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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009 or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
| Washington | 91-1422237 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
1301 “A” Street
Tacoma, Washington 98402
(Address of principal executive offices) (Zip code)
Registrant’s Telephone Number, Including Area Code: (253) 305-1900
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
(Title of class)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
¨ Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated Filer ¨ Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of Common Stock held by non-affiliates of the registrant at June 30, 2009 was $180,094,720 based on the closing sale price of the Common Stock on that date.
The number of shares of registrant’s Common Stock outstanding at January 31, 2010 was 28,164,749.
DOCUMENTS INCORPORATED BY REFERENCE:
| Portions of the Registrant’s definitive 2010 Annual Meeting Proxy Statement. |
Part III |
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COLUMBIA BANKING SYSTEM, INC.
FORM 10-K ANNUAL REPORT
DECEMBER 31, 2009
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results:
| • | local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets; |
| • | the local housing/real estate market could continue to decline; |
| • | the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates; |
| • | the integration of our two recent FDIC-assisted acquisitions may present unforeseen challenges; |
| • | the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions and infrastructure could not be realized; |
| • | interest rate changes could significantly reduce net interest income and negatively affect funding sources; |
| • | projected business increases following strategic expansion or opening of new branches could be lower than expected; |
| • | changes in the scope and cost of FDIC insurance and other coverages, and changes in the U.S. Treasury’s Capital Purchase Program; |
| • | changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking; |
| • | competition among financial institutions could increase significantly; |
| • | the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital; |
| • | the reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers; |
| • | the terms and costs of the numerous actions taken by the Federal Reserve, the U.S. Congress, the Treasury, the FDIC, the SEC and others in response to the liquidity and credit crisis, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity, or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock; and |
| • | our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk. |
You should take into account that forward-looking statements speak only as of the date of this report. Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under federal securities laws.
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PART I
| ITEM 1. | BUSINESS |
General
Columbia Banking System, Inc. (referred to in this report as “we,” “our,” and “the Company”) is a registered bank holding company whose wholly owned banking subsidiary, Columbia State Bank (“Columbia Bank” or “the Bank”) also does business under the Bank of Astoria name and conducts full-service commercial banking business in the states of Washington and Oregon. Headquartered in Tacoma, Washington, we provide a full range of banking services to small and medium-sized businesses, professionals and individuals.
The Company was originally organized in 1988 under the name First Federal Corporation, which was later named Columbia Savings Bank. In 1990, an investor group acquired a controlling interest in the Company and a second corporation, Columbia National Bankshares, Inc. (“CNBI”), and CNBI’s sole banking subsidiary, Columbia National Bank. In 1993, the Company was reorganized to take advantage of commercial banking business opportunities in our principal market area. The opportunities to capture commercial banking market share were due to increased consolidations of banks, primarily through acquisitions by out-of-state holding companies, which created dislocation of customers. As part of the reorganization, CNBI was merged into the Company and Columbia National Bank was merged into the then newly chartered Columbia Bank. In 1994, Columbia Savings Bank was merged into Columbia Bank. We have grown from four branch offices at January 1, 1993 to 52 branch offices at December 31, 2009 and 84 branch offices at January 31, 2010 as a result of our recent acquisitions described below.
At December 31, 2009 Columbia Bank had 52 branch locations in the Seattle/Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington State, as well as the Longview, Woodland and Vancouver communities in southwestern Washington State, the Portland, Oregon metropolitan area, and the northern Oregon coast. Included in those 52 branch locations are six Columbia Bank branches doing business under the Bank of Astoria name at the Bank of Astoria’s former branches located in Astoria, Warrenton, Seaside and Cannon Beach in Clatsop County and in Manzanita and Tillamook in Tillamook County. Substantially all of Columbia Bank’s loans, loan commitments and core deposits are within its service areas. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions Division of Banks. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.
Recent Acquisitions
On July 23, 2007, the Company completed its acquisition of Mountain Bank Holding Company (“Mt. Rainier”), the parent company of Mt. Rainier National Bank, Enumclaw, Washington. Mt. Rainier was merged into the Company and Mt. Rainier National Bank was merged into Columbia Bank doing business as Mt. Rainier Bank. The results of Mt. Rainier Bank’s operations are included in those of Columbia Bank starting on July 23, 2007. On October 1, 2009, branches doing business as Mt. Rainier Bank were renamed Columbia Bank.
On July 23, 2007, the Company completed its acquisition of Town Center Bancorp (“Town Center”), the parent company of Town Center Bank, Portland, Oregon. Town Center was merged into the Company and Town Center Bank was merged into Columbia Bank. The results of Town Center Bank’s operations are included in those of Columbia Bank starting on July 23, 2007.
On January 22, 2010, Columbia State Bank acquired all of the deposits and certain assets of Columbia River Bank from the FDIC, which was appointed receiver of Columbia River Bank. Columbia State Bank acquired approximately $903 million in assets and approximately $891 million in deposits located in 21 branches in Oregon and Washington. Columbia River Bank’s loans and other real estate
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assets acquired of approximately $696 million are subject to a loss-sharing agreement with the FDIC. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $43.9 million on net assets acquired.
On January 29, 2010 Columbia State Bank acquired substantially all of the deposits and assets of American Marine Bank from the FDIC, which was appointed receiver of American Marine Bank. Columbia State Bank acquired approximately $308 million in assets and approximately $253 million in deposits located in 11 branches on the western Puget Sound. American Marine Bank’s loans and other real estate assets acquired of approximately $257 million are subject to a loss-sharing agreement with the FDIC. In addition, Columbia State Bank will continue to operate the Trust and Wealth Management Division of American Marine Bank. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $23.0 million on net assets acquired.
Company Management
| Name |
Principal Position | |
| Melanie J. Dressel |
President & Chief Executive Officer | |
| Andrew McDonald |
Executive Vice President & Chief Credit Officer | |
| Mark W. Nelson |
Executive Vice President & Chief Operating Officer | |
| Kent L Roberts |
Executive Vice President & Human Resources Director | |
| Gary R. Schminkey |
Executive Vice President & Chief Financial Officer |
Business Overview
Our goal is to be the leading Pacific Northwest regional community banking company while consistently increasing shareholder value. We continue to build on our reputation for excellent customer service in order to be recognized in all markets we serve as the bank of choice for retail deposit customers, small to medium-sized businesses and affluent households.
We have established a network of 52 branches as of December 31, 2009 from which we intend to grow market share. Western Washington locations consist of twenty-three branches in Pierce County, twelve in King County, two in Cowlitz County, two in Thurston County and one each in Kitsap and Whatcom Counties. Oregon locations include three branches in Clackamas County, two branches in Multnomah County, four branches in Clatsop County and two in Tillamook County.
In order to fund our lending activities and to allow for increased contact with customers, we utilize a branch system to better serve both retail and business depositors. We believe this approach will enable us to expand lending activities while attracting a stable core deposit base. In order to support our strategy of market penetration and increased profitability while continuing our personalized banking approach, we have invested in experienced banking and administrative personnel and have incurred related costs in the creation of our branch network.
Business Strategy
Our business strategy is to provide our customers with the financial sophistication and breadth of products of a regional banking company while retaining the appeal and service level of a community bank. We continually evaluate our existing business processes while focusing on maintaining asset quality and balanced loan and deposit portfolios, building our strong core deposit base, expanding total revenue and controlling expenses in an effort to increase our return on average equity and gain operational efficiencies. We believe that, as a result of our strong commitment to highly personalized, relationship-oriented customer service, our varied products, our strategic branch locations and the long-standing community presence of our managers, banking officers and branch personnel, we are well positioned to attract and retain new customers and to increase our market share of
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loans, deposits, and other financial services in the communities we serve. We are committed to increasing market share in the communities we serve by continuing to leverage our existing branch network, adding new branch locations and considering business combinations that are consistent with our expansion strategy throughout the Pacific Northwest.
Products & Services
We place the highest priority on customer service and assist our customers in making informed decisions when selecting from the products and services we offer. We continuously review our product and service offerings to ensure that we provide our customers with the tools to meet their financial needs. A more complete listing of all the services and products available to our customers can be found on our website: www.columbiabank.com. Some of the core products and services we offer include:
| Personal Banking |
Business Banking | |
| • Checking and Saving Accounts |
• Checking & Saving Accounts | |
| • Online Banking |
• Online Banking | |
| • Electronic Bill Pay |
• Electronic Bill Pay | |
| • Consumer Lending |
• Remote Deposit Capture | |
| • Residential Lending |
• Cash Management | |
| • Visa Card Services |
• Commercial & Industrial Lending | |
| • Investment Services |
• Real Estate and Real Estate Construction Lending | |
| • Private Banking |
• Equipment Finance | |
| • Small Business Services | ||
| • Visa Card Services | ||
| • Investment Services | ||
| • International Banking | ||
| • Merchant Card Services |
Personal Banking: We offer our personal banking customers an assortment of account products including noninterest and interest-bearing checking, savings, money market and certificate of deposit accounts. Overdraft protection is also available with direct links to the customer’s checking account. Our online banking service, Columbia Online™, provides our personal banking customers with the ability to safely and securely conduct their banking business 24 hours a day, 7 days a week. Personal banking customers are also provided with a variety of borrowing products including fixed and variable rate home equity loans and lines of credit, home mortgages for purchases and refinances, personal loans, and other consumer loans. Eligible personal banking customers with checking accounts are provided a Visa® Debit Card which can be used both to make purchases and as an ATM card. A variety of Visa® Credit Cards are also available to eligible personal banking customers.
Columbia Private Banking offers affluent clientele and their businesses complex financial solutions, such as deposit and cash management services, credit services, and wealth management strategies. Each private banker provides advisory services and coordinates a relationship team of experienced financial professionals to meet the unique needs of each discerning customer.
Through CB Financial Services(1), customers are provided with a full range of investment options including mutual funds, stocks, bonds, retirement accounts, annuities, tax-favored investments, US Government securities as well as long-term care and life insurance policies. Qualified investment professionals are available to provide advisory services(2) and assist customers with retirement, education and other financial planning activities.
| (1) | Securities and insurance products are offered through PRIMEVEST Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for PRIMEVEST. Investment products are * Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal government agency * May lose value. |
| (2) | Advisory services may only be offered by Investment Adviser Representatives in connection with an appropriate PRIMEVEST Advisory Services Agreement and disclosure brochure as provided. |
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Business Banking: We offer our business banking customers an assortment of checking, savings, interest bearing money market and certificate of deposit accounts to satisfy all their banking needs. Our Cash Management professionals are available to customize banking solutions with products such as automatic investment and line of credit sweeps; dailyDEPOSIT, our remote deposit product to deposit checks without leaving their place of business; positive pay, to identify fraudulent account activity quickly; and two choices of online banking, Columbia OnLine Banking for Business and Streamlined Business Online Banking. Columbia OnLine Banking for Business provides customers with the ability to tailor user access by individual, view balances and transactions, see check images, transfer funds, place stop payments, pay bills electronically, export transaction history in multiple file formats, create wire transfers and originate ACH transactions, such as direct deposit of employees’ payroll. Streamlined Business Online Banking is our free online solution intended for smaller businesses, or those just starting out. Streamlined Business Online Banking provides customers with the ability to view balances and transactions, see statements and check images, transfer funds, pay bills electronically and export transaction history in multiple file formats.
We offer a variety of loan products tailored to meet the various needs of business banking customers. Commercial loan products include accounts receivable and inventory financing as well as Small Business Administration financing. We also offer commercial real estate loan products for construction and development or permanent financing. Real estate lending activities have been focused on construction and permanent loans for both owner occupants and investor oriented real estate properties. In addition, the Bank has pursued construction and first mortgages on owner occupied, one- to four-family residential properties. Commercial banking has been directed toward meeting the credit and related deposit needs of various sized businesses and professional practice organizations operating in our primary market areas.
We offer our business banking customers a selection of Visa® Cards including the Business Debit Card that works like a check wherever Visa® is accepted including ATM cash withdrawals 24 hours a day, 7 days a week. We partner with First National Bank of Omaha to offer Visa® Credit Cards such as the Corporate Card which can be used all over the world; the Purchasing Card with established purchasing capabilities based on business needs; as well as the Business Edition® and Business Edition with Maximum Rewards® that earns reward points with every purchase. Our International Banking Department provides both large and small businesses with the ability to buy and sell foreign currencies as well as obtain letters of credit and wire funds to their customers and suppliers in foreign countries.
Business clients that utilize Columbia’s Merchant Card Services have the ability to accept Visa®, MasterCard® and Discover® sales drafts for deposit directly into their business checking account. Merchants are provided with a comprehensive accounting system tailored to meet each merchant’s needs, which includes month-to-date credit card deposit information on a transaction statement. Internet access is available to view merchant reports that allow business customers to review merchant statements, authorized, captured, cleared and settled transactions.
Through CB Financial Services(1), customers are provided with an array of investment options and all the tools and resources necessary to assist them in reaching their investment goals. Some of the investment solutions available to customers include 401(k), Simple IRA, Simple Employee Pensions, Buy-Sell Agreements, Key-Man Insurance, Business Succession Planning and personal investments.
Competition
Our industry remains highly competitive in spite of challenging economic conditions. Several other financial institutions with greater resources compete for banking business in our market areas. Among the advantages of some of these institutions are their ability to make larger loans, finance extensive advertising and
| (1) | Securities and insurance products are offered through PRIMEVEST Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for PRIMEVEST. Investment products are * Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal government agency * May lose value. |
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promotion campaigns, access international financial markets and allocate their investment assets to regions of highest yield and demand. In addition to competition from other banking institutions, we continue to experience competition from non-banking companies such as credit unions, brokerage houses and other financial services companies. We compete for deposits, loans, and other financial services by offering our customers similar breadth of products as our larger competitors while delivering a more personalized service level with faster transaction turnaround time.
Market Areas
Washington: Over half of our total branches within Washington are located in Pierce County, with an estimated population of 805,000 residents. At June 30, 2009 our Pierce County branch locations’ share of the county’s total deposit market was 16%(1), ranking first among our competition. Also located in Pierce County is our Company headquarters in the city of Tacoma and one nearby operational facility. Some of the most significant contributors to the Pierce County economy are the Port of Tacoma whose activities are related to more than 43,000 jobs in the county, and well over 100,000 in the state of Washington, McChord Air Force Base and Fort Lewis Army Base that account for nearly 20% of the County’s total employment and the manufacturing industry which supplies the Boeing Company.
We operate twelve branch locations in King County, including Seattle, Bellevue and Redmond. King County, which is Washington’s most highly populated county at approximately 1.9 million residents, is a market that has significant growth potential for our Company and will play a key role in our expansion strategy in the future. At June 30, 2009 our share of the King County deposit market was less than 1%( 1); however, we have made inroads within this market through the strategic expansion of our banking team. The north King County economy is primarily made up of the aerospace, construction, computer software and biotechnology industries. South King County with its close proximity to Pierce County is considered a natural extension of our primary market area. The economy of south King County is primarily comprised of residential communities supported by light industrial, retail, aerospace and distributing and warehousing industries.
Some other market areas served by the Company include Cowlitz County where we operate two branch locations that account for 8.5%(1) of the deposit market share, Thurston County where we operate two branches offices, and Kitsap and Whatcom County where we operate one branch in each county.
Oregon: With the acquisition of Town Center Bancorp in July, 2007, we added five branches in Clackamas and Multnomah counties in the Portland, Oregon area. Our six branches located in the western portions of Clatsop and Tillamook Counties, in the northern Oregon coastal area account for 28%(1) and 7%(1) of the deposit market share, respectively. In Clatsop County, we tied for first place among our competition in market share as of June 30, 2009. Oregon market areas provide a significant opportunity for expansion in the future. Both Clatsop and Tillamook Counties are comprised primarily of tourism, forestry and commercial fishing related businesses.
Employees
As of December 31, 2009 the Company and its banking subsidiaries employed approximately 715 full-time equivalent employees down from 735 at December 31, 2008. We value our employees and pride ourselves on providing a professional work environment accompanied by comprehensive benefit programs. We are committed to providing flexible and value-added benefits to our employees through a “Total Compensation Philosophy” which incorporates all compensation and benefits. Our continued commitment to employees contributed to Columbia Bank being awarded second place in the large employer category by Seattle Business Magazine’s 100 Best Companies to Work For 2009 and designated one of the Puget Sound Business Journal’s “Washington’s Best Workplaces 2009”.
| (1) | Source: FDIC Annual Summary of Deposit Report as of June 30, 2009. |
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Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). The public may obtain copies of these reports and any amendments at the SEC’s Internet site, www.sec.gov. Additionally, reports filed with the SEC can be obtained through our website at www.columbiabank.com. These reports are available through our website as soon as reasonably practicable after they are filed electronically with the SEC. Information contained on our website is not intended to be incorporated by reference into this report.
Supervision and Regulation
General
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to the Company and Columbia State Bank, which operates under the name Columbia Bank in Washington, and Columbia State Bank and Bank of Astoria in Oregon (collectively, referred to herein as “Columbia Bank”). This regulatory framework is primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory framework, our costs of compliance continue to increase in order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including the interpretation or implementation thereof, could have a material effect on our business or operations. Recently, in light of the recent financial crisis, numerous proposals to modify or expand banking regulation have surfaced. Based on past history, if any are approved, they will add to the complexity and cost of our business.
Federal Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), and is therefore subject to regulation, supervision and examination by the Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must file reports with and provide the Federal Reserve such additional information as it may require. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in nature, such as securities brokerage and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.
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Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from Columbia Bank for its cash needs, including funds for payment of dividends, interest and operational expenses.
Tying Arrangements. We are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.
Support of Subsidiary Bank. Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to Columbia Bank. This means that the Company is required to commit, as necessary, resources to support Columbia Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.
State Law Restrictions. As a Washington corporation, the Company is subject to certain limitations and restrictions under applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.
Federal and State Regulation of Columbia Bank
General. The deposits of Columbia Bank, a Washington chartered commercial bank with branches in Washington and Oregon, are insured by the FDIC. As a result, Columbia Bank is subject to supervision and regulation by the Washington Department of Financial Institutions, Division of Banks and the FDIC. With respect to branches of Columbia Bank in Oregon, the Bank is also subject to supervision and regulation by the Oregon Department of Consumer and Business Services, as well as the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.
Community Reinvestment. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the record of the financial institution in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.
Regulation of Management. Federal law (i) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (ii) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (iii) prohibits
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management personnel of a bank from serving as a director or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.
Safety and Soundness Standards. Federal law imposes certain non-capital safety and soundness standards upon banks. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) relaxed prior interstate branching restrictions under federal law by permitting nationwide interstate banking and branching under certain circumstances. Generally, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. Additionally, banks are permitted to merge with banks in other states, as long as the home state of neither merging bank has opted out under the legislation. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from using their interstate branches primarily for deposit production and the federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.
Washington and Oregon have both enacted “opting in” legislation in accordance with the Interstate Act provisions allowing banks to engage in interstate merger transactions, subject to certain “aging” requirements. Under Washington law, an out-of-state bank may, subject to Department of Financial Institution approval, open de novo branches in Washington or acquire an in-state branch so long as the home state of the out-of-state bank has reciprocal laws with respect to de novo branching or branch acquisitions. In contrast, Oregon restricts an out-of-state bank from opening de novo branches, and no out-of-state bank may conduct banking business at a branch located in Oregon unless the out-of-state bank has converted from, has assumed all, or substantially all, of Oregon deposit liabilities of or has merged with an insured institution that, by itself or together with any predecessor, has been engaged in banking business in Oregon for at least three years.
Dividends
The principal source of the Company’s cash is from dividends received from Columbia Bank, which are subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Washington law also limits a bank’s ability to pay dividends that are greater than the bank’s retained earnings without approval of the applicable banking agency. In addition to the foregoing regulatory restrictions, we are subject to contractual restrictions that limit us from paying dividends on our common stock, including those contained in the securities purchase agreement between us and the Treasury, as described in more detail below. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.
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Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at least 1% to 2%.
Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions. During these challenging economic times, the federal banking regulators have actively enforced these provisions.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company’s rating at its last inspection.
Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.
Corporate Governance and Accounting Legislation
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”); (ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt
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and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and (v) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.
To deter wrongdoing, the Act (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.
As a publicly reporting company, we are subject to the requirements of the Act and related rules and regulations issued by the SEC and NASDAQ. After enactment, we updated our policies and procedures to comply with the Act’s requirements and have found that such compliance, including compliance with Section 404 of the Act relating to management control over financial reporting, has resulted in significant additional expense for the Company. We anticipate that we will continue to incur such additional expense in our ongoing compliance.
Anti-terrorism Legislation
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). Certain provisions of the Patriot Act were made permanent and other sections were made subject to extended “sunset” provisions. The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports. The Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. While the Patriot Act has had minimal effect on our record keeping and reporting expenses, we do not believe that the renewal and amendment will have a material adverse effect on our business or operations.
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (i) repeals historical restrictions on preventing banks from affiliating with securities firms; (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies; (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and (v) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities.
Recent Legislation
Emergency Economic Stabilization Act of 2008. In response to the recent financial crisis, the United States government passed the Emergency Economic Stabilization Act of 2008 (the “EESA”) on October 3, 2008, which provides the United States Department of the Treasury (the “Treasury”) with broad authority to implement certain actions intended to help restore stability and liquidity to the U.S. financial markets.
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Insurance of Deposit Accounts. The EESA included a provision for a temporary increase from $100,000 to $250,000 per depositor in deposit insurance effective October 3, 2008 through December 31, 2013. Deposit accounts are otherwise insured by the FDIC, generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.
Deposit Insurance Assessments. The FDIC imposes an assessment against institutions for deposit insurance. This assessment is based on the risk category of the institution and ranges from 5 to 43 basis points of the institution’s deposits. In December, 2008, the FDIC adopted a rule that raised the current deposit insurance assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points) for the first quarter of 2009. In February 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates April 1, 2009, at 12 to 45 basis points. The rule also gives the FDIC the authority to, as necessary, implement emergency special assessments to maintain the deposit insurance fund.
Capital Purchase Program
Pursuant to the EESA, the Treasury has the ability to purchase or insure up to $700 billion in troubled assets held by financial institutions under the Troubled Asset Relief Program (“TARP”). On October 14, 2008, the Treasury announced it would initially purchase equity stakes in financial institutions under a Capital Purchase Program (the “CPP”) of up to $350 billion of the $700 billion authorized under the TARP legislation. The CPP provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. For publicly traded companies, the CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. The Company applied for and received approximately $76 million in the CPP. As a result, the Company is subject to the restrictions described below. The Treasury made an equity investment in the Company through its purchase of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock”). The description of the Preferred Stock set forth below is qualified in its entirety by the actual terms of the Preferred Stock, as are stated in the Certificate of Designation for the Preferred Stock, a copy of which was attached as Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on November 21, 2008 and incorporated by reference.
General. The Preferred Stock constitutes a single series of our preferred stock, consisting of 76,898 shares, no par value per share, having a liquidation preference amount of $1,000 per share. The Preferred Stock has no maturity date. We issued the shares of Preferred Stock to Treasury on November 21, 2008 in connection with the CPP for a purchase price of $76,898,000.
Dividend Rate. Dividends on the Preferred Stock are payable quarterly in arrears, when, as and if authorized and declared by our Board of Directors out of legally available funds, on a cumulative basis on the $1,000 per share liquidation preference amount plus the amount of accrued and unpaid dividends for any prior dividend periods, at a rate of (i) 5% per annum, from the original issuance date to the fifth anniversary of the issuance date, and (ii) 9% per annum, thereafter. Dividends on the Preferred Stock will be cumulative. If for any reason our Board of Directors does not declare a dividend on the Preferred Stock for a particular dividend period, or if our Board of Directors declares less than a full dividend, we will remain obligated to pay the unpaid portion of the dividend for that period and the unpaid dividend will compound on each subsequent dividend date (meaning that dividends for future dividend periods will accrue on any unpaid dividend amounts for prior dividend periods).
Priority of Dividends. Until the earlier of the third anniversary of Treasury’s investment or our redemption or the Treasury’s transfer of the Preferred Stock to an unaffiliated third party, we may not declare or pay a dividend or other distribution on our common stock that exceeds $.07 per share (other than dividends payable solely in common stock), and we generally may not directly or indirectly purchase, redeem or otherwise acquire any shares of common stock, including trust preferred securities.
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Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders of the Preferred Stock will be entitled to receive for each share of Preferred Stock, out of the assets of the Company or proceeds available for distribution to our shareholders, subject to any rights of our creditors, before any distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other class or series of our stock ranking junior to the Preferred Stock, payment of an amount equal to the sum of (i) the $1,000 liquidation preference amount per share and (ii) the amount of any accrued and unpaid dividends on the Preferred Stock (including dividends accrued on any unpaid dividends). To the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the liquidation payments owing to the holders of the Preferred Stock and the holders of any other class or series of our stock ranking equally with the Preferred Stock, the holders of the Preferred Stock and such other stock will share ratably in the distribution. For purposes of the liquidation rights of the Preferred Stock, neither a merger nor consolidation of the Company with another entity nor a sale, lease or exchange of all or substantially all of the Company’s assets will constitute a liquidation, dissolution or winding up of the affairs of the Company.
Compensation and Corporate Governance Standards and Restrictions under the CPP. As a participant in the CPP, we are subject to compensation and corporate governance standards and restrictions under applicable legislation and Treasury regulations, which include but are not limited to (1) restrictions on bonus, incentive and retention awards to our five most highly-compensated employees, (2) restrictions on severance and change-in-control payments to our executive officers and next five most highly-compensated employees, (3) ensuring that our compensation programs do not encourage unnecessary and excessive risks, and (4) requiring the recovery or “clawback” of any incentive compensation paid to our executive officers and next 20 most highly-compensated employees if it is later determined that such payments were based on materially inaccurate financial or other performance criteria. The applicable regulations and their impact on Columbia will be discussed more fully in our proxy statement for the 2010 annual meeting of shareholders, incorporated by reference into Part III of this Form 10-K.
Temporary Liquidity Guarantee Program. In October 2008, the FDIC announced the Temporary Liquidity Guarantee Program, which has two components—the Debt Guarantee Program and the Transaction Account Guarantee Program. Under the Transaction Account Guarantee Program any participating depository institution is able to provide full deposit insurance coverage for non-interest bearing transaction accounts, regardless of the dollar amount. Under the program, effective November 14, 2008, insured depository institutions that have not opted out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 10 basis point surcharge through December 31, 2009, applied to non-interest bearing transaction deposit account balances in excess of $250,000, which surcharge will be added to the institution’s existing risk-based deposit insurance assessments. Beginning January 1, 2010, the surcharge will range from 15 to 25 basis points depending on the institution’s risk category. The Transaction Account Guarantee Program will expire on June 30, 2010. Under the Debt Guarantee Program, qualifying unsecured senior debt issued by a participating institution can be guaranteed by the FDIC. The Debt Guarantee Program has been extended for senior unsecured debt issued after April 1, 2009 and before October 31, 2009 and maturing on or before December 31, 2012. The Company and the Bank chose to participate in both components of the FDIC Temporary Liquidity Guaranty Program.
American Recovery and Reinvestment Act of 2009. On February 17, 2009 the American Recovery and Reinvestment Act of 2009 (“ARRA) was signed into law. ARRA is intended to help stimulate the economy and is a combination of tax cuts and spending provisions applicable to a broad range of areas with an estimated cost of about $780 billion. The impact that ARRA may have on the US economy, the Company and the Bank cannot be predicted with certainty.
Proposed Legislation
Proposed legislation is introduced in almost every legislative session. Certain of such legislation could dramatically affect the regulation of the banking industry. In light of the 2008 financial crisis, legislation reshaping the regulatory landscape for financial institutions has been proposed. A current proposal includes measures aimed to prevent another financial crisis like the one in 2008 by forming a federal regulatory body to
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protect the interests of consumers by preventing abusive and risky lending practices, increasing supervision and regulation on financial firms deemed too big to fail, giving shareholders an advisory vote on executive pay, and regulating complex derivatives instruments. We cannot predict if any such legislation will be adopted or if it is adopted how it would affect the business of Columbia Bank or the Company. Past history has demonstrated that new legislation or changes to existing laws or regulations usually results in a greater compliance burden and therefore generally increases the cost of doing business.
Effects of Government Monetary Policy
Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.
| ITEM 1A. | RISK FACTORS |
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.
The national economic recession could adversely affect our future results of operations or market price of our stock.
The national economy and the financial services sector in particular are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic recession, which has adversely impacted the markets we serve. The U.S. economy has also experienced substantial volatility in the financial markets. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long these conditions may exist, the economic recession could continue to present risks for some time for the industry and our company.
The current economic recession in the market areas we serve may continue to adversely impact our earnings and could increase our credit risk associated with our loan portfolio and the value of our investment portfolio.
Substantially all of our loans are to businesses and individuals in Washington and Oregon, and a continuing decline in the economies of these market areas could have a material adverse effect on our business, financial condition, results of operations and prospects. A series of large Puget Sound-based businesses have implemented substantial employee layoffs and scaled back plans for future growth. Additionally, acquisitions and consolidations have resulted in substantial employee layoffs, along with a significant increase in office space availability in downtown Seattle. Oregon has also seen a similar pattern of large layoffs in major metropolitan areas. There has been a decline in housing prices in both Washington and Oregon. A further deterioration in the market areas we serve could result in the following consequences, any of which could have an adverse impact, which could be material, on our business, financial condition, results of operations and prospects:
| • | Commercial and consumer loan delinquencies may increase further; |
| • | problem assets and foreclosures may increase; |
| • | collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans; |
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| • | certain securities within our investment portfolio could become other than temporarily impaired, requiring a write down through earnings to fair value thereby reducing equity; |
| • | low cost or non-interest bearing deposits may decrease; and |
| • | demand for our loan and other products and services may decrease. |
Our loan portfolio mix, which has a concentration of loans secured by real estate, could result in increased credit risk in an economic recession.
Our loan portfolio is concentrated in commercial real estate and commercial business loans. These types of loans, as well as real estate construction loans and land development loans, acquisition and development loans related to the for sale housing industry, generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy loan concentrations. Because our loan portfolio contains a significant number of construction, commercial business and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in our nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
A further downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both borrowers’ ability to repay their loans and the value of the real property securing such loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans.
Our Allowance for Loan and Lease Losses (“ALLL”) may not be adequate to cover future loan losses, which could continue to adversely affect earnings.
We maintain an ALLL in an amount that we believe is adequate to provide for losses inherent in our portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans in the portfolio that could result in losses, but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that have been identified. Additionally, the process for determining the ALLL requires different, subjective and complex judgments about the future impact from current economic conditions that might impair the ability of borrowers to repay their loans. As a result, future significant increases to the ALLL may be necessary. Additionally, future increases to the ALLL may be required based on changes in the composition of the loans comprising the portfolio, deteriorating values in underlying collateral (most of which consists of real estate) and changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a result of incorrect assumptions by management in determining the ALLL. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our ALLL. These regulatory agencies may require us to increase the ALLL which could have a negative effect on our financial condition and results of operation. Any increase in the ALLL would have an adverse effect, which could be material, on our financial condition and results of operations.
Our acquisitions and the integration of acquired businesses may not result in all of the benefits anticipated, and future acquisitions may be dilutive to current shareholders.
We have in the past and may in the future seek to grow our business by acquiring other businesses. Recently, we acquired assets and deposits of Columbia River Bank and American Marine Bank in FDIC-assisted transactions. There can be no assurance that our acquisitions will have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost of integration
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including management attention and resources; the time required to complete the integration successfully; the amount of longer-term cost savings; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.
We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we acquire. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect our operations or results.
Given the continued economic recession, market volatility and uncertainty, notwithstanding our loss-sharing arrangements with the FDIC with respect to the assets we recently acquired of Columbia River Bank and American Marine Bank, we may continue to experience increased credit costs or need to take additional markdowns and allowances for loan losses on the assets and loans acquired that could adversely affect our financial condition and results of operations in the future. There is no assurance that as our integration efforts continue in connection with these transactions, other unanticipated costs, including the diversion of personnel, or losses, will not be incurred.
Acquisitions may also result in business disruptions that cause us to lose customers or cause customers to remove their accounts from us and move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients, customers, depositors and employees. The loss of key employees in connection with an acquisition could adversely affect our ability to successfully conduct our business.
We may engage in future acquisitions involving the issuance of additional common stock and/or cash. Any such acquisitions and related issuances of stock may have a dilutive effect on earnings per share and the percentage ownership of current shareholders. The use of cash as consideration in any such acquisitions could impact our capital position and may require us to raise additional capital.
Furthermore, notwithstanding our recent acquisitions, we cannot provide any assurance as to the extent to which we can continue to grow through acquisitions as this will depend on the availability of prospective target opportunities at valuations we find attractive and the competition for such opportunities from other parties.
If the goodwill we have recorded in connection with acquisitions becomes impaired, it could have an adverse impact on our earnings and capital.
Accounting standards require that we account for acquisitions using the purchase method of accounting. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with generally accepted accounting principles, our goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation is based on a variety of factors, including the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples, discounted cash flows, and data from comparable acquisitions. There can be no assurance that future evaluations of goodwill will not result in impairment and ensuing write-down, which could be material, resulting in an adverse impact on our earnings and capital.
We may pursue additional capital, which may not be available on acceptable terms or at all, could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.
In the current economic environment, we believe it is prudent to consider alternatives for raising capital when opportunities to raise capital at attractive prices present themselves, in order to further strengthen our capital and better position ourselves to take advantage of opportunities that may arise in the future, including the
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possible redemption of the Series A Preferred Stock we issued and sold to Treasury under the CPP. Such alternatives may include issuance and sale of common or preferred stock, trust preferred securities, or borrowings by the Company, with proceeds contributed to the Bank. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at the time, which are outside of our control, and our financial performance. We cannot assure you that such capital will be available to us on acceptable terms or at all. Any such capital raising alternatives could dilute the holders of our outstanding common stock, and may adversely affect the market price of our common stock and our performance measures such as earnings per share.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.
Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in nonperforming loans. We do not record interest income on non-accrual loans, thereby adversely affecting our income, and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts, and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. There can be no assurance that we will not experience further increases in nonperforming loans in the future.
Fluctuating interest rates can adversely affect our profitability.
Our profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread, and, in turn, our profitability.
Fluctuations in interest rates on loans could adversely affect our business.
Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, decreases in interest rates could result in an acceleration of loan prepayments. An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our business.
The FDIC has increased insurance premiums to restore and maintain the federal deposit insurance fund, which has increased our costs and could adversely affect our business.
The FDIC adopted a final rule revising its risk-based assessment system, effective April 1, 2009. The changes to the assessment system involve adjustments to the risk-based calculation of an institution’s unsecured debt, secured liabilities and brokered deposits.
The FDIC also recently imposed a special deposit insurance assessment of five basis points on all insured institutions. This emergency assessment was calculated based on the insured institution’s assets at June 30, 2009,
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and collected on September 30, 2009. Based on our June 30, 2009 assets subject to the FDIC assessment, the special assessment was approximately $1.4 million. This special assessment is in addition to the regular quarterly risk-based assessment.
Additional increases in FDIC insurance premiums could have a significant impact on Columbia Bank.
The FDIC also has recently required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 and for 2010, 2011 and 2012, and increased the regular assessment rate by three basis points effective January 1, 2011, as a means of replenishing the deposit insurance fund. The prepayment was collected on December 30, 2009, and was accounted for as a prepaid expense amortized over the prepayment period.
The FDIC deposit insurance fund may suffer additional losses in the future due to bank failures. There can be no assurance that there will not be additional significant deposit insurance premium increases or special assessments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on our financial condition and results of operations.
We operate in a highly regulated environment and changes of or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
As discussed more fully in the section entitled “Supervision and Regulation”, we are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly-traded company, we are subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on 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. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations. In that regard, proposals for legislation restructuring the regulation of the financial services industry are currently under consideration. Adoption of such proposals could, among other things, increase the overall costs of regulatory compliance. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions we are facing. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the Federal Reserve Board.
We cannot accurately predict the actual effects of recent legislation or the proposed regulatory reform measures and various governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets, on the Company and on the Bank. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.
A continued tightening of the credit markets and credit market volatility may make it difficult to maintain adequate funding for loan growth, which could adversely affect our earnings.
A continued tightening of the credit markets and the inability to maintain adequate liquidity to fund continued loan growth may negatively affect asset growth and, therefore, our earnings capability. In addition to
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deposit growth and payments of principal and interest received on loans and investment securities, we also rely on borrowing lines with the Federal Home Loan Bank of Seattle (“FHLB”) and the Federal Reserve Bank of San Francisco to fund loans. However, the FHLB has discontinued the repurchase of its stock and discontinued the distribution of dividends. Based on the foregoing, there can be no assurance the FHLB will have sufficient resources to continue to fund our borrowings at their current levels. In the event of a deterioration in our financial condition or a further downturn in the economy, particularly in the housing market, our ability to access these funding resources could be negatively affected, which could limit the funds available to us making it difficult for us to maintain adequate funding for loan growth. In addition, our customers’ ability to raise capital and refinance maturing obligations could be adversely affected, resulting in a further unfavorable impact on our business, financial condition and results of operations.
We may be required, in the future, to recognize impairment with respect to investment securities, including the FHLB stock we hold.
Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declines in the fair market value of these securities. We evaluate the securities portfolio for any other than temporary impairment each reporting period, as required by generally accepted accounting principles in the United States of America, and as of December 31, 2009, we did not recognize any securities as other-than-temporarily impaired. There can be no assurance, however, that future evaluations of the securities portfolio will not require us to recognize an impairment charge with respect to these and other holdings.
In addition, as a condition to membership in the FHLB, we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. At December 31, 2009, we had stock in the FHLB totaling $11.6 million. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. The FHLB has discontinued the repurchase of their stock and discontinued the distribution of dividends. As of December 31, 2009, we did not recognize an impairment charge related to our FHLB stock holdings. There can be no assurance, however, that future negative changes to the financial condition of the FHLB may not require us to recognize an impairment charge with respect to such holdings.
Our ability to access markets for funding and acquire and retain customers could be adversely affected by negative public opinion, the deterioration of other financial institutions or the further deterioration of the financial services industry’s reputation.
The financial services industry continues to be featured in negative headlines about the global and national 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. In addition, our ability to engage in routine funding and other transactions could be adversely affected by the actions and financial condition of other financial institutions or negative public opinion resulting from our actual or alleged conduct in any number of activities, including lending practices, governmental enforcement actions taken by regulators or community organizations in response to those activities. Financial services institutions are interrelated as a result of trading, clearing, correspondent, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and to losses or defaults by us or by other institutions. We could experience material changes in the level of deposits as a direct or indirect result of other banks’ difficulties or failure, which could affect the amount of capital we need. In addition, negative perceptions associated with our continued participation in the CPP may adversely affect our ability to retain customers, attract investors and compete for new business opportunities.
Substantial competition in our market areas could adversely affect us.
Commercial banking is a highly competitive business. We compete with other commercial banks, savings and loan associations, credit unions, finance, insurance and other non-depository companies operating in our
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market areas. We also experience competition, especially for deposits, from internet-based banking institutions, which have grown rapidly in recent years. We are subject to substantial competition for loans and deposits from other financial institutions. Some of our competitors are not subject to the same degree of regulation and restriction as we are. Some of our competitors have greater financial resources than we do. Some of our competitors have severe liquidity issues, which could impact the pricing of deposits in our marketplace. If we are unable to effectively compete in our market areas, our business, results of operations and prospects could be adversely affected.
The Series A Preferred Stock diminishes the net income available to our common shareholders and earnings per common share, and the Warrant may be dilutive to holders of our common stock.
The dividends accrued and the accretion on discount on the Series A Preferred Stock reduce the net income available to common shareholders and our earnings per common share. The Series A Preferred Stock is cumulative, which means that any dividends not declared or paid will accumulate and will be payable when the payment of dividends is resumed. The Series A Preferred Stock’s dividend rate will increase to 9% per annum five years after its original issuance if not earlier redeemed. If we are unable to redeem the Series A Preferred Stock prior to the date of this increase, the cost of this capital to us will increase substantially on that date, from 5% per annum to 9% per annum. Depending on our financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Stock could have a material negative effect on our earnings and could also adversely affect our ability to declare and pay dividends on our common shares. Shares of Series A Preferred Stock will also receive preferential treatment in the event of the liquidation, dissolution or winding up of Columbia. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the Warrant is exercised. The shares of common stock underlying the Warrant represent approximately 2% of the shares of our common stock outstanding as of December 31, 2009 (including the shares issuable upon exercise of the Warrant in our total outstanding shares). Although the Treasury has agreed not to vote any of the shares of common stock acquired upon exercise of the Warrant, a transferee of any portion of the Warrant or of any shares of common stock acquired upon exercise of the Warrant is not bound by this restriction. For additional information related to the Series A Preferred Stock, see Note 23 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
The terms of the Series A Preferred Stock pose risks to the holders of our common stock in a variety of ways.
The terms of the Series A Preferred Stock pose risks to the holders of our common stock in a variety of ways:
| • | The terms of the Series A Preferred Stock allow the Treasury to impose additional restrictions, including on dividends, and such amendments to the terms of the Series A Preferred Stock as may be required to comply with changes in applicable federal law. |
| • | The holders of Series A Preferred Stock, including the Treasury, may have different interests from the holders of our common stock, and could exercise their special voting rights to block certain transactions, including authorizing senior stock, amendments to the Series A Preferred Stock and approval of certain mergers, share exchanges or similar transactions, even where such transactions may be considered desirable by, or in the best interests of, the holders of our common stock. |
| • | Common stock dividends may not be declared if we are in arrears on the payment of dividends on the Series A Preferred Stock. |
| • | The holder of the Series A Preferred Stock must consent to any repurchase of common stock (other than in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice). |
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Changes in accounting standards could materially impact our financial statements.
From time to time the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be very difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.
We may not pay dividends on our common stock.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and there may be circumstances under which we would eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. Also, our ability to increase our dividend or to make other distributions is restricted due to our participation in the CPP, which limits (without the consent of the U.S. Treasury) our ability to increase our quarterly common stock dividend above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 or to repurchase our common stock for so long as the Series A Preferred Stock remains outstanding.
Our ability to receive dividends from our banking subsidiary accounts for most of our revenue and could affect our liquidity and ability to pay dividends.
We are a separate and distinct legal entity from our banking subsidiary, Columbia State Bank. We receive substantially all of our revenue from dividends from our banking subsidiary. These dividends are the principal source of funds to pay dividends on our common and preferred stock and principal and interest on our outstanding debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank may pay us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Limitations on our ability to receive dividends from our subsidiary could have a material adverse effect on our liquidity and on our ability to pay dividends on common or preferred stock. Additionally, if our subsidiary’s earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our common and preferred stockholders or principal and interest payments on our outstanding debt.
Significant legal or regulatory actions could subject us to substantial uninsured liabilities and reputational harm and have a material adverse effect or on our business and results of operations.
We are from time to time subject to claims and proceedings related to our operations. These claims and legal actions, which could include supervisory or enforcement actions by our regulators, or criminal proceedings by prosecutorial authorities, could involve large monetary claims, including civil money penalties or fines imposed by government authorities, and significant defense costs. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by government authorities and may not cover all other claims that might be brought against us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.
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We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk of fraud or theft, which may adversely affect our business and results of operations.
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft, and unauthorized transactions or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of us to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Locations
The Company’s principal Columbia Bank properties include our corporate headquarters which is located at 13th & A Street, Tacoma, Washington, in Pierce County, where we occupy 62 thousand square feet of office space, 4 thousand square feet of commercial lending space and 750 square feet of branch space under various operating lease agreements, an operations facility in Lakewood, Washington, where we own 57 thousand square feet of office space and an office facility in Tacoma, Washington, that includes a branch where we occupy 26 thousand square feet under various operating lease agreements.
In Pierce County we conduct business in twenty-one additional branch locations, sixteen of which are owned and five of which are leased under various operating lease agreements. In King County we conduct business in twelve branch locations, nine of which are owned and three of which are leased. In Clark, Kitsap, Thurston, Cowlitz and Whatcom counties we conduct business in seven branch locations, five of which are owned and two that are leased under various operating lease agreements. In the Portland metropolitan area, Columbia Bank conducts business in four branch locations in Clackamas and Multnomah counties. Finally, Columbia Bank doing business under the Bank of Astoria name conducts business in six branch locations in Clatsop and Tillamook counties, all of which are owned.
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For additional information concerning our premises and equipment and lease obligations, see Note 8 and 18, respectively, to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
| ITEM 3. | LEGAL PROCEEDINGS |
The Company and its banking subsidiary 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.
| ITEM 4. | RESERVED |
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Quarterly Common Stock Prices and Dividends
Our common stock is traded on the NASDAQ Global Select Market under the symbol “COLB”. Quarterly high and low sales prices and dividend information for the last two years are presented in the following table. The prices shown do not include retail mark-ups, mark-downs or commissions:
| 2009 |
High | Low | Cash Dividend Declared | ||||||
| First quarter |
$ | 11.87 | $ | 4.93 | $ | 0.04 | |||
| Second quarter |
$ | 13.52 | $ | 6.54 | 0.01 | ||||
| Third quarter |
$ | 17.22 | $ | 9.78 | 0.01 | ||||
| Fourth quarter |
$ | 16.55 | $ | 13.80 | 0.01 | ||||
| For the year |
$ | 17.22 | $ | 4.93 | $ | 0.07 | |||
| 2008 |
High | Low | Cash Dividend Declared | ||||||
| First quarter |
$ | 29.90 | $ | 21.07 | $ | 0.17 | |||
| Second quarter |
$ | 29.57 | $ | 19.31 | 0.17 | ||||
| Third quarter |
$ | 29.00 | $ | 8.50 | 0.17 | ||||
| Fourth quarter |
$ | 18.49 | $ | 7.64 | 0.07 | ||||
| For the year |
$ | 29.90 | $ | 7.64 | $ | 0.58 | |||
On December 31, 2009, the last sale price for our stock on the NASDAQ Global Select Market was $16.18. At January 31, 2010, the number of shareholders of record was 2,202. This figure does not represent the actual number of beneficial owners of common stock because shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who may vote the shares.
At December 31, 2009, a total of 118,191 stock options were outstanding. Additional information about stock options and other equity compensation plans is included in Note 15 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
The payment of future cash dividends is at the discretion of our Board and subject to a number of factors, including results of operations, general business conditions, growth, financial condition and other factors deemed relevant by the Board of Directors. Our ability to pay future cash dividends is subject to the provisions contained in the agreement that governs our participation in the Treasury Capital Purchase Program. Specifically, the Company may not declare a dividend that exceeds $0.07 per common share until the earlier of the third anniversary of Treasury’s investment or our redemption or the transfer of our Preferred Stock to a third party along with other regulatory requirements and restrictions which are discussed in the “Supervision and Regulation” section in “Item 1. Business” of this report. In addition, the payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In this regard, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
Equity Compensation Plan Information
| Year Ended December 31, 2009 | |||||||
| Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) |
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |
Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (2) | |||||
| Equity compensation plans approved by security holders |
118,191 | $ | 19.73 | 1,444,604 | |||
| Equity compensation plans not approved by security holders |
— | — | — | ||||
| (1) | Consists of shares that are subject to outstanding options. |
| (2) | Includes 720,906 shares available for future issuance under the stock option and equity compensation plan and 723,698 shares available for purchase under the Employee Stock Purchase Plan as of December 31, 2009. |
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Five-Year Stock Performance Graph
The following graph shows a five-year comparison of the total return to shareholders of Columbia’s common stock, the Nasdaq Composite Index (which is a broad nationally recognized index of stock performance by companies listed on the Nasdaq Stock Market) and the Columbia Peer Group (comprised of banks with assets of $1 billion to $5 billion, all of which are located in the western United States). The definition of total return includes appreciation in market value of the stock as well as the actual cash and stock dividends paid to shareholders. The graph assumes that the value of the investment in Columbia’s common stock, the Nasdaq and the Columbia Peer Group was $100 on December 31, 2004, and that all dividends were reinvested.
| Index |
Period Ending | |||||||||||
| 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | |||||||
| Columbia Banking System, Inc. |
100.00 | 115.99 | 145.21 | 125.71 | 51.91 | 70.87 | ||||||
| NASDAQ Composite |
100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||
| Columbia Peer Group |
100.00 | 107.18 | 129.66 | 93.90 | 58.87 | 49.12 | ||||||
Source: SNL Financial LC, Charlottesville, VA
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| ITEM 6. | SELECTED FINANCIAL DATA |
Five-Year Summary of Selected Consolidated Financial Data (1)
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (in thousands except per share) | ||||||||||||||||||||
| For the Year |
||||||||||||||||||||
| Total revenue |
$ | 145,042 | $ | 134,363 | $ | 136,568 | $ | 122,435 | $ | 115,698 | ||||||||||
| Net interest income |
$ | 115,352 | $ | 119,513 | $ | 108,820 | $ | 97,763 | $ | 90,912 | ||||||||||
| Provision for loan and lease losses |
$ | 63,500 | $ | 41,176 | $ | 3,605 | $ | 2,065 | $ | 1,520 | ||||||||||
| Noninterest income |
$ | 29,690 | $ | 14,850 | $ | 27,748 | $ | 24,672 | $ | 24,786 | ||||||||||
| Noninterest expense |
$ | 94,488 | $ | 92,125 | $ | 88,829 | $ | 76,134 | $ | 72,855 | ||||||||||
| Net income (loss) |
$ | (3,968 | ) | $ | 5,968 | $ | 32,381 | $ | 32,103 | $ | 29,631 | |||||||||
| Net income (loss) applicable to common shareholders |
$ | (8,371 | ) | $ | 5,498 | $ | 32,381 | $ | 32,103 | $ | 29,631 | |||||||||
| Per Common Share (1) |
||||||||||||||||||||
| Earnings (loss) (Basic) |
$ | (0.38 | ) | $ | 0.30 | $ | 1.91 | $ | 2.00 | $ | 1.89 | |||||||||
| Earnings (loss) (Diluted) |
$ | (0.38 | ) | $ | 0.30 | $ | 1.89 | $ | 1.98 | $ | 1.86 | |||||||||
| Book Value |
$ | 16.13 | $ | 18.82 | $ | 19.03 | $ | 15.71 | $ | 14.29 | ||||||||||
| Averages |
||||||||||||||||||||
| Total assets |
$ | 3,084,421 | $ | 3,134,054 | $ | 2,837,162 | $ | 2,473,404 | $ | 2,290,746 | ||||||||||
| Interest-earning assets |
$ | 2,783,862 | $ | 2,851,555 | $ | 2,599,379 | $ | 2,265,393 | $ | 2,102,513 | ||||||||||
| Loans |
$ | 2,124,574 | $ | 2,264,486 | $ | 1,990,622 | $ | 1,629,616 | $ | 1,494,567 | ||||||||||
| Securities |
$ | 584,028 | $ | 565,299 | $ | 581,122 | $ | 623,631 | $ | 605,395 | ||||||||||
| Deposits |
$ | 2,378,176 | $ | 2,382,484 | $ | 2,242,134 | $ | 1,976,448 | $ | 1,923,778 | ||||||||||
| Core deposits |
$ | 1,945,039 | $ | 1,911,897 | $ | 1,887,391 | $ | 1,664,247 | $ | 1,689,270 | ||||||||||
| Shareholders’ equity |
$ | 462,127 | $ | 354,387 | $ | 289,297 | $ | 237,843 | $ | 214,612 | ||||||||||
| Financial Ratios |
||||||||||||||||||||
| Net interest margin |
4.33 | % | 4.38 | % | 4.35 | % | 4.49 | % | 4.44 | % | ||||||||||
| Return on average assets |
(0.13 | )% | 0.19 | % | 1.14 | % | 1.30 | % | 1.29 | % | ||||||||||
| Return on average common equity |
(2.16 | )% | 1.59 | % | 11.19 | % | 13.50 | % | 13.81 | % | ||||||||||
| Efficiency ratio (2) |
61.53 | % | 59.88 | % | 61.33 | % | 58.95 | % | 61.20 | % | ||||||||||
| Average equity to average assets |
14.98 | % | 11.31 | % | 10.20 | % | 9.62 | % | 9.37 | % | ||||||||||
| At Year End |
||||||||||||||||||||
| Total assets |
$ | 3,200,930 | $ | 3,097,079 | $ | 3,178,713 | $ | 2,553,131 | $ | 2,377,322 | ||||||||||
| Loans |
$ | 2,008,884 | $ | 2,232,332 | $ | 2,282,728 | $ | 1,708,962 | $ | 1,564,704 | ||||||||||
| Allowance for loan and lease losses |
$ | 53,478 | $ | 42,747 | $ | 26,599 | $ | 20,182 | $ | 20,829 | ||||||||||
| Securities |
$ | 631,645 | $ | 540,525 | $ | 572,973 | $ | 605,133 | $ | 585,332 | ||||||||||
| Deposits |
$ | 2,482,705 | $ | 2,382,151 | $ | 2,498,061 | $ | 2,023,351 | $ | 2,005,489 | ||||||||||
| Core deposits |
$ | 2,072,821 | $ | 1,941,047 | $ | 1,996,393 | $ | 1,701,528 | $ | 1,703,030 | ||||||||||
| Shareholders’ equity |
$ | 528,139 | $ | 415,385 | $ | 341,731 | $ | 252,347 | $ | 226,242 | ||||||||||
| Full-time equivalent employees |
715 | 735 | 775 | 657 | 651 | |||||||||||||||
| Banking offices |
52 | 53 | 55 | 40 | 40 | |||||||||||||||
| Nonperforming Assets |
||||||||||||||||||||
| Nonaccrual loans |
$ | 110,431 | $ | 106,163 | $ | 14,005 | $ | 2,886 | $ | 4,875 | ||||||||||
| Restructured loans accruing interest |
60 | 587 | 456 | 594 | — | |||||||||||||||
| Other real estate owned |
19,037 | 2,874 | 181 | — | 18 | |||||||||||||||
| Total nonperforming assets |
$ | 129,528 | $ | 109,624 | $ | 14,642 | $ | 3,480 | $ | 4,893 | ||||||||||
| Nonperforming loans to year end loans |
5.50 | % | 4.78 | % | 0.63 | % | 0.20 | % | 0.31 | % | ||||||||||
| Nonperforming assets to year end assets |
4.05 | % | 3.54 | % | 0.46 | % | 0.14 | % | 0.21 | % | ||||||||||
| Allowance for loan and lease losses to year end loans |
2.66 | % | 1.91 | % | 1.17 | % | 1.18 | % | 1.33 | % | ||||||||||
| Allowance for loan and lease losses to nonperforming loans |
48.40 | % | 40.04 | % | 183.94 | % | 579.94 | % | 428.84 | % | ||||||||||
| Net loan charge-offs |
$ | 52,769 | $ | 25,028 | $ | 380 | $ | 2,712 | $ | 572 | ||||||||||
| Risk-Based Capital Ratios |
||||||||||||||||||||
| Total capital |
19.60 | % | 14.25 | % | 10.90 | % | 13.23 | % | 12.97 | % | ||||||||||
| Tier 1 capital |
18.34 | % | 12.99 | % | 9.87 | % | 12.21 | % | 11.82 | % | ||||||||||
| Leverage ratio |
14.33 | % | 11.27 | % | 8.54 | % | 9.86 | % | 9.54 | % | ||||||||||
| (1) | These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report. |
| (2) | Noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gains/losses on investment securities, net cost of operation of OREO, reserve for VISA litigation liability and mark-to-market adjustments of interest rate floor instruments. |
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Consolidated Five-Year Financial Data (1)
| Years ended December 31, | |||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||
| Interest Income: |
|||||||||||||||||
| Loans |
$ | 117,062 | $ | 147,830 | $ | 156,253 | $ | 123,998 | $ | 99,535 | |||||||
| Taxable securities |
17,300 | 18,852 | 18,614 | 20,018 | 18,135 | ||||||||||||
| Tax-exempt securities |
8,458 | 7,976 | 7,923 | 7,042 | 4,452 | ||||||||||||
| Federal funds sold and deposits with banks |
215 | 402 | 1,427 | 617 | 85 | ||||||||||||
| Total interest income |
143,035 | 175,060 | 184,217 | 151,675 | 122,207 | ||||||||||||
| Interest Expense: |
|||||||||||||||||
| Deposits |
23,250 | 45,307 | 59,930 | 40,838 | 25,983 | ||||||||||||
| Federal Home Loan Bank advances |
2,759 | 7,482 | 11,065 | 10,944 | 3,515 | ||||||||||||
| Long-term obligations |
1,197 | 1,800 | 2,177 | 1,992 | 1,583 | ||||||||||||
| Other borrowings |
477 | 958 | 2,225 | 138 | 214 | ||||||||||||
| Total interest expense |
27,683 | 55,547 | 75,397 | 53,912 | 31,295 | ||||||||||||
| Net Interest Income |
115,352 | 119,513 | 108,820 | 97,763 | 90,912 | ||||||||||||
| Provision for loan and lease losses |
63,500 | 41,176 | 3,605 | 2,065 | 1,520 | ||||||||||||
| Net interest income after provision for loan and lease losses |
51,852 | 78,337 | 105,215 | 95,698 | 89,392 | ||||||||||||
| Noninterest income |
29,690 | 14,850 | 27,748 | 24,672 | 24,786 | ||||||||||||
| Noninterest expense |
94,488 | 92,125 | 88,829 | 76,134 | 72,855 | ||||||||||||
| Income (loss) before income taxes |
(12,946 | ) | 1,062 | 44,134 | 44,236 | 41,323 | |||||||||||
| Provision (benefit) for income taxes |
(8,978 | ) | (4,906 | ) | 11,753 | 12,133 | 11,692 | ||||||||||
| Net Income (Loss) |
$ | (3,968 | ) | $ | 5,968 | $ | 32,381 | $ | 32,103 | $ | 29,631 | ||||||
| Less: Dividends on preferred stock |
4,403 | 470 | — | — | — | ||||||||||||
| Net Income (Loss) Applicable to Common Shareholders |
$ | (8,371 | ) | $ | 5,498 | $ | 32,381 | $ | 32,103 | $ | 29,631 | ||||||
| Per Common Share |
|||||||||||||||||
| Earnings (loss) basic |
$ | (0.38 | ) | $ | 0.30 | $ | 1.91 | $ | 2.00 | $ | 1.89 | ||||||
| Earnings (loss) diluted |
$ | (0.38 | ) | $ | 0.30 | $ | 1.89 | $ | 1.98 | $ | 1.86 | ||||||
| Average number of common shares outstanding (basic) |
21,854 | 17,914 | 16,802 | 15,946 | 15,708 | ||||||||||||
| Average number of common shares outstanding (diluted) |
21,854 | 18,010 | 16,972 | 16,148 | 15,885 | ||||||||||||
| Total assets at year end |
$ | 3,200,930 | $ | 3,097,079 | $ | 3,178,713 | $ | 2,553,131 | $ | 2,377,322 | |||||||
| Long-term obligations |
$ | 25,669 | $ | 25,603 | $ | 25,519 | $ | 22,378 | $ | 22,312 | |||||||
| Cash dividends declared per common share |
$ | 0.07 | $ | 0.58 | $ | 0.66 | $ | 0.57 | $ | 0.39 | |||||||
| (1) | These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report. |
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Selected Quarterly Financial Data (1)
The following table presents selected unaudited consolidated quarterly financial data for each quarter of 2009 and 2008. The information contained in this table reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods.
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Year Ended December 31, |
||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
| 2009 |
||||||||||||||||||||
| Total interest income |
$ | 36,029 | $ | 35,530 | $ | 35,700 | $ | 35,776 | $ | 143,035 | ||||||||||
| Total interest expense |
8,126 | 6,999 | 6,582 | 5,976 | 27,683 | |||||||||||||||
| Net interest income |
27,903 | 28,531 | 29,118 | 29,800 | 115,352 | |||||||||||||||
| Provision for loan and lease losses |
11,000 | 21,000 | 16,500 | 15,000 | 63,500 | |||||||||||||||
| Noninterest income |
6,974 | 7,000 | 7,190 | 8,526 | 29,690 | |||||||||||||||
| Noninterest expense |
23,181 | 25,314 | 23,146 | 22,847 | 94,488 | |||||||||||||||
| Income (loss) before income taxes |
696 | (10,783 | ) | (3,338 | ) | 479 | (12,946 | ) | ||||||||||||
| Provision (benefit) for income taxes |
(816 | ) | (5,253 | ) | (1,836 | ) | (1,073 | ) | (8,978 | ) | ||||||||||
| Net Income (Loss) |
$ | 1,512 | $ | (5,530 | ) | $ | (1,502 | ) | $ | 1,552 | $ | (3,968 | ) | |||||||
| Less: Dividends on preferred stock |
1,093 | 1,101 | 1,103 | 1,105 | 4,403 | |||||||||||||||
| Net Income (Loss) Applicable to Common Shareholders |
$ | 419 | $ | (6,631 | ) | $ | (2,605 | ) | $ | 447 | $ | (8,371 | ) | |||||||
| Per Common Share (2) |
||||||||||||||||||||
| Earnings (loss) (basic) |
$ | 0.02 | $ | (0.37 | ) | $ | (0.11 | ) | $ | 0.02 | $ | (0.38 | ) | |||||||
| Earnings (loss) (diluted) |
$ | 0.02 | $ | (0.37 | ) | $ | (0.11 | ) | $ | 0.02 | $ | (0.38 | ) | |||||||
| 2008 |
||||||||||||||||||||
| Total interest income |
$ | 48,433 | $ | 44,323 | $ | 42,337 | $ | 39,967 | $ | 175,060 | ||||||||||
| Total interest expense |
18,106 | 14,049 | 12,744 | 10,648 | 55,547 | |||||||||||||||
| Net interest income |
30,327 | 30,274 | 29,593 | 29,319 | 119,513 | |||||||||||||||
| Provision for loan and lease losses |
2,076 | 15,350 | 10,500 | 13,250 | 41,176 | |||||||||||||||
| Noninterest income |
10,157 | 9,305 | (10,946 | ) | 6,334 | 14,850 | ||||||||||||||
| Noninterest expense |
23,554 | 23,367 | 23,391 | 21,813 | 92,125 | |||||||||||||||
| Income (loss) before income taxes |
14,854 | 862 | (15,244 | ) | 590 | 1,062 | ||||||||||||||
| Provision (benefit) for income taxes |
3,877 | (1,074 | ) | (6,485 | ) | (1,224 | ) | (4,906 | ) | |||||||||||
| Net Income (Loss) |
$ | 10,977 | $ | 1,936 | $ | (8,759 | ) | $ | 1,814 | $ | 5,968 | |||||||||
| Less: Dividends on preferred stock |
— | — | — | 470 | 470 | |||||||||||||||
| Net Income (Loss) Applicable to Common Shareholders |
$ | 10,977 | $ | 1,936 | $ | (8,759 | ) | $ | 1,344 | $ | 5,498 | |||||||||
| Per Common Share (2) |
||||||||||||||||||||
| Earnings (loss) (basic) |
$ | 0.61 | $ | 0.11 | $ | (0.49 | ) | $ | 0.07 | $ | 0.30 | |||||||||
| Earnings (loss) (diluted) |
$ | 0.61 | $ | 0.11 | $ | (0.49 | ) | $ | 0.07 | $ | 0.30 | |||||||||
| (1) | These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report. |
| (2) | Due to averaging of shares, quarterly earnings per share may not add up to the totals reported for the full year. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
This discussion should be read in conjunction with our Consolidated Financial Statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this report. 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 for the previous year.
Critical Accounting Policies
We have established certain accounting policies in preparing our Consolidated Financial Statements that are in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are presented in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. Certain of these policies require the use of judgments, estimates and economic assumptions which may prove inaccurate or are subject to variation that may significantly affect our reported results of operations and financial position for the periods presented or in future periods. Management believes that the judgments, estimates and economic assumptions used in the preparation of the Consolidated Financial Statements are appropriate given the factual circumstances at the time. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) is established to absorb known and inherent losses in our loan and lease portfolio. Our methodology in determining the appropriate level of the ALLL includes components for a general valuation allowance in accordance with the Contingencies topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), a specific valuation allowance in accordance with the Receivables topic of the FASB ASC and an unallocated component. Both quantitative and qualitative factors are considered in determining the appropriate level of the ALLL. Quantitative factors include historical loss experience, delinquency and charge-off trends, collateral values, past-due and nonperforming loan trends and the evaluation of specific loss estimates for problem loans. Qualitative factors include existing general economic and business conditions in our market areas as well as the duration of the current business cycle. Changes in any of the factors mentioned could have a significant impact on our calculation of the ALLL. Our ALLL policy and the judgments, estimates and economic assumptions involved are described in greater detail in the “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” section of this discussion and in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
Valuation and Recoverability of Goodwill
Goodwill represented $95.5 million of our $3.20 billion in total assets and $528.1 million in total shareholders’ equity as of December 31, 2009. Goodwill is assigned to reporting units for purposes of impairment testing. We review our goodwill for impairment annually, during the third quarter. The Company had three reporting units during the third quarter of 2009: retail banking, commercial banking, and private banking. All of the Company’s goodwill was assigned to the retail banking reporting unit. Goodwill of a reporting unit is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such indicators may include, among others: a significant adverse change in legal factors or in the general business climate; significant decline in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and an adverse action or assessment by a regulator. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.
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When required, the goodwill impairment test involves a two-step process. We first test goodwill for impairment by comparing the fair value of the reporting unit with its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the reporting unit, goodwill is not deemed to be impaired, and no further testing would be necessary. If the carrying amount of the reporting unit were to exceed the fair value of the reporting unit, we would perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. Specifically, we would allocate the fair value of the reporting unit to all of the assets and liabilities of the reporting unit in a hypothetical calculation that would determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference.
The accounting estimates related to our goodwill require us to make considerable assumptions about fair values. Our assumptions regarding fair values require significant judgment about economic factors, industry factors and technology considerations, as well as our views regarding the growth and earnings prospects of the retail banking unit. Changes in these judgments, either individually or collectively, may have a significant effect on the estimated fair values.
Based on the results of the annual goodwill impairment test, we determined no goodwill impairment charges were required for the year ended December 31, 2009. Even though we determined that there was no goodwill impairment during 2009, additional adverse changes in the operating environment for the financial services industry may result in a future impairment charge. Finally, in conjunction with the analysis of our operating segments during the fourth quarter (see Note 22 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report), we concluded that as of December 31, 2009 we had one, single reporting unit. As of December 31, 2009 we determined there were no events or circumstances which would more likely than not reduce the fair value of this reporting unit below its carrying amount. We also determined, had the annual goodwill impairment test been performed based upon one reporting unit as of September 30, 2009, the fair value of the single, consolidated reporting unit would have been in excess of its carrying value (including goodwill).
Please refer to Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report for further discussion.
2009 Overview
| • | Consolidated net loss applicable to common shareholders for 2009 was $8.4 million, or $0.38 per diluted common share, compared with net income of $5.5 million, or $0.30 per diluted common share, in 2008. Net income(loss) applicable to common shareholders reflects net income(loss) less dividends on preferred stock related to the Company’s participation in the Treasury’s Capital Purchase Program. The decrease in net income applicable to common shareholders is primarily due to a $63.5 million provision for loan and lease losses recorded during 2009. |
| • | Noninterest income was $29.7 million for 2009, an increase from $14.9 million for 2008. Excluding securities impairment charges of $19.5 million in 2008, net gains on sales of securities of $1.1 million in 2009 and $846 thousand in 2008 and proceeds from redemption of Visa and Mastercard stock of $49 thousand in 2009 and $3.0 million in 2008, noninterest income in 2009 was relatively flat when compared to 2008. Management believes that it is useful for investors to understand the impact of the impairment charge, nets gains on sales of securities and proceeds from redemption of Visa and Mastercard stock on the Company’s results of operations. Noninterest income accounted for 20% of the Company’s revenue in 2009, up from 11% in 2008 due primarily to the $19.5 million impairment charge in 2008. |
| • | Total assets at December 31, 2009 were $3.20 billion, up 3% from $3.10 billion at the end of 2008. Decreases in the loan portfolio were offset by higher investment securities and interest-earning deposits with bank balances. |
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| • | The allowance for loan and lease losses increased to $53.5 million at December 31, 2009 from $42.7 million at December 31, 2008. The Company’s allowance amounts to 2.66% of total loans, compared with 1.91% at the end of 2008. |
| • | Nonperforming loans totaled $110.5 million as of December 31, 2009, compared with $106.8 million at December 31, 2008. Net loan charge-offs were $52.8 million in 2009, compared with $25.0 million in 2008. The increase in nonaccruals occurred primarily in the Company’s commercial business portfolio and commercial real estate portfolio. The increase in net loan charge-offs occurred primarily in the commercial business and one-to-four family residential construction portfolios. |
| • | Investment securities available for sale totaled $620.0 million at December 31, 2009 compared to $528.9 million at December 31, 2008. |
| • | Deposits totaled $2.48 billion at December 31, 2009 compared to $2.38 billion at December 31, 2008. Core deposits totaled $2.07 billion at December 31, 2009, comprising 83% of total deposits compared to $1.94 billion, or 81%, of total deposits at December 31, 2008. |
| • | The Company is well capitalized with a total risk-based capital ratio of 19.60% at December 31, 2009 compared to 14.25% at December 31, 2008. These ratios reflect the net proceeds to the Company of $113.5 million from an underwritten public offering of common shares completed in August, 2009 as well as proceeds of $76.9 million from the issuance of preferred under the Treasury’s Capital Purchase Program. |
Recent Developments
On January 22, 2010, Columbia State Bank acquired all of the deposits and certain assets of Columbia River Bank from the FDIC, which was appointed receiver of Columbia River Bank. Columbia State Bank acquired approximately $903 million in assets and approximately $891 million in deposits located in 21 branches in Oregon and Washington. Columbia River Bank’s loans and other real estate assets acquired of approximately $696 million are subject to a loss-sharing agreement with the FDIC. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $43.9 million on net assets acquired.
On January 29, 2010 Columbia State Bank acquired substantially all of the deposits and assets of American Marine Bank from the FDIC, which was appointed receiver of American Marine Bank. Columbia State Bank acquired approximately $308 million in assets and approximately $253 million in deposits located in 11 branches on the western Puget Sound. American Marine Bank’s loans and other real estate assets acquired of approximately $257 million are subject to a loss-sharing agreement with the FDIC. In addition, Columbia State Bank will continue to operate the Trust and Wealth Management Division of American Marine Bank. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $23.0 million on net assets acquired.
Business Combinations
In July, 2007, the Company acquired all of the outstanding common stock of Mountain Bank Holding Company (“Mt. Rainier “), the parent company of Mt. Rainier National Bank, headquartered in Enumclaw, Washington and Town Center Bancorp (“Town Center”), the parent company of Town Center Bank, headquartered in Portland, Oregon. The acquisitions were consistent with our expansion strategy and added seven branches in King and Pierce counties and five Oregon branches in the North Clackamas and Southeast Portland areas.
The operating results of Mt. Rainier and Town Center were included in the Company’s operating results beginning July 23, 2007; consequently, 2009 and 2008 operating results are not directly comparable to the 2007 results for the same periods. For comparison purposes to prior periods, as of July 23, 2007 Mt. Rainier and Town Center combined contributed $360 million in assets, $287 million in loans and $305 million in deposits.
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RESULTS OF OPERATIONS
Summary
A summary of the Company’s results of operations on a fully taxable-equivalent basis for each of the last five years ended December 31 follows:
| Year Ended 2009 |
Increase (Decrease) |
Year Ended 2008 |
Increase (Decrease) |
Years ended December 31, | |||||||||||||||||||||||||||
| Amount | % | Amount | % | 2007 | 2006 | 2005 | |||||||||||||||||||||||||
| (in thousands, except per share amounts) |
|||||||||||||||||||||||||||||||
| Interest income (1) |
$ | 148,163 | $ | (32,199 | ) | (18 | ) | $ | 180,362 | $ | (8,192 | ) | (4 | ) | $ | 188,554 | $ | 155,557 | $ | 124,715 | |||||||||||
| Interest expense |
27,683 | (27,864 | ) | (50 | ) | 55,547 | (19,850 | ) | (26 | ) | 75,397 | 53,912 | 31,295 | ||||||||||||||||||
| Net interest income |
120,480 | (4,335 | ) | (3 | ) | 124,815 | 11,658 | 10 | 113,157 | 101,645 | 93,420 | ||||||||||||||||||||
| Provision for loan and lease losses |
63,500 | 22,324 | 54 | 41,176 | 37,571 | 1,042 | 3,605 | 2,065 | 1,520 | ||||||||||||||||||||||
| Noninterest income |
29,690 | 14,840 | 100 | 14,850 | (12,898 | ) | (46 | ) | 27,748 | 24,672 | 24,786 | ||||||||||||||||||||
| Noninterest expense: |
|||||||||||||||||||||||||||||||
| Staff expense |
47,275 | (2,040 | ) | (4 | ) | 49,315 | 2,612 | 6 | 46,703 | 38,769 | 37,285 | ||||||||||||||||||||
| Other expense |
47,213 | 4,403 | 10 | 42,810 | 684 | 2 | 42,126 | 37,365 | 35,570 | ||||||||||||||||||||||
| Total |
94,488 | 2,363 | 3 | 92,125 | 3,296 | 4 | 88,829 | 76,134 | 72,855 | ||||||||||||||||||||||
| Income (loss) before income taxes |
(7,818 | ) | (14,182 | ) | (223 | ) | 6,364 | (42,107 | ) | (87 | ) | 48,471 | 48,118 | 43,831 | |||||||||||||||||
| Provision (benefit) for income taxes |
(8,978 | ) | (4,072 | ) | 83 | (4,906 | ) | (16,659 | ) | (142 | ) | 11,753 | 12,133 | 11,692 | |||||||||||||||||
| Less: adjustments (1) |
5,128 | (174 | ) | (3 | ) | 5,302 | 965 | 22 | 4,337 | 3,882 | 2,508 | ||||||||||||||||||||
| Net income (loss) |
$ | (3,968 | ) | $ | (9,936 | ) | (166 | ) | $ | 5,968 | $ | (26,413 | ) | (82 | ) | $ | 32,381 | $ | 32,103 | $ | 29,631 | ||||||||||
| Less: Dividends on preferred stock |
4,403 | 3,933 | 837 | 470 | 470 | NM | — | — | — | ||||||||||||||||||||||
| Net income (loss) applicable to common shareholders |
$ | (8,371 | ) | $ | (13,869 | ) | (252 | ) | $ | 5,498 | $ | (26,883 | ) | (83 | ) | $ | 32,381 | $ | 32,103 | $ | 29,631 | ||||||||||
| Earnings (loss) per common share, diluted |
$ | (0.38 | ) | $ | (0.68 | ) | (227 | ) | $ | 0.30 | $ | (1.59 | ) | (84 | ) | $ | 1.89 | $ | 1.98 | $ | 1.86 | ||||||||||
| (1) | Includes amounts to convert nontaxable income to a fully taxable-equivalent yield. To compare tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35%. |
NM –Not Meaningful
Net Interest Income
Net interest income is the difference between interest income and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total interest-earning assets is referred to as the net interest margin, which represents the average net effective yield on interest-earning assets.
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The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to interest-earning liabilities:
Net Interest Income Summary
| 2009 | 2008 | 2007 | |||||||||||||||||||||||||
| Average Balances (1) |
Interest Earned/ Paid |
Average Rate |
Average Balances (1) |
Interest Earned/ Paid |
Average Rate |
Average Balances (1) |
Interest Earned/ Paid |
Average Rate |
|||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||
| ASSETS |
|||||||||||||||||||||||||||
| Loans (1)(2) |
$ | 2,124,574 | $ | 117,497 | 5.53 | % | $ | 2,264,486 | $ | 148,240 | 6.55 | % | $ | 1,990,622 | $ | 156,253 | 7.85 | % | |||||||||
| Taxable securities |
386,571 | 17,300 | 4.48 | % | 379,052 | 18,852 | 4.97 | % | 395,512 | 18,685 | 4.72 | % | |||||||||||||||
| Tax exempt securities (2) |
197,457 | 13,151 | 6.66 | % | 186,246 | 12,868 | 6.91 | % | 185,610 | 12,189 | 6.57 | % | |||||||||||||||
| Interest-earning deposits with banks and federal funds sold |
75,260 | 215 | 0.29 | % | 21,771 | 402 | 1.85 | % | 27,635 | 1,427 | 5.16 | % | |||||||||||||||
| Total interest-earning assets |
$ | 2,783,862 | $ | 148,163 | 5.32 | % | $ | 2,851,555 | $ | 180,362 | 6.33 | % | $ | 2,599,379 | $ | 188,554 | 7.25 | % | |||||||||
| Other earning assets |
49,488 | 47,753 | 42,334 | ||||||||||||||||||||||||
| Noninterest-earning assets |
251,071 | 234,746 | 195,449 | ||||||||||||||||||||||||
| Total assets |
$ | 3,084,421 | $ | 3,134,054 | $ | 2,837,162 | |||||||||||||||||||||
| LIABILITIES AND |
|||||||||||||||||||||||||||
| Certificates of deposit |
$ | 706,799 | $ | 15,931 | 2.25 | % | $ | 780,092 | $ | 28,120 | 3.60 | % | $ | 698,078 | $ | 31,274 | 4.48 | % | |||||||||
| Savings accounts |
133,348 | 352 | 0.26 | % | 118,073 | 437 | 0.37 | % | 111,265 | 467 | 0.42 | % | |||||||||||||||
| Interest-bearing demand |
458,450 | 2,221 | 0.48 | % | 445,449 | 6,009 | 1.35 | % | 435,807 | 11,026 | 2.53 | % | |||||||||||||||
| Money market accounts |
568,320 | 4,746 | 0.84 | % | 578,123 | 10,741 | 1.86 | % | 558,510 | 17,163 | 3.07 | % | |||||||||||||||
| Total interest-bearing deposits |
1,866,917 | 23,250 | 1.25 | % | 1,921,737 | 45,307 | 2.36 | % | 1,803,660 | 59,930 | 3.32 | % | |||||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank borrowings |
149,416 | 2,759 | 1.85 | % | 297,193 | 7,573 | 2.55 | % | 207,521 | 11,065 | 5.33 | % | |||||||||||||||
| Long-term subordinated debt |
25,635 | 1,197 | 4.67 | % | 25,558 | 1,800 | 7.04 | % | 23,777 | 2,177 | 9.16 | % | |||||||||||||||
| Other borrowings and interest-bearing liabilities |
25,046 | 477 | 1.90 | % | 32,934 | 867 | 2.63 | % | 40,606 | 2,225 | 5.48 | % | |||||||||||||||
| Total interest-bearing liabilities |
$ | 2,067,014 | $ | 27,683 | 1.34 | % | $ | 2,277,422 | $ | 55,547 | 2.44 | % | $ | 2,075,564 | $ | 75,397 | 3.63 | % | |||||||||
| Noninterest-bearing deposits |
511,259 | 460,747 | 438,474 | ||||||||||||||||||||||||
| Other noninterest-bearing liabilities |
44,021 | 41,498 | 33,827 | ||||||||||||||||||||||||
| Shareholders’ equity |
462,127 | 354,387 | 289,297 | ||||||||||||||||||||||||
| Total liabilities & shareholders’ equity |
$ | 3,084,421 | $ | 3,134,054 | $ | 2,837,162 | |||||||||||||||||||||
| Net interest income |
$ | 120,480 | $ | 124,815 | $ | 113,157 | |||||||||||||||||||||
| Net interest spread |
3.98 | % | 3.89 | % | 3.62 | % | |||||||||||||||||||||
| Net interest margin |
4.33 | % | 4.38 | % | 4.35 | % | |||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
134.68 | % | 125.21 | % | 125.24 | % | |||||||||||||||||||||
| (1) | Nonaccrual loans were included in loans. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $2.8 million in 2009, $3.5 million in 2008, $3.5 million in 2007. |
| (2) | Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%. |
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Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and the mix of interest-earning assets and interest-bearing liabilities. The following table shows changes in net interest income on a fully taxable-equivalent basis between 2009 and 2008, as well as between 2008 and 2007 broken down between volume and rate. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
Changes in Net Interest Income
| 2009 Compared to 2008 Increase (Decrease) Due to |
2008 compared to 2007 (1) Increase (Decrease) Due to |
|||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Interest Income |
||||||||||||||||||||||||
| Loans |
$ | (8,754 | ) | $ | (21,989 | ) | $ | (30,743 | ) | $ | 19,880 | $ | (27,893 | ) | $ | (8,013 | ) | |||||||
| Securities |
1,125 | (2,394 | ) | (1,269 | ) | (754 | ) | 1,600 | 846 | |||||||||||||||
| Interest earning deposits with banks and federal funds sold |
367 | (554 | ) | (187 | ) | (255 | ) | (770 | ) | (1,025 | ) | |||||||||||||
| Interest income |
$ | (7,262 | ) | $ | (24,937 | ) | $ | (32,199 | ) | $ | 18,871 | $ | (27,063 | ) | $ | (8,192 | ) | |||||||
| Interest Expense |
||||||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||
| Certificates of deposit |
$ | (2,444 | ) | $ | (9,745 | ) | $ | (12,189 | ) | $ | 3,405 | $ | (6,559 | ) | $ | (3,154 | ) | |||||||
| Savings accounts |
51 | (136 | ) | (85 | ) | 27 | (57 | ) | (30 | ) | ||||||||||||||
| Interest-bearing demand |
170 | (3,958 | ) | (3,788 | ) | 239 | (5,256 | ) | (5,017 | ) | ||||||||||||||
| Money market accounts |
(179 | ) | (5,816 | ) | (5,995 | ) | 583 | (7,005 | ) | (6,422 | ) | |||||||||||||
| Total interest on deposits |
(2,402 | ) | (19,655 | ) | (22,057 | ) | 4,254 | (18,877 | ) | (14,623 | ) | |||||||||||||
| FHLB and FRB borrowings |
(3,098 | ) | (1,716 | ) | (4,814 | ) | 3,651 | (7,143 | ) | (3,492 | ) | |||||||||||||
| Long-term subordinated debt & trust preferred obligations |
5 | (608 | ) | (603 | ) | 154 | (531 | ) | (377 | ) | ||||||||||||||
| Other borrowings |
(181 | ) | (209 | ) | (390 | ) | (362 | ) | (996 | ) | (1,358 | ) | ||||||||||||
| Interest expense |
$ | (5,676 | ) | $ | (22,188 | ) | $ | (27,864 | ) | $ | 7,697 | $ | (27,547 | ) | $ | (19,850 | ) | |||||||
| (1) | Certain prior period balances have been reclassified to conform to the current period presentation. |
Taxable-equivalent net interest income totaled $120.5 million in 2009, compared with $124.8 million for 2008. A reduction in interest rates from 2009 to 2008 contributed to the decline in net interest income, lowering the yield on earning assets 101 basis points compared to a 110 basis point decrease in the cost of interest-bearing liabilities. The net effect of these rate changes was a decrease in net interest income of $2.7 million. Net interest income for 2009 also includes $2.6 million in income from the settlement of interest rate floor contracts compared with $1.7 million in 2008.
The net interest margin was up slightly in 2008 compared to 2007, increasing 3 basis points to 4.38% from 4.35%. Average loan yields decreased 92 basis points with average deposit costs decreasing 96 basis points from 2007. In addition, average borrowing costs from the Federal Home Loan Bank and Federal Reserve Bank decreased 278 basis points.
Provision for Loan and Lease Losses
The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses and provision for loan and lease losses. The provision is the expense recognized in the consolidated statements of income to adjust the allowance to the levels deemed appropriate by management, as
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determined through its application of the Company’s allowance methodology procedures. For discussion over the methodology used by management in determining the adequacy of the ALLL see the following “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” and “Critical Accounting Policies” sections of this discussion.
The Company recorded expense of $63.5 million and $41.2 million through the provision for loan and lease losses in 2009 and 2008, respectively. The provision recorded in 2009 reflects management’s ongoing assessment of the credit quality of the Company’s loan portfolio, which is impacted by various economic trends, including continued weakness in the Pacific Northwest economy. Additional factors affecting the provision include trends in nonperforming loans, size and composition of the loan portfolio and changes in the economic environment during the period. See “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” section of this discussion for further information on factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.
For the years ended December 31, 2009, 2008, and 2007, net loan charge-offs amounted to $52.8 million, $25.0 million and $380 thousand, respectively. Loans in the real estate construction portfolio accounted for 69% of the 2009 net charge-offs while loans in the commercial business portfolio accounted for an additional 23% of the 2009 net charge-offs compared to 82% and 10%, respectively, in 2008.
Noninterest Income
Noninterest income for the year totaled $29.7 million, an increase of $14.8 million, from 2008. Noninterest income represented 20% of total revenues in 2009, compared with 11% and 20% in 2008 and 2007, respectively. 2008 noninterest income was lower than 2009 and 2007 primarily due to the $19.5 million impairment charge on investment securities described below, partially offset by the $3.0 million gain from the redemption of Visa and Mastercard shares described below. Excluding securities impairment charges of $19.5 million in 2008, net gains on sales of securities of $1.1 million in 2009 and $846 thousand in 2008 and proceeds from redemption of Visa and Mastercard stock of $49 thousand in 2009 and $3.0 million in 2008, noninterest income in 2009 was relatively flat when compared to 2008. Management believes that it is useful for investors to understand the impact of the impairment charge, net gains on sales of securities and proceeds from redemption of Visa and Mastercard stock on the Company’s results of operations.
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The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
| Years ended December 31, | ||||||||||||||||||||||||
| 2009 | $ Change |
% Change |
2008 | $ Change |
% Change |
2007 | ||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Fees and Other Income |
||||||||||||||||||||||||
| Service charges, loan fees and other fees |
$ | 15,181 | $ | 368 | 2 | % | $ | 14,813 | $ | 1,315 | 10 | % | $ | 13,498 | ||||||||||
| Merchant services fees |
7,321 | (719 | ) | -9 | % | 8,040 | (333 | ) | -4 | % | 8,373 | |||||||||||||
| Redemption of Visa and Mastercard shares |
49 | (2,979 | ) | -98 | % | 3,028 | 3,028 | 100 | % | — | ||||||||||||||
| Gain on sale of investment securities, net |
1,077 | 231 | 27 | % | 846 | 846 | 100 | % | — | |||||||||||||||
| Impairment charge on investment securities |
— | 19,541 | -100 | % | (19,541 | ) | (19,541 | ) | -100 | % | — | |||||||||||||
| Bank owned life insurance (BOLI) |
2,023 | (52 | ) | -3 | % | 2,075 | 189 | 10 | % | 1,886 | ||||||||||||||
| Other Income |
4,039 | (1,550 | ) | -28 | % | 5,589 | 1,598 | 40 | % | 3,991 | ||||||||||||||
| Total noninterest income |
$ | 29,690 | $ | 14,840 | 100 | % | $ | 14,850 | $ | (12,898 | ) | -46 | % | $ | 27,748 | |||||||||
Service charges, loan fees and other fees had a slight increase of $368 thousand in 2009 over 2008, or 2%. Service charges, loan fees and other fees increased $1.3 million in 2008 over 2007, or 10%, due to higher transaction volumes.
Merchant services fees declined $719 thousand in 2009 over 2008, or 9%. Merchant services fees declined $333 thousand in 2008 over 2007. These reductions reflect lower volumes of merchant activity.
Proceeds from the redemption of Visa and Mastercard shares totaled $49 thousand and $3.0 million in 2009 and 2008, respectively. There was no redemption of these shares in 2007.
The impairment charge on investment securities was $19.5 million in 2008 due to the impairment charge on Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) preferred stock resulting from these government-sponsored enterprises being placed into conservatorship in a plan announced by the U.S. Treasury Department (“Treasury”) and the Federal Housing Finance Agency (“FHFA”). There was no impairment charge on investment securities in 2009 or 2007. During the fourth quarter of 2009, all of the Company’s Freddie Mac and Fannie Mae preferred stock was sold resulting in a net gain on sale of $166 thousand.
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Other Noninterest Income: The following table presents selected items of “other noninterest income” and the related dollar and percentage change from period to period:
| Years ended December 31, | |||||||||||||||||||||||
| 2009 | $ Change |
% Change |
2008 | $ Change |
% Change |
2007 | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Gain on disposal of assets |
$ | 114 | $ | (378 | ) | -77 | % | $ | 492 | $ | 227 | 86 | % | $ | 265 | ||||||||
| Mortgage banking |
382 | (246 | ) | -39 | % | 628 | 91 | 17 | % | 537 | |||||||||||||
| Cash management 12b-1 fees |
245 | (221 | ) | -47 | % | 466 | 67 | 17 | % | 399 | |||||||||||||
| Letter of credit fees |
528 | 101 | 24 | % | 427 | 28 | 7 | % | 399 | ||||||||||||||
| Late charges |
307 | (31 | ) | -9 | % | 338 | 88 | 35 | % | 250 | |||||||||||||
| Currency exchange income |
293 | (63 | ) | -18 | % | 356 | 40 | 13 | % | 316 | |||||||||||||
| New Markets Tax Credit dividend |
66 | (8 | ) | -11 | % | 74 | (19 | ) | -20 | % | 93 | ||||||||||||
| Miscellaneous fees on loans |
842 | (73 | ) | -8 | % | 915 | 45 | 5 | % | 870 | |||||||||||||
| Interest rate swap income |
265 | (382 | ) | -59 | % | 647 | 422 | 188 | % | 225 | |||||||||||||
| Credit card fees |
127 | (15 | ) | -11 | % | 142 | 61 | 75 | % | 81 | |||||||||||||
| Life insurance death benefit |
— | (612 | ) | 100 | % | 612 | 612 | 0 | % | 0 | |||||||||||||
| Miscellaneous |
870 | 378 | 77 | % | 492 | (64 | ) | -12 | % | 556 | |||||||||||||
| Total noninterest income |
$ | 4,039 | $ | (1,550 | ) | -28 | % | $ | 5,589 | $ | 1,598 | 40 | % | $ | 3,991 | ||||||||
Included in gain on disposal of assets are amounts related to the sale and lease-back of two buildings which occurred in September 2004. The resulting $1.3 million gain on the sale was deferred and recognized over the life of the leases, the unamortized gain balance at December 31, 2009 and 2008 was $400 thousand and $483 thousand, respectively, and is included in other liabilities on our consolidated balance sheets. During 2009, 2008 and 2007 the Company recognized amortized gains associated with the sale and lease-back transaction of $83 thousand, $83 thousand and $219 thousand, respectively.
The decrease in other noninterest income was primarily due to the reductions in interest rate swap, mortgage banking and cash management fee income as well as the receipt in 2008 of life insurance death benefit proceeds. Interest rate swap and mortgage banking income decreased due to reduced transaction volumes.
Noninterest Expense
Noninterest expense was $94.5 million in 2009, an increase of $2.4 million, or 3%, over 2008. Noninterest expense increased $3.3 million, or 4%, in 2008 over 2007.
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
| Years ended December 31, | ||||||||||||||||||||||||
| 2009 | $ Change |
% Change |
2008 | $ Change |
% Change |
2007 | ||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Compensation and employee benefits |
$ | 47,275 | $ | (2,040 | ) | -4 | % | $ | 49,315 | $ | 2,612 | 6 | % | $ | 46,703 | |||||||||
| All other noninterest expense: |
||||||||||||||||||||||||
| Occupancy |
12,128 | (710 | ) | -6 | % | 12,838 | 516 | 4 | % | 12,322 | ||||||||||||||
| Merchant processing |
3,449 | (109 | ) | -3 | % | 3,558 | 88 | 3 | % | 3,470 | ||||||||||||||
| Advertising and promotion |
1,943 | (381 | ) | -16 | % | 2,324 | (67 | ) | -3 | % | 2,391 | |||||||||||||
| Data processing |
4,047 | 561 | 16 | % | 3,486 | 922 | 36 | % | 2,564 | |||||||||||||||
| Legal and professional services |
3,871 | 1,902 | 97 | % | 1,969 | (2,943 | ) | -60 | % | 4,912 | ||||||||||||||
| Taxes, license and fees |
2,478 | (439 | ) | -15 | % | 2,917 | 35 | 1 | % | 2,882 | ||||||||||||||
| Regulatory premiums |
5,777 | 3,636 | 170 | % | 2,141 | 1,634 | 322 | % | 507 | |||||||||||||||
| Net cost operation of other real estate owned |
861 | 910 | -1857 | % | (49 | ) | (54 | ) | -1080 | % | 5 | |||||||||||||
| Other |
12,659 | (967 | ) | -7 | % | 13,626 | 553 | 4 | % | 13,073 | ||||||||||||||
| Total all other noninterest expense |
47,213 | 4,403 | 10 | % | 42,810 | 684 | 2 | % | 42,126 | |||||||||||||||
| Total noninterest expense |
$ | 94,488 | $ | 2,363 | 3 | % | $ | 92,125 | $ | 3,296 | 4 | % | $ | 88,829 | ||||||||||
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Compensation and employee benefits expense decreased to $47.2 million, or 4% in 2009 from $49.3 million in 2008 reflecting staffing decreases and reductions in employee benefits from the prior year. Compensation and employee benefits expense increased 6% in 2008 from 2007 largely due to a full year of employee expenses related to our two acquisitions. Full-time equivalent staff decreased to 715 at December 31, 2009 from 735 at December 31, 2008 and 775 at December 31, 2007.
The remaining noninterest expense categories increased $4.4 million or 10%, between 2008 and 2009. Regulatory premiums expense increased $3.6 million. This increase is due primarily to significantly higher FDIC premium assessment rates as well as a special assessment imposed by the FDIC on all insured depository institutions. The increased assessment rate as well as the special assessment is the result of losses incurred by the Deposit Insurance Fund and not directly related to the Company’s performance. Finally, legal and professional services expense increased $1.9 million and the net cost of operation of other real estate increased $910 thousand.
The remaining noninterest expense categories increased $684 thousand or 2%, between 2007 and 2008 million largely due to our 2007 acquisitions. The decrease in legal and professional fees between 2007 and 2008 was attributed to the reversal of previously expensed legal costs in the amount of $1.3 million related to our Visa litigation reserve. In the fourth quarter of 2007 we established a litigation reserve through legal expense in the amount of $1.8 million. During 2008 we were able to reduce our litigation reserve by $1.3 million due to the economic benefit resulting from our pro-rata share of the funds Visa placed into an escrow account established to pay for the settlement of the litigation liabilities. At December 31, 2009 and 2008 our remaining accrual for the Visa litigation liability was $317 thousand and $485 thousand, respectively.
Other Noninterest Expense: The following table presents selected items of “other noninterest expense” and the related dollar and percentage change from period to period:
| Years ended December 31, | |||||||||||||||||||||||
| 2009 | $ Change |
% Change |
2008 | $ Change |
% Change |
2007 | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| CRA partnership investment expense (1) |
$ | 501 | $ | (167 | ) | -25 | % | $ | 668 | $ | (64 | ) | -9 | % | $ | 732 | |||||||
| Core deposit intangible amortization |
1,046 | (96 | ) | -8 | % | 1,142 | 423 | 59 | % | 719 | |||||||||||||
| Software support & maintenance |
639 | (74 | ) | -10 | % | 713 | (133 | ) | -16 | % | 846 | ||||||||||||
| Federal Reserve Bank processing fees |
326 | (96 | ) | -23 | % | 422 | (18 | ) | -4 | % | 440 | ||||||||||||
| Telephone & network communications |
1,435 | (92 | ) | -6 | % | 1,527 | 293 | 24 | % | 1,234 | |||||||||||||
| Supplies |
889 | (175 | ) | -16 | % | 1,064 | (300 | ) | -22 | % | 1,364 | ||||||||||||
| Postage |
1,245 | (175 | ) | -12 | % | 1,420 | 53 | 4 | % | 1,367 | |||||||||||||
| Sponsorships & charitable contributions |
598 | (44 | ) | -7 | % | 642 | 19 | 3 | % | 623 | |||||||||||||
| Travel |
402 | (69 | ) | -15 | % | 471 | 18 | 4 | % | 453 | |||||||||||||
| Investor relations |
204 | 22 | 12 | % | 182 | (46 | ) | -20 | % | 228 | |||||||||||||
| Insurance |
500 | (5 | ) | -1 | % | 505 | 57 | 13 | % | 448 | |||||||||||||
| Director expenses |
440 | (13 | ) | -3 | % | 453 | 30 | 7 | % | 423 | |||||||||||||
| Employee expenses |
350 | (249 | ) | -42 | % | 599 | (64 | ) | -10 | % | 663 | ||||||||||||
| ATM Network |
595 | (64 | ) | -10 | % | 659 | 3 | 0 | % | 656 | |||||||||||||
| Miscellaneous |
3,489 | 330 | 10 | % | 3,159 | 282 | 10 | % | 2,877 | ||||||||||||||
| Total other noninterest expense |
$ | 12,659 | $ | (967 | ) | -7 | % | $ | 13,626 | $ | 553 | 4 | % | $ | 13,073 | ||||||||
| (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 twelve months ended December 31, 2009, $511 thousand of such credits was taken as a reduction in our current period income tax expense. In addition, our taxable income was decreased by $178 thousand during the twelve months ended December 31, 2009 as a result of the tax benefit associated with this investment expense. |
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Income Tax
For the years ended December 31, 2009, 2008, and 2007, we recorded income tax benefits of $9.0 million and $4.9 million, and an income tax provision of $11.8 million, respectively. The effective tax benefit was 69.3% in 2009 and 463% in 2008 and the effective tax rate was 26.6% in 2007. Our effective tax rate is less than our statutory rate of 35.52% and has exhibited a declining trend over the past three years. This decline is primarily due to a significant increase in the amount of tax-exempt municipal securities held in the investment portfolio, tax exempt earnings on bank owned life insurance, and tax credits received on investments in affordable housing partnerships. For additional information, see Note 14 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
Financial Condition
Our total assets increased 3% to $3.20 billion at December 31, 2009 from $3.10 billion at December 31, 2008. Interest-earning deposits with bank balances increased $245.3 million. The inability to prepay advances from the Federal Home Loan Bank contributed to this increase. Our investment portfolio increased 17% or $91.1 million. This increase was primarily a result of investment security purchases in the third quarter of 2009. The loan portfolio decreased 10% or $223.4 million to $2.01 billion. The decline in the loan portfolio can be attributed to a combination of loan payoffs, pay downs, a reduced emphasis on lending in certain sectors of the loan portfolio, and loan charge-offs. Deposit balances increased $100.6 million or 4% to $2.48 billion and borrowings decreased 44% to $125.0 million.
Investment Portfolio
We invest in securities to generate revenues for the Company, to manage liquidity while minimizing interest rate risk, and to provide collateral for certain public deposits and short-term borrowings. The amortized cost amounts represent the Company’s original cost for the investments, adjusted for accumulated amortization or accretion of any yield adjustments related to the security. The estimated fair values are the amounts that we believe the securities could be sold for as of the dates indicated. As of December 31, 2009 we had 34 available for sale securities in an unrealized loss position. Based on past experience with these types of securities and our own financial performance, we do not intend to sell any impaired securities nor does available evidence suggest it is more likely than not that management will be required to sell any impaired securities before the recovery of the amortized cost basis. We review these investments for other-than-temporary impairment on an ongoing basis.
Purchases during 2009 totaled $162.4 million while maturities and repayments and sales totaled $67.7 million compared to purchases of $89.1 million and maturities and repayments of $49.7 million during 2008. At December 31, 2009 U.S. Government agency and government-sponsored enterprise mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) comprised 65% of our investment portfolio and state and municipal securities were 35%. Our entire investment portfolio is categorized as available for sale and carried on our balance sheet at their fair values. The average duration of our investment portfolio was approximately 3 years and 10 months at December 31, 2009. For further information on our investment portfolio see Note 4 of the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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The following table presents the contractual maturities and weighted average yield of our investment portfolio:
Securities Available for Sale
| December 31, 2009 | |||||||||
| Amortized Cost |
Fair Value |
Yield | |||||||
| (dollars in thousands) | |||||||||
| U.S. Government agency and government-sponsored enterprise mortgage-backed securities & collateralized mortgage obligations (1) |
|||||||||
| Over 1 through 5 years |
$ | 41,884 | $ | 43,254 | 4.63 | % | |||
| Over 5 through 10 years |
62,869 | 64,687 | 4.57 | % | |||||
| Over 10 years |
285,935 | 292,215 | 4.28 | % | |||||
| Total |
$ | 390,688 | $ | 400,156 | 4.37 | % | |||
| State and municipal securities (2) |
|||||||||
| Due through 1 year |
$ | 1,385 | $ | 1,402 | 5.58 | % | |||
| Over 1 through 5 years |
18,875 | 20,328 | 6.70 | % | |||||
| Over 5 through 10 years |
42,499 | 45,020 | 6.03 | % | |||||
| Over 10 years |
148,228 | 152,161 | 6.66 | % | |||||
| Total |
$ | 210,987 | $ | 218,911 | 6.52 | % | |||
| (1) | The maturities reported for mortgage-backed securities collateralized mortgage obligations are based on contractual maturities and principal amortization. |
| (2) | Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%. |
FHLB Stock
As a condition of membership in the Federal Home Loan Bank of Seattle (“FHLB”), the Company is required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. Our FHLB stock has a par value of $100 and is redeemable at par for cash.
FHLB stock is carried at cost and is subject to recoverability testing per the Financial Services—Depository and Lending topic of the FASB ASC. The FHLB is currently classified as undercapitalized by the Federal Housing Finance Agency (“Finance Agency”). Under Finance Agency regulations, a Federal Home Loan Bank that fails to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital stock. However, management believes, despite the undercapitalized classification, the FHLB has adequate capital to cover the risks reflected on their balance sheet. Accordingly, as of December 31, 2009 we did not recognize an impairment charge related to our FHLB stock holdings. We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of our investment.
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Loan Portfolio
We are a full service commercial bank, which originates a wide variety of loans, and concentrates its lending efforts on originating commercial business and commercial real estate loans. The following table sets forth our loan portfolio by type of loan for the dates indicated:
| December 31, | |||||||||||||||||||||||||||||||||||
| 2009 | % of Total |
2008 | % of Total |
2007 | % of Total |
2006 | % of Total |
2005 | % of Total |
||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Commercial business |
$ | 744,440 | 37.1 | % | $ | 810,922 | 36.3 | % | $ | 762,365 | 33.4 | % | $ | 617,899 | 36.1 | % | $ | 570,974 | 36.5 | % | |||||||||||||||
| Real estate: |
|||||||||||||||||||||||||||||||||||
| One-to-four family residential |
63,364 | 3.1 | % | 57,237 | 2.6 | % | 60,991 | 2.7 | % | 51,277 | 3.0 | % | 74,930 | 4.8 | % | ||||||||||||||||||||
| Commercial and five or more family residential properties |
856,260 | 42.6 | % | 862,595 | 38.6 | % | 852,139 | 37.3 | % | 687,635 | 40.3 | % | 651,393 | 41.6 | % | ||||||||||||||||||||
| Total real estate |
919,624 | 45.7 | % | 919,832 | 41.2 | % | 913,130 | 40.0 | % | 738,912 | 43.3 | % | 726,323 | 46.4 | % | ||||||||||||||||||||
| Real estate construction: |
|||||||||||||||||||||||||||||||||||
| One-to-four family residential |
107,620 | 5.4 | % | 209,682 | 9.4 | % | 269,115 | 11.8 | % | 92,124 | 5.4 | % | 41,033 | 2.6 | % | ||||||||||||||||||||
| Commercial and five or more family residential properties |
41,829 | 2.1 | % | 81,176 | 3.6 | % | 165,490 | 7.2 | % | 115,185 | 6.8 | % | 89,134 | 5.7 | % | ||||||||||||||||||||
| Total real estate construction |
149,449 | 7.5 | % | 290,858 | 13.0 | % | 434,605 | 19.0 | % | 207,309 | 12.2 | % | 130,167 | 8.3 | % | ||||||||||||||||||||
| Consumer |
199,987 | 10.0 | % | 214,753 | 9.7 | % | 176,559 | 7.8 | % | 147,782 | 8.6 | % | 140,110 | 9.0 | % | ||||||||||||||||||||
| Subtotal |
2,013,500 | 100.2 | % | 2,236,365 | 100.2 | % | 2,286,659 | 100.2 | % | 1,711,902 | 100.2 | % | 1,567,574 | 100.2 | % | ||||||||||||||||||||
| Less deferred loan fees and other |
(4,616 | ) | -0.2 | % | (4,033 | ) | -0.2 | % | (3,931 | ) | -0.2 | % | (2,940 | ) | -0.2 | % | (2,870 | ) | -0.2 | % | |||||||||||||||
| Total loans |
$ | 2,008,884 | 100.0 | % | $ | 2,232,332 | 100.0 | % | $ | 2,282,728 | 100.0 | % | $ | 1,708,962 | 100.0 | % | $ | 1,564,704 | 100.0 | % | |||||||||||||||
| Loans held for sale |
$ | — | $ | 1,964 | $ | 4,482 | $ | 933 | $ | 1,850 | |||||||||||||||||||||||||
At December 31, 2009, total loans were $2.01 billion compared with $2.23 billion in the prior year, a decrease of $223.4 million or 10%. Generally, loan volumes were down across all categories with significant declines in real estate construction and commercial business loans. Total loans represented 63% and 72% of total assets at December 31, 2009 and 2008, respectively. Although balances declined during 2009, the compound annual growth rate of our loan portfolio over the last five years is 8%.
Commercial Business Loans: Commercial loans decreased $66.5 million, or 8%, to $744.4 million from year-end 2008, representing 37% of total loans at year end. We are committed to providing competitive commercial banking in our primary market areas. We expect our commercial lending focus to center around expanding our existing banking relationships with businesses and business owners while continuing to build new customer relationships.
Real Estate Loans: Residential real estate loans in our portfolio are secured by properties located within our primary market area, and typically have loan-to-value ratios of 80% or lower at origination. These loans are used to collateralize outstanding advances from the FHLB and borrowings from the FRB. Previously, we originated residential loans for sale to third parties. Currently, we generally do not originate purchase money residential loans but rather refer customers seeking such loans to third parties.
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.
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Real Estate Construction Loans: 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. The recent economic environment has resulted in the Company having a substantially reduced desire to originate these types of loans. However, when we do originate such loans we endeavor to maintain the highest practical underwriting standards.
Currently, on a selected basis, 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.
Consumer Loans: Consumer loans made by us include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans, and miscellaneous personal loans.
Foreign Outstanding: We are not involved with loans to foreign companies and foreign countries.
For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 6 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the maturity distribution of our commercial and real estate construction loan portfolios and the sensitivity of these loans due after one year to changes in interest rates as of December 31, 2009:
| Maturing | ||||||||||||
| Due Through 1 Year |
Over 1 Through 5 Years |
Over 5 Years |
Total | |||||||||
| (in thousands) | ||||||||||||
| Commercial business |
$ | 346,818 | $ | 228,791 | $ | 168,831 | $ | 744,440 | ||||
| Real estate construction |
116,223 | 23,736 | 9,490 | 149,449 | ||||||||
| Total |
$ | 463,041 | $ | 252,527 | $ | 178,321 | $ | 893,889 | ||||
| Fixed rate loans due after 1 year |
$ | 114,992 | $ | 37,899 | $ | 152,891 | ||||||
| Variable rate loans due after 1 year |
137,535 | 140,422 | 277,957 | |||||||||
| Total |
$ | 252,527 | $ | 178,321 | $ | 430,848 | ||||||
Risk Elements
The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of our principal commerce 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 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.
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We review these loans to assess the ability of our borrowers to service all 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 non-accrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan. For additional discussion on our methodology in managing credit risk within our loan portfolio see the following “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” section and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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 on-site examination to ensure continued performance and proper risk assessment.
Nonperforming 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 nonaccrual status, which occurs when there are serious doubts about the collectibility of principal or interest. Our policy is generally to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status.
Nonperforming Assets: Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectibility of principal or interest within the existing terms of the loan; (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, if applicable. Nonperforming assets totaled $129.5 million, or 4.05% of year-end assets at December 31, 2009, compared to $109.6 million or 3.54% of year end assets at December 31, 2008.
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The following table sets forth information with respect to our nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), other real estate owned, other personal property owned, total nonperforming assets, accruing loans past-due 90 days or more, and potential problem loans:
Nonperforming Loans and OREO
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Nonaccrual: |
||||||||||||||||||||
| Commercial business |
$ | 18,979 | $ | 2,976 | $ | 2,170 | $ | 2,249 | $ | 4,440 | ||||||||||
| Real Estate: |
||||||||||||||||||||
| One-to-four family residential |
1,860 | 905 | 204 | 366 | 376 | |||||||||||||||
| Commercial and five or more family residential real estate |
24,354 | 5,710 | 3,476 | 217 | — | |||||||||||||||
| Real Estate Construction: |
||||||||||||||||||||
| One-to-four family residential |
47,653 | 69,668 | 7,317 | — | — | |||||||||||||||
| Commercial and five or more family residential real estate |
16,230 | 25,752 | — | — | — | |||||||||||||||
| Consumer |
1,355 | 1,152 | 838 | 54 | 41 | |||||||||||||||
| Total nonaccrual loans: |
110,431 | 106,163 | 14,005 | 2,886 | 4,857 | |||||||||||||||
| Restructured loans accruing interest: |
||||||||||||||||||||
| Commercial business |
60 | 587 | 456 | 594 | — | |||||||||||||||
| Total nonperforming loans |
110,491 | 106,750 | 14,461 | 3,480 | 4,857 | |||||||||||||||
| Other real estate owned |
19,037 | 2,874 | 181 | — | 18 | |||||||||||||||
| Total nonperforming assets |
$ | 129,528 | $ | 109,624 | $ | 14,642 | $ | 3,480 | $ | 4,875 | ||||||||||
| Accruing loans past-due 90 days or more |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Forgone interest on nonperforming loans |
$ | 7,637 | $ | 4,072 | $ | 814 | $ | 497 | $ | 106 | ||||||||||
| Interest recognized on nonperforming loans |
$ | 2,437 | $ | 4,550 | $ | 244 | $ | 202 | $ | 45 | ||||||||||
| Potential problem loans |
$ | 11,423 | $ | 17,736 | $ | 2,343 | $ | 2,288 | $ | 2,269 | ||||||||||
| Allowance for loan and lease losses |
$ | 53,478 | $ | 42,747 | $ | 26,599 | $ | 20,182 | $ | 20,829 | ||||||||||
| Allowance for loan and lease losses to nonperforming loans |
48.40 | % | 40.04 | % | 183.94 | % | 579.94 | % | 428.84 | % | ||||||||||
| Nonperforming loans to year end loans |
5.50 | % | 4.78 | % | 0.63 | % | 0.20 | % | 0.31 | % | ||||||||||
| Nonperforming assets to year end assets |
4.05 | % | 3.54 | % | 0.46 | % | 0.14 | % | 0.21 | % | ||||||||||
At December 31, 2009 nonperforming loans increased to 5.50% of year end loans up from 4.78% of year end loans at December 31, 2008. Residential construction loans continue to be the primary driver of nonperforming loans, representing $47.7 million, or 43% of nonperforming loans; however it was also the area where we saw the largest reduction in nonperforming loans. Commercial real estate loans account for another $40.6 million, or 37% of nonperforming loans.
We remain aggressive in managing our construction loan portfolio and continue to be successful at reducing our overall exposure in the 1-4 family residential construction segment as well as in the commercial real estate construction segment. For the year, total construction loans declined 33.1% due to payoffs and conversions to permanent loan status. Our 1-4 family residential construction loans now represent less than 6% of our entire loan portfolio. While we believe both of these segments will remain challenged during 2010, we believe we have appropriate risk management strategies in place to manage through the current economic cycle.
Other Real Estate Owned: As of December 31, 2009 there was $19.0 million in other real estate owned which is comprised of property from foreclosed real estate loans, an increase of $16.2 million from $2.9 million at December 31, 2008. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to OREO
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and are recorded at fair value less estimated costs to sell, at the date of transfer of the property. If the carrying value exceeds the fair value at the time of the transfer, the difference is charged to the allowance for loan and lease losses. The fair value of the OREO property is based upon current appraisal. Losses that result from the ongoing periodic valuation of these properties are charged to the net cost of operation of OREO expense in the period in which they are identified. Improvements to the OREO are capitalized and holding costs are charged to the net cost of operation of OREO as incurred.
Potential Problem Loans: Potential problem loans are loans which are currently performing and are not on nonaccrual status, restructured or impaired, but about which there are significant doubts as to the borrower’s future ability to comply with repayment terms and which may later be included in nonaccrual, past due, restructured or impaired loans. Potential problem loans totaled $11.4 million at year end 2009, compared to $17.7 million at year end 2008. For additional information on our nonperforming loans see Note 6 to our Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
The following table summarizes activity in nonperforming loans for the period indicated:
Changes in Nonperforming Loans
| Twelve months ended December 31, |
||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period |
$ | 106,750 | $ | 14,461 | ||||
| Loans placed on nonaccrual or restructured |
111,678 | 134,376 | ||||||
| Advances |
2,248 | 1,254 | ||||||
| Charge-offs |
(47,567 | ) | (23,540 | ) | ||||
| Loans returned to accrual status |
(2,482 | ) | (5,788 | ) | ||||
| Repayments (including interest applied to principal) |
(36,738 | ) | (10,456 | ) | ||||
| Transfers to OREO |
(23,398 | ) | (3,557 | ) | ||||
| Balance, end of period |
$ | 110,491 | $ | 106,750 | ||||
Loans are considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. The assessment for impairment occurs when and while such loans are designated as criticized/classified per the Company’s internal risk rating system or when and while such loans are on nonaccrual. All criticized/classified loans with an outstanding balance greater than $100 thousand and all non-accrual loans with an outstanding balance greater than $250 thousand are considered impaired and are analyzed individually, on a quarterly basis, under the guidance of the Receivables topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”). The Company’s policy is to record cash receipts on impaired loans first as reductions in principal and then as interest income.
The following table summarizes impaired loan financial data at December 31, 2009 and 2008:
| December 31, | ||||||
| in millions |
2009 | 2008 | ||||
| Impaired loans |
$ | 116.4 | $ | 106.8 | ||
| Impaired loans with specific allocations |
$ | 18.1 | $ | 8.3 | ||
| Amount of the specific allocations |
$ | 3.8 | $ | 1.2 | ||
Impaired loans with a carrying amount of $51.2 million at December 31, 2009 were subject to specific allocations of $3.8 million and partial charge-offs of $28.5 million during the year. Collateral dependent impaired loans without specific allocations at December 31, 2009 and 2008 either had collateral which exceeded the carrying value of the loans or reflected a partial charge-off to the market value of collateral (less costs to sell), as of the most recent appraisal date.
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When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In these cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. As a final alternative, the observable market price of the debt may be used to assess impairment. Predominately, the Company uses the fair value of collateral approach based upon a reliable valuation.
When a loan secured by real estate migrates to nonperforming and impaired status and it does not have a market valuation less than one year old, the Company secures an updated market valuation by a third party appraiser that is reviewed by the Company’s on staff appraiser. Subsequently, the asset will be appraised annually by a third party appraiser or the Company’s on staff appraiser. The evaluation may occur more frequently if management determines that there has been increased market deterioration within a specific geographical location. Upon receipt and verification of the market valuation, the Company will record the loan at the lower of cost or market (less costs to sell) by recording a charge-off to the allowance for loan and lease losses or by designating a specific reserve in accordance with accounting principles generally accepted in the United States.
Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit
We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:
| 1. | General valuation allowance consistent with the Contingencies topic of the FASB ASC. |
| 2. | Criticized/classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with the Receivables topic of the FASB ASC. |
| 3. | The unallocated allowance provides for other credit losses inherent in our loan portfolio that may not have been contemplated in the general and specific components of the allowance. This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends. |
On a quarterly basis our Chief Credit Officer reviews with Executive Management and the Board of Directors the various additional factors that management considers when determining the adequacy of the ALLL, including economic and business condition reviews. Factors which influenced management’s judgment in determining the amount of the additions to the ALLL charged to operating expense include the following as of the applicable balance sheet dates:
| 1. | Existing general economic and business conditions affecting our market place |
| 2. | Credit quality trends, including trends in nonperforming loans |
| 3. | Collateral values |
| 4. | Seasoning of the loan portfolio |
| 5. | Bank regulatory examination results |
| 6. | Findings of internal credit examiners |
| 7. | Duration of current business cycle |
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The ALLL is increased by provisions for loan and lease losses (“provision”) charged to expense, and is reduced by loans charged off, net of recoveries. While we believe the best information available is used by us to determine the ALLL, changes in market conditions could result in adjustments to the ALLL, affecting net income, if circumstances differ from the assumptions used in determining the ALLL.
In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. This methodology is similar to the methodology we use for determining the adequacy of our ALLL. For additional information on our allowance for unfunded loan commitments and letters of credit, see Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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Analysis of the ALLL
The following table provides an analysis of our loss experience by loan type for the last five years:
Changes in Allowance for Loan and Lease Losses and
Unfunded Loan Commitments and Letters of Credit
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Beginning balance |
$ | 42,747 | $ | 26,599 | $ | 20,182 | $ | 20,829 | $ | 19,881 | ||||||||||
| Balance established through acquisition |
— | — | 3,192 | — | — | |||||||||||||||
| Charge-offs: (1) |
||||||||||||||||||||
| Commercial business |
(12,930 | ) | (2,819 | ) | (781 | ) | (2,077 | ) | (386 | ) | ||||||||||
| Real Estate: |
||||||||||||||||||||
| One-to-four family residential |
(395 | ) | (46 | ) | — | — | — | |||||||||||||
| Commercial and five or more family residential properties |
(1,309 | ) | (966 | ) | — | (9 | ) | — | ||||||||||||
| Real Estate Construction: |
||||||||||||||||||||
| One-to-four family residential |
(27,711 | ) | (18,340 | ) | — | — | — | |||||||||||||
| Commercial and five or more family residential properties |
(9,297 | ) | (2,169 | ) | — | — | (665 | ) | ||||||||||||
| Consumer |
(2,879 | ) | (1,647 | ) | (432 | ) | (1,109 | ) | (221 | ) | ||||||||||
| Total charge-offs |
(54,521 | ) | (25,987 | ) | (1,213 | ) | (3,195 | ) | (1,272 | ) | ||||||||||
| Recoveries: (1) |
||||||||||||||||||||
| Commercial business |
750 | 272 | 530 | 233 | 218 | |||||||||||||||
| Real Estate: |
||||||||||||||||||||
| One-to-four family residential |
68 | — | — | 20 | — | |||||||||||||||
| Commercial and five or more family residential properties |
25 | 304 | 12 | 83 | — | |||||||||||||||
| Real Estate Construction: |
||||||||||||||||||||
| One-to-four family residential |
833 | 16 | — | 7 | — | |||||||||||||||
| Commercial and five or more family residential properties |
— | — | — | — | 326 | |||||||||||||||
| Consumer |
76 | 367 | 291 | 140 | 156 | |||||||||||||||
| Total recoveries |
1,752 | 959 | 833 | 483 | 700 | |||||||||||||||
| Net charge-offs |
(52,769 | ) | (25,028 | ) | (380 | ) | (2,712 | ) | (572 | ) | ||||||||||
| Provision for loan and lease losses |
63,500 | 41,176 | 3,605 | 2,065 | 1,520 | |||||||||||||||
| Ending balance |
$ | 53,478 | $ | 42,747 | $ | 26,599 | $ | 20,182 | $ | 20,829 | ||||||||||
| Loans outstanding at end of period (2) |
$ | 2,008,884 | $ | 2,232,332 | $ | 2,282,728 | $ | 1,708,962 | $ | 1,564,704 | ||||||||||
| Average amount of loans outstanding |
$ | 2,124,574 | $ | 2,264,486 | $ | 1,990,622 | $ | 1,629,616 | $ | 1,494,567 | ||||||||||
| Allowance for loan and lease losses to period-end loans |
2.66 | % | 1.91 | % | 1.17 | % | 1.18 | % | 1.33 | % | ||||||||||
| Net charge-offs to average loans outstanding |
2.48 | % | 1.11 | % | 0.02 | % | 0.17 | % | 0.04 | % | ||||||||||
| Allowance for unfunded commitments and letters of credit |
||||||||||||||||||||
| Beginning balance |
$ | 500 | $ | 349 | $ | 339 | $ | 339 | $ | 289 | ||||||||||
| Net changes in the allowance for unfunded commitments and letters of credit |
275 | 151 | 10 | — | 50 | |||||||||||||||
| Ending balance |
$ | 775 | $ | 500 | $ | 349 | $ | 339 | $ | 339 | ||||||||||
| (1) | Certain prior period balances have been reclassified to conform to the current period presentation. |
| (2) | Excludes loans held for sale. |
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We have used the same methodology for ALLL calculations during 2009, 2008 and 2007. Adjustments to the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. We continually review the ALLL quantitative and qualitative methodology and make adjustments appropriate to the loan portfolio. We maintain a conservative approach to credit quality and will continue to prudently add to our ALLL as necessary in order to maintain adequate reserves. We carefully monitor the loan portfolio and continue to emphasize the importance of credit quality while continuously strengthening our loan monitoring systems and controls.
Allocation of the ALLL
The table below sets forth the allocation of the ALLL by loan category:
| Balance at End of |
December 31, | |||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||
| Amount | % of Total Loans* |
Amount | % of Total Loans* |
Amount | % of Total Loans* |
Amount | % of Total Loans* |
Amount | % of Total Loans* |
|||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||
| Commercial business |
$ | 21,969 | 37.1 | % | $ | 12,759 | 36.3 | % | $ | 7,068 | 33.4 | % | $ | 9,628 | 36.1 | % | $ | 12,060 | 36.5 | % | ||||||||||
| Real estate and construction: |
||||||||||||||||||||||||||||||
| One-to-four family residential |
9,087 | 8.5 | % | 16,781 | 12.0 | % | 7,648 | 14.5 | % | 1,134 | 8.4 | % | 809 | 7.4 | % | |||||||||||||||
| Commercial and five or more family residential properties |
||||||||||||||||||||||||||||||