|
|
|
1,449 |
|
|
|
- |
|
|
|
- |
|
|
|
1,449 |
|
|
|
$ |
15,902 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
15,902 |
|
In
accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan, impaired loans, with carrying amounts of $16,701
had specific valuation allowances totaling $2,248, which were included in the
allowance for loan and lease losses.
Other
real estate owned with a carrying amount of $1.6 million was acquired during the
quarter. In accordance with Statement of Financial Accounting
Standards No.144, Accounting
for the Impairment or Disposal of Long-Lived Assets, these long-lived
assets held for sale were written down to their fair value of $1.4 million, less
cost to sell of $161,000 (or $1.3 million), resulting in a loss of $266,000,
which was charged to the allowance for loan and lease losses during the
period.
7.
Securities
The following table summarizes the
amortized cost, gross unrealized gains and losses and the resulting fair value
of securities available for sale:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
(in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
September
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise preferred stock
|
|
$ |
1,512 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,512 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
344,123 |
|
|
|
3,803 |
|
|
|
(1,268 |
) |
|
|
346,658 |
|
State
and municipal securities
|
|
|
188,985 |
|
|
|
2,635 |
|
|
|
(4,453 |
) |
|
|
187,167 |
|
Other
securities
|
|
|
1,000 |
|
|
|
- |
|
|
|
(60 |
) |
|
|
940 |
|
Total
|
|
$ |
535,620 |
|
|
$ |
6,438 |
|
|
$ |
(5,781 |
) |
|
$ |
536,277 |
|
December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored enterprise
|
|
$ |
61,137 |
|
|
$ |
216 |
|
|
$ |
(53 |
) |
|
$ |
61,300 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
304,475 |
|
|
|
1,132 |
|
|
|
(1,865 |
) |
|
|
303,742 |
|
State
and municipal securities
|
|
|
190,673 |
|
|
|
3,782 |
|
|
|
(490 |
) |
|
|
193,965 |
|
Other
securities
|
|
|
2,400 |
|
|
|
- |
|
|
|
(41 |
) |
|
|
2,359 |
|
Total
|
|
$ |
558,685 |
|
|
$ |
5,130 |
|
|
$ |
(2,449 |
) |
|
$ |
561,366 |
|
During
the quarter, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the
Federal National Mortgage Association (“Fannie Mae”) were placed into
conservatorship in a plan announced by the U.S. Treasury Department (“Treasury”)
and the Federal Housing Finance Agency (“FHFA”). The Company
holds 400,000 shares of Series Z preferred stock issued by Freddie Mac and
400,000 shares of Series S preferred stock issued by Fannie Mae. Such
securities are held in the Company’s available-for-sale investment securities
portfolio and, as such, declines in fair value below cost are subject to a
potential other than temporary impairment charge to earnings under Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The Company’s cost for these
securities was $20 million. The estimated fair market value of these
securities declined from $20 million at June 30, 2008 to $1.5 million at
September 30, 2008. In light of the actions taken by Treasury and
FHFA and the accompanying significant decline in the fair value of these
securities below cost, the Company has deemed the impairment to be other than
temporary and, accordingly, recognized a pre-tax charge to earnings in the third
quarter totaling $18.5 million.
At
September 30, 2008, available for sale securities with a carrying amount of
$28.7 million were pledged as collateral for repurchase agreement
borrowings. In addition, available for sale securities with a
carrying amount of $6.1 million at September 30, 2008 were pledged as collateral
for certain interest rate swap agreements.
The
following tables show the gross unrealized losses and fair value of the
Company’s investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position at September 30, 2008 and December 31, 2007:
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(in
thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
$ |
11,679 |
|
|
$ |
(78 |
) |
|
$ |
53,728 |
|
|
$ |
(1,190 |
) |
|
$ |
65,407 |
|
|
$ |
(1,268 |
) |
State
and municipal securities
|
|
|
95,609 |
|
|
|
(4,037 |
) |
|
|
6,158 |
|
|
|
(416 |
) |
|
|
101,767 |
|
|
|
(4,453 |
) |
Other
securities
|
|
|
- |
|
|
|
- |
|
|
|
940 |
|
|
|
(60 |
) |
|
|
940 |
|
|
|
(60 |
) |
Total
|
|
$ |
107,288 |
|
|
$ |
(4,115 |
) |
|
$ |
60,826 |
|
|
$ |
(1,666 |
) |
|
$ |
168,114 |
|
|
$ |
(5,781 |
) |
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(in
thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U.S.
government-sponsored enterprise
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
17,678 |
|
|
$ |
(53 |
) |
|
$ |
17,678 |
|
|
$ |
(53 |
) |
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
16,897 |
|
|
|
(28 |
) |
|
|
170,932 |
|
|
|
(1,837 |
) |
|
|
187,829 |
|
|
|
(1,865 |
) |
State
and municipal securities
|
|
|
19,725 |
|
|
|
(112 |
) |
|
|
24,549 |
|
|
|
(378 |
) |
|
|
44,274 |
|
|
|
(490 |
) |
Other
securities
|
|
|
- |
|
|
|
- |
|
|
|
959 |
|
|
|
(41 |
) |
|
|
959 |
|
|
|
(41 |
) |
Total
|
|
$ |
36,622 |
|
|
$ |
(140 |
) |
|
$ |
214,118 |
|
|
$ |
(2,309 |
) |
|
$ |
250,740 |
|
|
$ |
(2,449 |
) |
U.S. Government Agency and
Government-Sponsored Enterprise Mortgage-Backed Securities and Collateralized
Mortgage Obligations. At September 30, 2008, there were
21 U.S. government agency and government-sponsered enterprise mortgage-backed
securities & collateralized mortgage obligations securities in an
unrealized loss position, of which 15 were in a continuous loss position for 12
months or more. The unrealized losses on U.S. Government agency mortgage-backed
securities & collateralized mortgage obligations were caused by
interest rate increases subsequent to the purchase of the securities. It is
expected that the securities would not be settled at a price less than the
amortized cost of the investment. Because the decline in fair value is
attributable to changes in interest rates rather than credit quality, and
because the Company has the ability and intent to hold these investments until a
recovery of market value, which may be maturity, the Company does not consider
these investments to be other-than-temporarily impaired at September 30,
2008.
State and Municipal
Securities. At September 30, 2008 there were 126 state and
municipal government securities in an unrealized loss position, of which 8 were
in a continuous loss position for 12 months or more. The unrealized losses on
state and municipal securities were caused by interest rate increases subsequent
to the purchase of the individual securities. Management monitors published
credit ratings of these securities for adverse changes. As of September 30, 2008
none of the obligations of state and local government entities held by the
Company had an adverse credit rating. Because the decline in fair value is
attributable to changes in interest rates rather than credit quality, and
because the Company has the ability and intent to hold these investments until a
recovery of market value, which may be maturity, the Company does not consider
these investments to be other-than-temporarily impaired at September 30,
2008.
Other
Securities. At September 30, 2008, there was one other
security, a mortgage-backed securities fund, which was in a continuous loss
position for 12 months or more. The unrealized loss on this security was caused
by interest rate increases subsequent to the purchase of the security. It is
expected that this security would not be settled at a price less than the
amortized cost of the investment. Because the decline in fair value is
attributable to changes in interest rates rather than credit quality, and
because the Company has the ability and intent to hold this investment until a
recovery of market value, the Company does not consider this investment to be
other-than-temporarily impaired at September 30, 2008.
8.
Comprehensive Income (Loss)
The
components of comprehensive income are as follows:
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Net
income(loss) as reported
|
|
$ |
(8,759 |
) |
|
$ |
9,256 |
|
Unrealized
gain from securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding gain from available for sale securities arising during
the period, net of tax of ($1,935) and $(3,259)
|
|
|
3,513 |
|
|
|
5,974 |
|
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 gain from securities, net of reclassification
adjustment
|
|
|
3,513 |
|
|
|
5,974 |
|
Unrealized
gain(loss) from cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Net
unrealized gain from cash flow hedging instruments arising during the
period, net of tax of $0 and $(863)
|
|
|
- |
|
|
|
1,583 |
|
Reclassification
adjustment of net (gain)loss included in income, net of tax of $197 and
$(13)
|
|
|
(357 |
) |
|
|
24 |
|
Net
unrealized gain(loss) from cash flow hedging instruments
|
|
|
(357 |
) |
|
|
1,607 |
|
Total
comprehensive income (loss)
|
|
$ |
(5,603 |
) |
|
$ |
16,837 |
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Net
income as reported
|
|
$ |
4,154 |
|
|
$ |
25,083 |
|
Unrealized
gain(loss) from securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding gain(loss) from available for sale securities arising
during the period, net of tax of $410 and $(992)
|
|
|
(731 |
) |
|
|
1,911 |
|
Reclassification
adjustment of net gain from sale of available for sale securities included
in income, net of tax of $311 and $0
|
|
|
(571 |
) |
|
|
- |
|
Net
unrealized gain (loss) from securities, net of reclassification
adjustment
|
|
|
(1,302 |
) |
|
|
1,911 |
|
Unrealized
gain from cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Net
unrealized gain from cash flow hedging instruments arising during the
period, net of tax of $(425) and ($413)
|
|
|
739 |
|
|
|
756 |
|
Reclassification
adjustment of net (gain)loss included in income, net of tax of $363 and
$(20)
|
|
|
(659 |
) |
|
|
38 |
|
Net
unrealized gain from cash flow hedging instruments
|
|
|
80 |
|
|
|
794 |
|
Total
comprehensive income
|
|
$ |
2,932 |
|
|
$ |
27,788 |
|
9.
Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of
Credit
The
following table presents activity in the allowance for loan and lease losses for
the three and nine months ended September 30, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
41,724 |
|
|
$ |
21,339 |
|
|
$ |
26,599 |
|
|
$ |
20,182 |
|
Balance
established through acquisition
|
|
|
- |
|
|
|
3,192 |
|
|
|
- |
|
|
|
3,192 |
|
Provision
charged to expense
|
|
|
10,500 |
|
|
|
1,231 |
|
|
|
27,926 |
|
|
|
2,198 |
|
Loans
charged off
|
|
|
(16,481 |
) |
|
|
(528 |
) |
|
|
(19,384 |
) |
|
|
(854 |
) |
Recoveries
|
|
|
71 |
|
|
|
146 |
|
|
|
673 |
|
|
|
662 |
|
Ending
balance
|
|
$ |
35,814 |
|
|
$ |
25,380 |
|
|
$ |
35,814 |
|
|
$ |
25,380 |
|
Changes
in the allowance for unfunded loan commitments and letters of credit are
summarized as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
459 |
|
|
$ |
339 |
|
|
$ |
349 |
|
|
$ |
339 |
|
Net
changes in the allowance for unfunded commitments and letters of
credit
|
|
|
- |
|
|
|
10 |
|
|
|
110 |
|
|
|
10 |
|
Ending
balance
|
|
$ |
459 |
|
|
$ |
349 |
|
|
$ |
459 |
|
|
$ |
349 |
|
10.
Goodwill and Intangible Assets
At
September 30, 2008 and December 31, 2007, the Company had $95.5 million and
$96.0 million in goodwill, respectively. The change in goodwill from
year-end is due to income tax adjustments related to the 2007 acquisitions
resulting from the preparation of final income tax returns. At
September 30, 2008 and December 31, 2007, the Company had a core deposit
intangible (“CDI”) asset of $6.2 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 in certain circumstances such as material adverse changes in legal,
business, regulatory, and economic factors. An impairment loss is recorded to
the extent that the carrying amount of goodwill exceeds its implied fair value.
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 $279,000 and $96,000 for the three months ended September 30, 2008 and
September 30, 2007 and $871,000 and $287,000 for the nine months ended September
30, 2008 and September 30, 2007, respectively. The Company estimates that
aggregate amortization expense on the CDI will be $271,000 during the fourth
quarter of 2008, $1.0 million for 2009, $963,000 for 2010, $893,000 for 2011 and
$832,000 for 2012. The CDI amortization expense is included in other
noninterest expense on the consolidated condensed statements of
income.
11.
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. Subsequent to quarter-end, on October 27,
2008, Visa announced that it had reached a settlement in principle in certain
covered litigation with Discover Financial Services. The settlement
totals $1.9 billion, which includes $1.7 billion from the litigation escrow
account, $80 million from Visa to obtain releases from MasterCard and an
additional $65 million which will be refunded by Morgan Stanley under a separate
agreement
related to the settlement. On November 5, 2008, Visa announced that
the settlement was approval by Visa’s former U.S. member financial
institutions.
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
first nine months of 2007 financial information does not include the results of
operations of Mountain Bank Holding Company and Town Center Bancorp prior to the
acquisition date of July 23, 2007.
Earnings
Summary
The
Company reported a net loss for the third quarter of $8.8 million or ($0.49) per
diluted share, compared to net income of $9.3 million or $0.53 per diluted share
for the third quarter of 2007. Return on average assets and return on
average equity were (1.12%) and (10.10%), respectively, for the third quarter of
2008, compared with returns of 1.24% and 12.18%, respectively for the same
period of 2007. The Company’s results for the third quarter of 2008
declined from the same period in 2007, as a result of an other than temporary
impairment charge of $18.5 million, before tax, on preferred stock issued by
Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and a provision for loan and lease losses
of $10.5 million as discussed below. The results of the third 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 third quarter of 2007 only includes partial
results of the two organizations.
The
Company reported net income of $4.2 million for the first nine months of 2008 or
$0.23 per diluted share, compared with $25.1 million or $1.51 per diluted share
for the first nine months of 2007. Return on average assets and
return on average equity were 0.18% and 1.59%, respectively, for the first nine
months of 2008, compared with returns of 1.22% and 12.92%, respectively for the
first nine months of 2007. As stated above, the Company’s results for
the first nine months of 2008 declined from the same period in 2007, as a result
of the other than temporary impairment charge of $18.5 million and a provision
for loan and lease losses of $27.9 million as discussed below. The
results of the first nine 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 nine months of
2007 does not include the results of the two organizations for the entire
period.
Revenue
(net interest income plus noninterest income) for the three months ended
September 30, 2008 was $18.6 million, 49% lower than the same period in
2007. The decrease was primarily driven by the reduction in
noninterest income resulting from the $18.5 million impairment loss on preferred
stock discussed above.
Revenue
(net interest income plus noninterest income) for the first nine months of 2008
was $98.7 million, 1%, lower than the first nine months of 2007. The
reduction in noninterest income for the period stemming from the $18.5 million
impairment loss was partially offset by gains on the sale of investment
securities, proceeds from the redemption of Visa and MasterCard shares and
increased service charges and other fees. In addition, net interest
income increased 14% from the prior year driven primarily by growth in earning
assets due, in part, to the third quarter 2007 acquisitions.
Total
noninterest expense in the quarter ended September 30, 2008 was $23.4 million, a
4% increase from the third quarter of 2007. Regulatory premiums, data
processing expenses and core deposit intangible expenses increased in the third
quarter 2008 primarily due to the third quarter 2007 acquisitions.
Total
noninterest expense in the first nine months of 2008 was $70.3 million, or 11%,
higher than in the first nine months of 2007. The increase was due to
compensation and occupancy costs related to the third quarter 2007
acquisitions. In addition, regulatory premiums were $1.2 million
higher for the first nine months of 2008 over the same period in 2007, resulting
from a credit received in 2007 which offset the majority of the FDIC premiums
due. These increases were offset by a partial reversal of legal expenses in the
first quarter of 2008, totaling $889,000, related to certain Visa
litigation. Legal expenses related to this litigation were accrued by
the Company in the fourth quarter of 2007.
The
provision for loan and lease losses for the third quarter of 2008 was $10.5
million compared with $1.2 million for the third quarter of 2007. The
additional provision is due to the continued weakness in the for-sale housing
industry resulting from the slowing economic environment and non-accrual loans
of $76.2 million at September 30, 2008 compared to $10 million at September 30,
2007. The provision increased the Company’s total allowance for loan
and lease losses to 1.62% of net loans at September 30, 2008 from 1.17% at
year-end. Net charge-offs for the current quarter were $16.4 million
compared to $382,000 for the third quarter of 2007.
The
provision for loan and lease losses for the first nine months of 2008 was $27.9
million compared with $2.2 million for the first nine months of
2007. Net charge-offs for the first nine months of 2008 were $18.7
million as compared to $192,000 for the first nine 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 nine months of 2007 financial information does not include the results of
operations of Mountain Bank Holding Company and Town Center Bancorp prior to the
acquisition date of July 23, 2007.
Net
Interest Income
For the
three months ended September 30, 2008 we experienced a slight decrease in our
net interest margin when compared to the same period in 2007. This
decrease resulted primarily from a decline in the yield on earning
assets. For the third quarter of 2008 interest income decreased 14%
while interest expense decreased 38%, when compared to the same period in
2007. The decrease in interest income and interest expense for the
period is primarily due to rate decreases on both interest-earning assets and
interest-bearing liabilities. For the nine months ended September 30,
2008 interest income increased 1% over the same period in 2007 whereas interest
expense decreased 18%. The increase in interest income in the first
nine months 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. Finally, like most financial institutions,
changes in the target Federal Funds rate may affect our net interest
margin.
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 September 30,
|
|
|
Three
months ending September 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)
|
|
$ |
2,241,574 |
|
|
$ |
35,696 |
|
|
|
6.34 |
% |
|
$ |
2,102,281 |
|
|
$ |
42,353 |
|
|
|
7.99 |
% |
Securities
(2)
|
|
|
558,990 |
|
|
|
7,806 |
|
|
|
5.56 |
% |
|
|
572,124 |
|
|
|
7,727 |
|
|
|
5.36 |
% |
Interest-earning
deposits with banks and federal funds sold
|
|
|
30,330 |
|
|
|
135 |
|
|
|
1.78 |
% |
|
|
28,082 |
|
|
|
395 |
|
|
|
5.58 |
% |
Total
interest-earning assets
|
|
|
2,830,894 |
|
|
$ |
43,637 |
|
|
|
6.13 |
% |
|
|
2,702,487 |
|
|
$ |
50,475 |
|
|
|
7.41 |
% |
Other
earning assets
|
|
|
47,795 |
|
|
|
|
|
|
|
|
|
|
|
44,595 |
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
227,867 |
|
|
|
|
|
|
|
|
|
|
|
222,115 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,106,556 |
|
|
|
|
|
|
|
|
|
|
$ |
2,969,197 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
741,101 |
|
|
$ |
6,048 |
|
|
|
3.25 |
% |
|
$ |
772,358 |
|
|
$ |
8,976 |
|
|
|
4.61 |
% |
Savings
accounts
|
|
|
120,025 |
|
|
|
109 |
|
|
|
0.36 |
% |
|
|
116,640 |
|
|
|
131 |
|
|
|
0.45 |
% |
Interest-bearing
demand and money market accounts
|
|
|
1,035,641 |
|
|
|
3,991 |
|
|
|
1.53 |
% |
|
|
1,038,571 |
|
|
|
7,734 |
|
|
|
2.95 |
% |
Total
interest-bearing deposits
|
|
|
1,896,767 |
|
|
|
10,148 |
|
|
|
2.13 |
% |
|
|
1,927,569 |
|
|
|
16,841 |
|
|
|
3.47 |
% |
Federal
Home Loan Bank advances
|
|
|
293,685 |
|
|
|
1,887 |
|
|
|
2.56 |
% |
|
|
178,303 |
|
|
|
2,454 |
|
|
|
5.46 |
% |
Securities
sold under agreements to repurchase
|
|
|
25,000 |
|
|
|
121 |
|
|
|
1.93 |
% |
|
|
44,457 |
|
|
|
637 |
|
|
|
5.68 |
% |
Other
borrowings and interest-bearing liabilities
|
|
|
18,634 |
|
|
|
165 |
|
|
|
3.52 |
% |
|
|
370 |
|
|
|
2 |
|
|
|
2.14 |
% |
Long-term
subordinated debt
|
|
|
25,569 |
|
|
|
423 |
|
|
|
6.59 |
% |
|
|
24,771 |
|
|
|
584 |
|
|
|
9.35 |
% |
Total
interest-bearing liabilities
|
|
|
2,259,655 |
|
|
$ |
12,744 |
|
|
|
2.24 |
% |
|
|
2,175,470 |
|
|
$ |
20,518 |
|
|
|
3.74 |
% |
Noninterest-bearing
deposits
|
|
|
468,455 |
|
|
|
|
|
|
|
|
|
|
|
455,312 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
34,288 |
|
|
|
|
|
|
|
|
|
|
|
36,916 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
344,158 |
|
|
|
|
|
|
|
|
|
|
|
301,499 |
|
|
|
|
|
|
|
|
|
Total
liabilities & shareholders' equity
|
|
$ |
3,106,556 |
|
|
|
|
|
|
|
|
|
|
$ |
2,969,197 |
|
|
|
|
|
|
|
|
|
Net
interest income (2)
|
|
|
|
|
|
$ |
30,893 |
|
|
|
|
|
|
|
|
|
|
$ |
29,957 |
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.34 |
% |
|
|
|
|
|
|
|
|
|
|
4.40 |
% |
(1)
|
Nonaccrual
loans have been included in the tables as loans carrying a zero yield.
Interest reversals for the third quarter ended September 30, 2008 related
to nonaccrual loans totaled $1.4 million. Excluding the impact
of interest reversals, net interest margin for the quarter would have been
4.49%. Amortized net deferred loan fees were included in the
interest income calculations. The amortization of net deferred loan fees
was $737,000 and $1.2 million for the three months ended
September 30, 2008 and 2007
respectively.
|
(2)
|
Tax-exempt
income is calculated on a tax equivalent basis, based on a marginal tax
rate of 35%.
|
|
|
Nine
months ending September 30,
|
|
|
Nine
months ending September 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)
|
|
$ |
2,281,129 |
|
|
$ |
114,521 |
|
|
|
6.71 |
% |
|
$ |
1,905,945 |
|
|
$ |
112,607 |
|
|
|
7.90 |
% |
Securities
(2)
|
|
|
575,215 |
|
|
|
24,278 |
|
|
|
5.64 |
% |
|
|
584,057 |
|
|
|
23,239 |
|
|
|
5.32 |
% |
Interest-earning
deposits with banks and federal funds sold
|
|
|
23,316 |
|
|
|
379 |
|
|
|
2.17 |
% |
|
|
29,621 |
|
|
|
1,180 |
|
|
|
5.33 |
% |
Total
interest-earning assets
|
|
|
2,879,660 |
|
|
$ |
139,178 |
|
|
|
6.46 |
% |
|
|
2,519,623 |
|
|
$ |
137,026 |
|
|
|
7.27 |
% |
Other
earning assets
|
|
|
47,579 |
|
|
|
|
|
|
|
|
|
|
|
40,877 |
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
231,054 |
|
|
|
|
|
|
|
|
|
|
|
177,599 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,158,293 |
|
|
|
|
|
|
|
|
|
|
$ |
2,738,099 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
794,734 |
|
|
$ |
22,505 |
|
|
|
3.78 |
% |
|
$ |
645,320 |
|
|
$ |
21,431 |
|
|
|
4.44 |
% |
Savings
accounts
|
|
|
116,938 |
|
|
|
326 |
|
|
|
0.37 |
% |
|
|
110,340 |
|
|
|
349 |
|
|
|
0.42 |
% |
Interest-bearing
demand and money market accounts
|
|
|
1,038,461 |
|
|
|
13,613 |
|
|
|
1.75 |
% |
|
|
973,999 |
|
|
|
20,837 |
|
|
|
2.86 |
% |
Total
interest-bearing deposits
|
|
|
1,950,133 |
|
|
|
36,444 |
|
|
|
2.50 |
% |
|
|
1,729,659 |
|
|
|
42,617 |
|
|
|
3.29 |
% |
Federal
Home Loan Bank advances
|
|
|
297,154 |
|
|
|
6,464 |
|
|
|
2.91 |
% |
|
|
197,294 |
|
|
|
8,117 |
|
|
|
5.50 |
% |
Securities
sold under agreements to repurchase
|
|
|
23,084 |
|
|
|
381 |
|
|
|
2.21 |
% |
|
|
52,967 |
|
|
|
2,177 |
|
|
|
5.50 |
% |
Other
borrowings and interest-bearing liabilities
|
|
|
9,702 |
|
|
|
271 |
|
|
|
3.73 |
% |
|
|
333 |
|
|
|
6 |
|
|
|
2.41 |
% |
Long-term
subordinated debt
|
|
|
25,548 |
|
|
|
1,339 |
|
|
|
7.00 |
% |
|
|
23,194 |
|
|
|
1,604 |
|
|
|
9.25 |
% |
Total
interest-bearing liabilities
|
|
|
2,305,621 |
|
|
$ |
44,899 |
|
|
|
2.60 |
% |
|
|
2,003,447 |
|
|
$ |
54,521 |
|
|
|
3.64 |
% |
Noninterest-bearing
deposits
|
|
|
460,912 |
|
|
|
|
|
|
|
|
|
|
|
429,836 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
42,006 |
|
|
|
|
|
|
|
|
|
|
|
31,085 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
349,754 |
|
|
|
|
|
|
|
|
|
|
|
273,731 |
|
|
|
|
|
|
|
|
|
Total
liabilities & shareholders' equity
|
|
$ |
3,158,293 |
|
|
|
|
|
|
|
|
|
|
$ |
2,738,099 |
|
|
|
|
|
|
|
|
|
Net
interest income (2)
|
|
|
|
|
|
$ |
94,279 |
|
|
|
|
|
|
|
|
|
|
$ |
82,505 |
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.37 |
% |
|
|
|
|
|
|
|
|
|
|
4.38 |
% |
(1)
|
Nonaccrual
loans have been included in the tables as loans carrying a zero yield.
Interest reversals for the nine months ended September 30, 2008 related to
nonaccrual loans totaled $3.3 million. Excluding the impact of
interest reversals, net interest margin for the nine month period would
have been 4.48%. Amortized net deferred loan fees were included
in the interest income calculations. The amortization of net deferred loan
fees was $2.8 million and $2.5 million for the nine months ended
September 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 third quarter of 2008, the Company allocated $10.5 million to its provision
for loan and lease losses, compared to $1.2 million for the same period in
2007. For the nine months ended September 30, 2008, the Company
allocated $27.9 million to its provision for loan and lease losses, compared to
$2.2 million for the nine months ended September 30, 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 increased the Company’s total
allowance for loan losses to 1.62% of net loans at September 30,
2008. See the discussion under “Nonperforming Assets” for
details related to the non-accrual loans.
Noninterest
Income
Noninterest
income for the third quarter of 2008 reflected a loss of $10.9 million, compared
to income of $7.6 million during the same period last year. The loss
was primarily a result of the $18.5 million impairment charge on Fannie Mae and
Freddie Mac investment securities. In addition, noninterest income in
the current quarter was down as compared to last year due to decreases of
$170,000 in merchant card services driven primarily by an increase in
interchange expense rates and $183,000 in other income attributed primarily to a
decrease in mortgage banking fees and loan origination fees resulting from
decreased volumes. These decreases were partially offset by an
increase of $262,000 in service charges on deposit
accounts. The increase in service charges is primarily due to
an increased number of transaction accounts.
For the
nine months ended September 30, 2008, noninterest income was $8.5 million, a 59%
decrease from $20.5 million for the nine months ended September 30, 2007,
primarily due to the impairment charge on investment securities mentioned above.
The decrease in noninterest income was partially offset with proceeds from the
redemption of Visa and MasterCard shares of $3.0 million and a gain on the sale
of investment securities of $882,000. Service charges and other fees
increased $1.3 million, or 13% in the first nine months of 2008 from the 2007
period, reflecting a change in our deposit account fee structure in conjunction
with an increase in the number of deposit accounts. Other income
increased $1.2 million, or 41% due in part to the receipt of insurance proceeds
received for the death of a former officer in the amount of
$612,000.
Noninterest
Expense
Noninterest
expense for the third quarter of 2008 was $23.4 million, a 4% increase from
$22.4 million a year earlier. Regulatory premiums in the current
quarter increased $514,000 from the same period one year ago. This
increase is related to a larger deposit base due in part to the third quarter
2007 acquisitions. Finally, data processing expenses and core deposit
intangible amortization expense increased $166,000 and $184,000 compared to the
same period in 2007 also as a result of the 2007 third quarter
acquisitions.
Total
noninterest expense for the first nine months of 2008 was $70.3 million, an
increase of 11% from $63.1 million from the 2007 period. Notable increases included
compensation and employee benefits and occupancy costs related to the third
quarter 2007 acquisitions. Regulatory premiums were $1.2 million
higher for the first nine months of 2008 over the same period last
year. This increase relates to a credit we received in 2007 which
offset the majority of the FDIC premiums due and the increased deposit account
base due in part from the acquisitions.
The
following table presents selected items included in other noninterest expense
and the associated change from period to period:
|
|
Three
months ended
|
|
|
|
|
|
Nine
months ended
|
|
|
|
|
|
|
September
30,
|
|
|
|
|
|
September
30,
|
|
|
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease) Amount
|
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease) Amount
|
|
Core
deposit intangible amortization ("CDI")
|
|
$ |
279 |
|
|
$ |
95 |
|
|
$ |
184 |
|
|
$ |
871 |
|
|
$ |
287 |
|
|
$ |
584 |
|
Software
support & maintenance
|
|
|
142 |
|
|
|
221 |
|
|
|
(79 |
) |
|
|
519 |
|
|
|
610 |
|
|
|
(91 |
) |
Telephone
& network communications
|
|
|
377 |
|
|
|
351 |
|
|
|
26 |
|
|
|
1,186 |
|
|
|
901 |
|
|
|
285 |
|
Federal
Reserve Bank processing fees
|
|
|
96 |
|
|
|
98 |
|
|
|
(2 |
) |
|
|
323 |
|
|
|
338 |
|
|
|
(15 |
) |
Supplies
|
|
|
227 |
|
|
|
402 |
|
|
|
(175 |
) |
|
|
856 |
|
|
|
979 |
|
|
|
(123 |
) |
Postage
|
|
|
341 |
|
|
|
435 |
|
|
|
(94 |
) |
|
|
1,092 |
|
|
|
1,006 |
|
|
|
86 |
|
Investor
relations
|
|
|
22 |
|
|
|
22 |
|
|
|
- |
|
|
|
163 |
|
|
|
180 |
|
|
|
(17 |
) |
Travel
|
|
|
108 |
|
|
|
122 |
|
|
|
(14 |
) |
|
|
342 |
|
|
|
321 |
|
|
|
21 |
|
ATM
Network
|
|
|
170 |
|
|
|
193 |
|
|
|
(23 |
) |
|
|
513 |
|
|
|
483 |
|
|
|
30 |
|
Sponsorships
and charitable contributions
|
|
|
177 |
|
|
|
136 |
|
|
|
41 |
|
|
|
480 |
|
|
|
392 |
|
|
|
88 |
|
Regulatory
premiums
|
|
|
579 |
|
|
|
65 |
|
|
|
514 |
|
|
|
1,415 |
|
|
|
173 |
|
|
|
1,242 |
|
Directors
fees
|
|
|
111 |
|
|
|
96 |
|
|
|
15 |
|
|
|
341 |
|
|
|
311 |
|
|
|
30 |
|
Employee
expenses
|
|
|
156 |
|
|
|
162 |
|
|
|
(6 |
) |
|
|
478 |
|
|
|
482 |
|
|
|
(4 |
) |
Insurance
|
|
|
127 |
|
|
|
127 |
|
|
|
- |
|
|
|
371 |
|
|
|
346 |
|
|
|
25 |
|
CRA
partnership investment expense (1)
|
|
|
156 |
|
|
|
78 |
|
|
|
78 |
|
|
|
502 |
|
|
|
366 |
|
|
|
136 |
|
Miscellaneous
|
|
|
964 |
|
|
|
756 |
|
|
|
208 |
|
|
|
2,475 |
|
|
|
2,007 |
|
|
|
468 |
|
Total
other noninterest expense
|
|
$ |
4,032 |
|
|
$ |
3,359 |
|
|
$ |
673 |
|
|
$ |
11,927 |
|
|
$ |
9,182 |
|
|
$ |
2,745 |
|
(1)
|
The
amounts shown represent pass-through losses from our interests in certain
low-income housing related limited partnerships. As a result of these
interests we receive federal low-income housing tax credits available
under the Internal Revenue Code. For the nine months ended September 30,
2008, $383,000 of such credits was taken as a reduction in our current
period income tax expense. In addition, our taxable income was
decreased by $172,000 during the nine months ended September 30, 2008 as a
result of the tax benefit associated with this investment
expense.
|
In
managing our business, we review the efficiency ratio, on a fully
taxable-equivalent basis (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 60.34% for the third quarter 2008
and was 60.62% for the first nine months of 2008, compared to 59.23% and 60.79%
for the third quarter and first nine months of 2007, respectively. The third
quarter change in the efficiency ratio is due to the increase in non 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
interest income (1)
|
|
$ |
29,593 |
|
|
$ |
28,860 |
|
|
$ |
90,194 |
|
|
$ |
79,258 |
|
Tax
equivalent adjustment for non-taxable loan and investment securities
interest income
(2)
|
|
|
1,300 |
|
|
|
1,097 |
|
|
|
4,085 |
|
|
|
3,247 |
|
Adjusted
net interest income
|
|
$ |
30,893 |
|
|
$ |
29,957 |
|
|
$ |
94,279 |
|
|
$ |
82,505 |
|
Noninterest
income
|
|
$ |
(10,946 |
) |
|
$ |
7,631 |
|
|
$ |
8,516 |
|
|
$ |
20,549 |
|
Gain
on sale of investment securities, net
|
|
|
- |
|
|
|
- |
|
|
|
(882 |
) |
|
|
- |
|
Redemption
of Visa and Mastercard shares
|
|
|
- |
|
|
|
- |
|
|
|
(3,028 |
) |
|
|
- |
|
Death
benefit proceeds on former officer covered by BOLI
|
|
|
- |
|
|
|
- |
|
|
|
(612 |
) |
|
|
- |
|
Tax
equivalent adjustment for BOLI income (2)
|
|
|
294 |
|
|
|
270 |
|
|
|
876 |
|
|
|
742 |
|
Other
than temporary security impairment expense
|
|
|
18,517 |
|
|
|
- |
|
|
|
18,517 |
|
|
|
- |
|
Adjusted
noninterest income
|
|
$ |
7,865 |
|
|
$ |
7,901 |
|
|
$ |
23,387 |
|
|
$ |
21,291 |
|
Noninterest
expense
|
|
$ |
23,391 |
|
|
$ |
22,425 |
|
|
$ |
70,312 |
|
|
$ |
63,093 |
|
Net
gain (loss) on sale of OREO
|
|
|
(4 |
) |
|
|
- |
|
|
|
19 |
|
|
|
- |
|
BOLI
policy swap net income
|
|
|
- |
|
|
|
- |
|
|
|
107 |
|
|
|
- |
|
Reversal
of previously accrued Visa litigation expense
|
|
|
- |
|
|
|
- |
|
|
|
889 |
|
|
|
- |
|
Adjusted
noninterest expense
|
|
$ |
23,387 |
|
|
$ |
22,425 |
|
|
$ |
71,327 |
|
|
$ |
63,093 |
|
Efficiency
ratio
|
|
|
62.93 |
% |
|
|
61.45 |
% |
|
|
63.29 |
% |
|
|
63.22 |
% |
Efficiency
ratio (fully taxable-equivalent)
|
|
|
60.34 |
% |
|
|
59.23 |
% |
|
|
60.62 |
% |
|
|
60.79 |
% |
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 $6.5 million for the third quarter and $3.7
million for the first nine months of 2008, compared with a provision of $3.6
million and $9.4 million for the same periods in 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. For additional information, please
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:
|
|
September
30,
|
|
|
%
of
|
|
|
December
31,
|
|
|
%
of
|
|
(in
thousands)
|
|
2008
|
|
|
Total
|
|
|
2007
|
|
|
Total
|
|
Commercial
business
|
|
$ |
780,450 |
|
|
|
35.2 |
% |
|
$ |
762,365 |
|
|
|
33.4 |
% |
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
57,280 |
|
|
|
2.6 |
% |
|
|
60,991 |
|
|
|
2.7 |
% |
Commercial
and five or more family residential properties
|
|
|
841,885 |
|
|
|
38.0 |
% |
|
|
852,139 |
|
|
|
37.3 |
% |
Total
real estate
|
|
|
899,165 |
|
|
|
40.5 |
% |
|
|
913,130 |
|
|
|
40.0 |
% |
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
236,512 |
|
|
|
10.7 |
% |
|
|
269,115 |
|
|
|
11.8 |
% |
Commercial
and five or more family residential properties
|
|
|
97,297 |
|
|
|
4.4 |
% |
|
|
165,490 |
|
|
|
7.2 |
% |
Total
real estate construction
|
|
|
333,809 |
|
|
|
15.1 |
% |
|
|
434,605 |
|
|
|
19.0 |
% |
Consumer
|
|
|
206,561 |
|
|
|
9.4 |
% |
|
|
176,559 |
|
|
|
7.8 |
% |
Subtotal
|
|
|
2,219,985 |
|
|
|
100.2 |
% |
|
|
2,286,659 |
|
|
|
100.2 |
% |
Less:
Deferred loan fees
|
|
|
(3,852 |
) |
|
|
-0.2 |
% |
|
|
(3,931 |
) |
|
|
-0.2 |
% |
Total
loans
|
|
$ |
2,216,133 |
|
|
|
100.0 |
% |
|
$ |
2,282,728 |
|
|
|
100.0 |
% |
Loans
Held for Sale
|
|
$ |
2,890 |
|
|
|
|
|
|
$ |
4,482 |
|
|
|
|
|
Total
loans were $66.6 million, or 3% less than, year-end 2007. The
reduction in total loans was driven primarily by decreases in real estate
construction related loans. During the period, the Company’s exposure
to such loans has been reduced through a combination of loan payoffs and
paydowns as well as loan charge-offs. In addition, commercial real
estate construction loan totals were reduced through conversion to permanent
loans. These reductions are a reflection of management’s strategy to
shrink the loan portfolio in these loan categories. Consumer loans
rose $30 million, or 17%, from year-end 2007. Home equity lines of
credit were the primary driver of consumer loan growth.
Commercial Loans: We are
committed to providing competitive commercial lending in our primary market
areas. Management expects a continued focus within its commercial lending
products and to emphasize, in particular, relationship banking with businesses,
and business owners.
Real Estate Loans: These
loans are used to collateralize outstanding advances from the FHLB. 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
September 30, 2008, total nonperforming assets were $78.2 million, net of
charge-offs of $16.4 million during the third quarter 2008, compared to $14.6
million at December 31, 2007 and $72.3 million at June 30, 2008. The
percent of non-performing assets to period-end assets at September 30, 2008 was
2.52% compared to 0.46% for December 31, 2007 and 2.28% at June 30,
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:
|
|
September
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Nonaccrual:
|
|
|
|
|
|
|
Commercial
business
|
|
$ |
2,845 |
|
|
$ |
2,170 |
|
Real
estate:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
- |
|
|
|
204 |
|
Commercial
and five or more family residential real estate
|
|
|
4,381 |
|
|
|
1,112 |
|
Total
real estate
|
|
|
4,381 |
|
|
|
1,316 |
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
51,658 |
|
|
|
6,005 |
|
Commercial
and five or more family residential real estate
|
|
|
15,788 |
|
|
|
3,676 |
|
Total
real estate construction
|
|
|
67,446 |
|
|
|
9,681 |
|
Consumer
|
|
|
1,492 |
|
|
|
838 |
|
Total
nonaccrual loans
|
|
|
76,164 |
|
|
|
14,005 |
|
Restructured:
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
746 |
|
|
|
456 |
|
Total
nonperforming loans
|
|
|
76,910 |
|
|
|
14,461 |
|
Other
real estate owned
|
|
|
1,288 |
|
|
|
181 |
|
Other
personal property owned
|
|
|
- |
|
|
|
- |
|
Total
nonperforming assets
|
|
$ |
78,198 |
|
|
$ |
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, primarily comprised of condominium developments. During the
quarter, the for-sale housing portfolio, which currently totals $237 million,
had a net increase in non-accrual loans of approximately $4 million, bringing
the total to about $51 million.
In our
commercial real estate portfolio, which is approximately $842 million as of
September 30, 2008, we experienced an increase of $1.8 million in non-accrual
loans. This segment represents a little over $4.3 million of the
non-accruals as of September 30, 2008.
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
September 30, 2008, our allowance for loan and lease losses (“ALLL”) was $35.8
million, or 1.62% of total loans (excluding loans held for sale) and 47% of
nonperforming loans and 46% of nonperforming assets. This compares with an
allowance of $26.6 million, or 1.17% of the total loan portfolio (excluding
loans held for sale), 184% of nonperforming loans and 182% of nonperforming
assets at December 31, 2007.
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 September 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 September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
41,724 |
|
|
$ |
21,339 |
|
|
$ |
26,599 |
|
|
$ |
20,182 |
|
Balance
established through acquisition |
|
|
- |
|
|
|
3,192 |
|
|
|
- |
|
|
|
3,192 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential,
construction, land & acquisitions
|
|
|
(14,598 |
) |
|
|
- |
|
|
|
(15,285 |
) |
|
|
- |
|
Commercial
business
|
|
|
(652 |
) |
|
|
(459 |
) |
|
|
(1,011 |
) |
|
|
(653 |
) |
Commercial
real estate
|
|
|
(946 |
) |
|
|
- |
|
|
|
(1,451 |
) |
|
|
- |
|
Private
banking
|
|
|
- |
|
|
|
- |
|
|
|
(24 |
) |
|
|
- |
|
Consumer
|
|
|
(285 |
) |
|
|
(69 |
) |
|
|
(1,613 |
) |
|
|
(201 |
) |
Total
charge-offs
|
|
|
(16,481 |
) |
|
|
(528 |
) |
|
|
(19,384 |
) |
|
|
(854 |
) |
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
construction, land & acquisitions
|
|
|
- |
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
Commercial
business
|
|
|
23 |
|
|
|
77 |
|
|
|
127 |
|
|
|
485 |
|
Commercial
real estate:
|
|
|
- |
|
|
|
- |
|
|
|
303 |
|
|
|
12 |
|
Private
banking
|
|
|
3 |
|
|
|
- |
|
|
|
54 |
|
|
|
- |
|
Consumer
|
|
|
45 |
|
|
|
69 |
|
|
|
173 |
|
|
|
165 |
|
Total
recoveries
|
|
|
71 |
|
|
|
146 |
|
|
|
673 |
|
|
|
662 |
|
Net
charge-offs
|
|
|
(16,410 |
) |
|
|
(382 |
) |
|
|
(18,711 |
) |
|
|
(192 |
) |
Provision
charged to expense
|
|
|
10,500 |
|
|
|
1,231 |
|
|
|
27,926 |
|
|
|
2,198 |
|
Ending
balance
|
|
$ |
35,814 |
|
|
$ |
25,380 |
|
|
$ |
35,814 |
|
|
$ |
25,380 |
|
Total
loans, net at end of period (1)
|
|
$ |
2,216,133 |
|
|
$ |
2,212,751 |
|
|
$ |
2,216,133 |
|
|
$ |
2,212,751 |
|
Allowance
for loan and lease losses to total loans
|
|
|
1.62 |
% |
|
|
1.15 |
% |
|
|
1.62 |
% |
|
|
1.15 |
% |
(1)
Excludes loans held for sale
During
the third quarter of 2008, the Company had net loan charge-offs of $16.4
million, compared to $382,000 in the same period of 2007. For the first nine
months of 2008, the Company had net loan charge-offs of $18.7 million, compared
to $192,000 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 nine 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.
On
September 7, 2008 the U.S. Department of Treasury (“Treasury”) and Federal
Housing Finance Agency (“FHFA”) announced a plan to place the Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage
Association (“Fannie Mae”) into conservatorship. Under the plan, the
Treasury and the FHFA will purchase senior preferred stock as needed to ensure
each company maintains a positive net worth. Common and preferred
dividends will be suspended and preferred stock claims will be maintained ahead
of common stock but behind the senior preferred stock held by the Treasury and
FHFA.
The
Company holds 400,000 shares of Series Z preferred stock issued by Freddie Mac
and 400,000 shares of Series S preferred stock issued by Fannie
Mae. Such securities are held in the Company’s available-for-sale
investment securities portfolio and, as such, declines in fair value below cost
are subject to a potential other than temporary impairment charge to earnings
under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The Company’s cost for such
securities was $20 million. The estimated fair market value of such
securities declined from $20 million at June 30, 2008 to $1.5 million during the
third quarter.
In light
of the actions taken by Treasury and FHFA and the accompanying significant
decline in the fair value of these securities below cost, the Company has deemed
the impairment to be other than temporary and, accordingly, recognized a pre-tax
charge to earnings in the third quarter totaling $18.5 million.
At
September 30, 2008, the market value of securities available for sale had an
unrealized gain, net of tax, of $424,000 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. In addition, during the first quarter of 2008, the Company
sold certain securities, as described above, which had an unrealized gain, net
of tax, of approximately $126,000 at December 31, 2007. The Company
does not consider these remaining 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 available for
sale portfolio by type for the dates
indicated:
|
|
|
September
30,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
U.S.
government-sponsored enterprise preferred stock
|
|
$ |
1,512 |
|
|
$ |
- |
|
U.S.
government-sponsored enterprise
|
|
|
- |
|
|
|
61,300 |
|
U.S.
government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations
|
|
|
346,658 |
|
|
|
303,742 |
|
State
and municipal securities
|
|
|
187,167 |
|
|
|
193,965 |
|
Other
securities
|
|
|
940 |
|
|
|
2,359 |
|
Total
|
|
$ |
536,277 |
|
|
$ |
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
$51.6 million, or 3%, since year-end 2007 while certificates of deposit greater
than $100,000 decreased $95.3 million, or 22%, 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 September 30,
2008 brokered and other wholesale deposits (excluding public deposits) totaled
$77.5 million, or 3% of total deposits, compared to $72.8 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:
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
September
30, 2007
|
|
(in
thousands)
|
|
Balance
|
|
|
%
of
Total
|
|
|
Balance
|
|
|
%
of
Total
|
|
|
Balance
|
|
|
%
of
Total
|
|
Core
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and other non-interest bearing
|
|
$ |
498,815 |
|
|
|
21.2 |
% |
|
$ |
468,237 |
|
|
|
18.7 |
% |
|
$ |
474,600 |
|
|
|
19.2 |
% |
Interest
bearing demand
|
|
|
437,769 |
|
|
|
18.6 |
% |
|
|
478,596 |
|
|
|
19.2 |
% |
|
|
451,282 |
|
|
|
18.2 |
% |
Money
market
|
|
|
582,040 |
|
|
|
24.7 |
% |
|
|
609,502 |
|
|
|
24.4 |
% |
|
|
593,301 |
|
|
|
24.0 |
% |
Savings
|
|
|
121,845 |
|
|
|
5.2 |
% |
|
|
115,324 |
|
|
|
4.6 |
% |
|
|
118,347 |
|
|
|
4.8 |
% |
Certificates
of deposit less than $100,000
|
|
|
304,310 |
|
|
|
12.9 |
% |
|
|
324,734 |
|
|
|
13.0 |
% |
|
|
325,739 |
|
|
|
13.1 |
% |
Total
core deposits
|
|
|
1,944,779 |
|
|
|
82.6 |
% |
|
|
1,996,393 |
|
|
|
79.9 |
% |
|
|
1,963,269 |
|
|
|
79.2 |
% |
Certificates
of deposit greater than $100,000
|
|
|
333,579 |
|
|
|
14.2 |
% |
|
|
428,885 |
|
|
|
17.2 |
% |
|
|
453,284 |
|
|
|
18.3 |
% |
Wholesale
certificates of deposit (CDARS®)
|
|
|
15,233 |
|
|
|
0.6 |
% |
|
|
762 |
|
|
|
0.0 |
% |
|
|
760 |
|
|
|
0.0 |
% |
Wholesale
certificates of deposit
|
|
|
62,230 |
|
|
|
2.6 |
% |
|
|
72,021 |
|
|
|
2.9 |
% |
|
|
60,481 |
|
|
|
2.4 |
% |
Total
deposits
|
|
$ |
2,355,821 |
|
|
|
100.0 |
% |
|
$ |
2,498,061 |
|
|
|
100.0 |
% |
|
$ |
2,477,794 |
|
|
|
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 September 30, 2008, we had FHLB advances of $301 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
September 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 6.38% at September 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 6.54% at September 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 September 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. The outstanding balance on the line of credit
was $20.0 million at September 30, 2008 and $5.0 million at December 31, 2007.
The line matures on June 30, 2009 and, if not renewed, any principle balance
outstanding is 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 September 30, 2008, we
had commitments to extend credit of $729.7 million compared to $857.6 million at
December 31, 2007.
Capital
Resources
Shareholders’
equity at September 30, 2008 was $336.4 million, down $5.3 million, or 1.5%
from $341.7 million at December 31, 2007. The decrease is due primarily to
cash dividends paid of $9.2 million and offset by net income of $4.2 million for
the first nine months of 2008. Shareholders’ equity was 10.8% of
total period-end assets at September 30, 2008 and December 31,
2007.
Capital Ratios: Banking
regulations require bank holding companies to maintain a minimum “leverage”
ratio of core capital to adjusted quarterly average total assets of at least 3%.
In addition, banking regulators have adopted risk-based capital guidelines,
under which risk percentages are assigned to various categories of assets and
off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I
capital generally consists of common shareholders’ equity and trust preferred
obligations, less goodwill and certain identifiable intangible assets, while
Tier II capital includes the allowance for loan losses and subordinated debt,
both subject to certain limitations. Regulatory minimum risk-based capital
guidelines require Tier I capital of 4% of risk-adjusted assets and total
capital (combined Tier I and Tier II) of 8% to be considered “adequately
capitalized”.
Federal
Deposit Insurance Corporation regulations set forth the qualifications necessary
for a bank to be classified as “well capitalized”, primarily for assignment of
FDIC insurance premium rates. To qualify as “well capitalized,” banks must have
a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted
capital ratio of at least 10%, and a leverage ratio of at least 5%. Failure to
qualify as “well capitalized” can negatively impact a bank’s ability to expand
and to engage in certain activities.
The Company and its subsidiaries
qualify as “well-capitalized” at September 30, 2008 and December 31,
2007.
|
|
Company
|
|
|
Columbia
Bank
|
|
|
Requirements
|
|
|
|
9/30/2008
|
|
|
12/31/2007
|
|
|
9/30/2008
|
|
|
12/31/2007
|
|
|
Adequately
capitalized
|
|
|
Well-Capitalized
|
|
Total
risk-based capital ratio
|
|
|
11.24 |
% |
|
|
10.90 |
% |
|
|
11.14 |
% |
|
|
10.49 |
% |
|
|
8 |
% |
|
|
10 |
% |
Tier
1 risk-based capital ratio
|
|
|
9.99 |
% |
|
|
9.87 |
% |
|
|
9.89 |
% |
|
|
9.47 |
% |
|
|
4 |
% |
|
|
6 |
% |
Leverage
ratio
|
|
|
8.52 |
% |
|
|
8.54 |
% |
|
|
8.45 |
% |
|
|
8.23 |
% |
|
|
4 |
% |
|
|
5 |
% |
Application
for U.S. Treasury Capital Purchase Program
Subsequent
to quarter-end, the Company received preliminary approval from the U.S.
Department of Treasury to receive additional capital by participating in the
Treasury Department’s Capital Purchase Program. As a participant in
the program, Columbia could issue to the U.S. Treasury up to $76.9 million in
senior preferred shares and related warrants. Receipt of the funding
is subject to Columbia’s acceptance of the terms of the agreement, satisfaction
of closing conditions and registration with the Securities and Exchange
Commission.
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
September 30, 2008 we have repurchased 64,788 shares of common stock in
this current stock repurchase program, none of which was repurchased in the
period covered by this report.
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 September 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.
We
cannot predict the effect of the national economic situation on our future
results of operations or stock trading price.
The national economy, and the
financial services sector in particular, is currently facing challenges of a
scope unprecedented in recent history. No one can predict the
severity or duration of this downturn. We cannot predict whether, or
the extent to which, the more severe regional and local economic downturns that
have affected other areas of the country may also occur to the same degree in
the markets we serve. Any such further deterioration in our markets
could have an adverse effect on our business, financial condition, results of
operations and prospects, as discussed in the following risk factors, and could
also cause the trading price of our stock to decline.
We
cannot predict the effect of the recently enacted federal rescue
plan.
Congress
recently enacted the Emergency Economic Stabilization Act of 2008, which is
intended to stabilize the financial markets, including providing funding of up
to $700 billion to purchase troubled assets and loans from financial
institutions and increasing the amount of account insurance coverage from
$100,000 to $250,000. Most recently, the federal government agreed to
invest $125 billion in preferred stock of nine U.S. financial institutions, and
to make available up to another $125 billion for investment in preferred stock
of other U.S. financial institutions, on certain terms and
conditions. The full effect of this wide-ranging legislation on the
national economy and financial institutions, particularly on mid-sized
institutions like us, cannot now be predicted.
Our
ability to access markets for funding and acquire and retain customers could be
adversely affected to the extent the financial services industry’s reputation is
damaged.
Reputation
risk is the risk to liquidity, earnings and capital arising from negative
publicity regarding the financial services industry. The financial
services industry continues to be featured in negative headlines about the
global credit crisis and the resulting stabilization legislation enacted by the
U.S. federal government. These reports can be damaging to the industry's image
and potentially erode consumer confidence in insured financial institutions,
such as our banking subsidiary.
We
have a high concentration of loans secured by real estate.
We have a
high concentration of loans secured by real estate. While the
concentration is spread amongst varying types of commercial real estate loans,
with permanent commercial real estate loans being the largest exposure, our
construction and land development loans currently carry a higher degree of risk,
and a continued downturn in the real estate market, for any reason, will hurt
our business and prospects. In particular, we could be exposed to
additional risk of losses from real estate related loans. Business
activities and credit exposure are concentrated in loans secured by real
estate. A further downturn in the economies or real estate values in
the markets we serve could have a material adverse effect on borrowers’ ability
to repay their loans, as well as the value of the real property held as
collateral securing such loans. 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.
Our
loan portfolio mix could result in increased credit risk in an economic
downturn.
Our loan
portfolio, is concentrated in permanent commercial real estate loans, commercial
business and real estate construction loans, including acquisition and
development loans related to the for sale housing industry. These
types of loans generally are viewed as having more risk of default than
residential real estate loans or certain other types of loans or
investments. In fact, the FDIC has issued pronouncements alerting
banks of its concern about banks with a heavy concentration of commercial real
estate loans. These types of loans also typically are larger than
residential real estate loans and other commercial loans. Because our
loan portfolio contains a significant number of commercial business and
commercial real estate loans with relatively large balances, the deterioration
of one or a few of these loans may cause a significant increase in our
non-performing loans. An increase in non-performing loans could
result in a loss of earnings from these
loans, an increase in the provision for loan losses, or an increase in loan
charge-offs, which could have an adverse impact on the results of operations and
financial condition.
Changes
in economic conditions, in particular a further economic slowdown in Washington
and/or Oregon, could hurt the banking business generally.
Our business is directly affected by
factors such as economic, market and political conditions in our service areas,
broad trends in industry and finance, legislative and regulatory changes,
changes in government monetary and fiscal policies and inflation, all of which
are beyond our control. We have experienced recent declines in
economic indicators and real estate values in several of the markets we
serve. A further deterioration in economic conditions in Washington
and/or Oregon could result in the following consequences, any of which could
have an adverse impact on our prospects, results of operations and financial
condition:
·
|
loan
delinquencies may increase further;
|
·
|
problem
assets and foreclosures may
increase;
|
·
|
collateral
for loans made may decline in value, in turn reducing
customers’ borrowing power, reducing the value of assets and collateral
associated with existing loans;
|
·
|
demand
for banking products and services may decline;
and
|
·
|
low
cost or non-interest bearing deposits may
decrease.
|
Our
Allowance for Loan and Lease Losses (ALLL) may not be adequate to cover actual
loan losses, which could adversely affect earnings.
We
maintain an ALLL in an amount that we believe is adequate to provide for losses
inherent in our loan and lease portfolio. While we strive to
carefully monitor credit quality and to identify loans that may become
non-performing, at any time there are loans in the portfolio that will result in
losses that have not been identified as non-performing or potential problem
loans. In the quarter ended September 30, 2008, non-performing loans
as a percentage of total loans increased to 3.47%, up from 0.63% for the year
ended December 31, 2007. We cannot be sure that we will be able to
identify deteriorating loans before they become non-performing assets, or that
we will be able to limit losses on those loans that have been
identified. As a result, future significant increases to the ALLL may
be necessary. Additionally, future increases to the ALLL may be
required based on changes in the composition of the loans comprising the
portfolio, deteriorating values in underlying collateral (most of which consists
of real estate) and changes in the financial condition of borrowers, such as may
result from changes in economic conditions, or as a result of incorrect
assumptions by management in determining the ALLL. Additionally,
federal banking regulators, as an integral part of their supervisory function,
periodically review our ALLL. These regulatory agencies may require
us to increase the ALLL which could have a negative effect on our financial
condition and results of operation.
Fluctuating
interest rates can adversely affect our profitability.
Our
profitability is dependent to a large extent upon net interest income, which is
the difference (or “spread”) between the interest earned on loans, securities
and other interest-earning assets and interest paid on deposits, borrowings, and
other interest-bearing liabilities. Because of the differences in
maturities and repricing characteristics of our interest-earning assets and
interest-bearing liabilities, changes in interest rates do not produce
equivalent changes in interest income earned on interest-earning assets and
interest paid on interest-bearing liabilities. Accordingly,
fluctuations in interest rates could adversely affect our interest rate spread,
and, in turn, our profitability. We cannot provide assurance that we
can minimize interest rate risk. In addition, interest rates also
affect the amount of money we can lend. When interest rates rise, the
cost of borrowing also increases. Accordingly, changes in levels of
market interest rates could materially and adversely affect our net interest
spread, asset quality, loan origination volume, business and
prospects.
A
continued tightening of the credit market may make it difficult to obtain
available money to fund loan growth, 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 also rely on alternative funding
sources through correspondent banking and a borrowing line with the FHLB of
Seattle and the Federal Reserve Bank to fund loans. In the event of a
downturn in the economy, particularly in the housing market, these resources
could be negatively affected, which would limit the funds available to
us.
We may grow through future acquisitions, which could, in
some circumstances, adversely affect our profitability
measures.
We may
engage in selected acquisitions of financial institutions in the
future. There are risks associated with our acquisition strategy that
could adversely impact our profitability. These risks include, among
others, incorrectly assessing the asset quality of a particular institution
being acquired, encountering greater than anticipated costs of incorporating
acquired businesses into our company, and being unable to profitably deploy
funds acquired in an acquisition. Furthermore, we cannot provide any
assurance as to the extent to which we can continue to grow through
acquisitions.
We
anticipate issuing capital stock in connection with additional
acquisitions. These acquisitions and related issuances of stock may
have a dilutive effect on earnings per share and the percentage ownership of
current shareholders. We do not currently have any definitive
understandings or agreements for any acquisitions that involve the issuance of
our capital stock. However, we may continue to expand through
acquisitions in the future.
Competition
in our market areas may limit our future success.
Commercial
banking is a highly competitive business. We compete with other
commercial banks, savings and loan associations, credit unions, finance,
insurance and other non-depository companies operating in our market
areas. We are subject to substantial competition for loans and
deposits from other financial institutions. Some of our competitors
are not subject to the same degree of regulation and restriction as we
are. Some of our competitors have greater financial resources than we
do. If we are unable to effectively compete in our market areas, our
business, results of operations and prospects could be adversely
affected.
The
FDIC has increased insurance premiums to rebuild and maintain the federal
deposit insurance fund.
Based on
recent events and the state of the economy, the FDIC has increased federal
deposit insurance premiums beginning in the first quarter of 2009 to double what
we originally paid. The increase of these premiums will add to our
cost of operations and could have a significant impact on the
Company. Further, depending upon any future losses that the FDIC
insurance fund may suffer, there can be no assurance that there will not be
additional premium increases in order to replenish the fund.
We
operate in a highly regulated environment and may be adversely affected by
changes in federal, state and local laws and regulations.
We are
subject to extensive regulation, supervision and examination by federal and
state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on us and
our operations. Additional legislation and regulations that could
significantly affect our powers, authority and operations may be enacted or
adopted in the future, which could have a material adverse effect on our
financial condition and results of operations. Further, regulators
have significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws by financial institutions and holding companies
in the performance of their supervisory and enforcement duties. The
exercise of regulatory authority may have a negative impact on our results of
operations and financial condition.
None.
Item 3.
|
DEFAULTS
UPON SENIOR
SECURITIES
|
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
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:
November 7, 2008
|
|
By
|
/s/
MELANIE J. DRESSEL
|
|
|
|
|
Melanie
J. Dressel
|
|
|
|
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
Date:
November 7, 2008
|
|
By
|
/s/
GARY R. SCHMINKEY
|
|
|
|
|
Gary
R. Schminkey
|
|
|
|
|
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial Officer)
|
|
|
|
|
Date:
November 7, 2008
|
|
By
|
/s/
CLINT E. STEIN
|
|
|
|
|
Clint
E. Stein
|
|
|
|
|
Senior
Vice President and
Chief
Accounting Officer
(Principal
Accounting Officer)
|