UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2008 or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
File Number 0-20288
COLUMBIA
BANKING SYSTEM, INC.
(Exact
name of registrant as specified in its charter)
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Washington
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91-1422237
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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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:
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Common
Stock, No Par Value
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The NASDAQ Stock Market LLC |
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(Title
of class)
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(Name of each exchange on which
registered)
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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 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, a non-accelerated filer, or a smaller reporting company.
See definitions of “large accelerated filer", "accelerated filer” and
"smaller reporting company" 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, 2008 was
$337,951,416 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,
2009 was 18,173,527.
DOCUMENTS
INCORPORATED BY REFERENCE:
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Portions
of the Registrant’s definitive 2009 Annual Meeting Proxy Statement Dated
March 23, 2009.
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Part III
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COLUMBIA
BANKING SYSTEM, INC.
FORM
10-K ANNUAL REPORT
DECEMBER
31, 2008
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PART
I
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Item 1.
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3
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Item 1A.
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15
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Item
1B.
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18
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Item
2.
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18
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Item
3.
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19
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Item
4.
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19
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PART
II
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Item
5.
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20
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Item
6.
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22
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Item
7.
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26
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Item
7A.
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49
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Item
8.
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51
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Item
9.
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86
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Item
9A.
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86
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Item
9B.
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88
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PART
III
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Item
10.
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89
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Item
11.
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89
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Item
12.
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89
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Item
13.
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89
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Item
14.
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89
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PART
IV
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Item 15.
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90
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91
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92
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, and any prospectus supplement, including information included or
incorporated by reference, 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. The following factors, among others, could cause
actual results to differ materially from the anticipated results or other
expectations in the forward-looking statements, including those set forth in
this prospectus, any accompanying prospectus supplement or the documents
incorporated by reference, including the “Risk Factors,” “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” sections of our reports and other documents filed with the
SEC:
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the
risks associated with lending and potential adverse changes in credit
quality;
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increased
delinquency rates;
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competition
from other financial services companies in our
markets;
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the
risks presented by a continuing economic slowdown, which could adversely
affect credit quality, collateral values, including real estate
collateral, investment values, liquidity and loan
originations;
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demand
for banking products and services may
decline;
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legislative
or regulatory changes that adversely affect our business or our ability to
complete prospective future
acquisitions;
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the
risks presented by a continued economic slowdown and the public stock
market volatility, which could adversely affect our stock value and our
ability to raise capital in the future;
and
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our
success in managing risks involved in the
foregoing.
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Additional
factors that could cause actual results to differ materially from those
expressed in the forward-looking statements are discussed in “Risk Factors” above, in our
prospectus supplement and in our reports filed with the SEC. We
believe the expectations reflected in our forward-looking statements are
reasonable, based on information available to us on the date hereof. However,
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.
PART
I
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BUSINESS
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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”) also does business as Bank of
Astoria and Mt. Rainier Bank 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 consolidation 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 53 branch offices at December 31, 2008.
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 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
October 1, 2004, the Company completed its acquisition of Bank of Astoria, an
Oregon state-chartered commercial bank headquartered in Astoria,
Oregon. Astoria’s results of operations are included in our results
beginning October 1, 2004. Astoria operated as a separate banking
subsidiary of the Company until April 1, 2008, when it was merged into the
Columbia Bank banking subsidiary. This change in internal
organizational structure altered the composition of the Company’s reportable
segments; accordingly, segment results for the Bank of Astoria are now
included within the Retail Banking segment. Prior period segment
reporting has been restated to reflect this change.
Columbia
Bank has 53 branch locations in the Seattle/Tacoma metropolitan area and
contiguous parts of the Puget Sound region of Washington State, as well as the
Longview and Woodland communities in southwestern Washington State, the
Portland, Oregon metropolitan area, and the northern Oregon coast. Included in
those 53 branch locations are six branches doing business as Bank of Astoria
along the northern coast of Oregon and five branches doing business as Mt.
Rainier Bank, in King and Pierce counties in Washington
State. Subsequent to year-end, the operations of one branch in each
of King, Pierce and Clackamas counties were consolidated into other branches in
the same regions. 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 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.
Company
Management
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Name
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Principal
Position
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Melanie J. Dressel
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President
& Chief Executive Officer
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Andrew McDonald
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Executive
Vice President & Chief Credit Officer
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Mark W. Nelson
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Executive
Vice President & Chief Operating Officer
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Kent
L Roberts
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Executive
Vice President & Human Resources Director
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Gary R. Schminkey
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Executive
Vice President & Chief Financial
Officer
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Financial
Information about Segments
The
Company is managed along two major lines of business within the Columbia Bank
banking subsidiary: commercial banking and retail banking. The
treasury function of the Company, although not considered a line of business, is
responsible for the management of investments and interest rate
risk. Financial information about segments that conform to accounting
principles generally accepted in the United States is presented in Note 22 to
the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data” of this report.
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 53 branches as of December 31, 2008 from which we
intend to grow market share. Western Washington locations consist of twenty-four
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 balanced loan and deposit
portfolios, 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 deposits, loans, and
other financial services in the communities we serve. We intend to increase our
market share by continuing to leverage our existing branch network, as well as
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:
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Personal
Banking
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Business
Banking
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•Checking
and Saving Accounts
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•Checking
& Saving Accounts
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•Online
Banking
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•Online
Banking
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•Electronic
Bill Pay
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•Electronic
Bill Pay
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•Consumer
Lending
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•Remote
Deposit Capture
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•Residential
Lending
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•Cash
Management
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•Visa
Card Services
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•Commercial
& Industrial Lending
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•Investment
Services
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•Real
Estate and Real Estate Construction Lending
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•Private
Banking
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•Equipment
Finance
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•Small
Business Services
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•Visa
Card Services
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•Investment
Services
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•International
Banking
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•Merchant
Card Services
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Personal
Banking: We offer our personal banking customers an assortment of
account products including non-interest 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® Check
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),
personal banking 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.
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 Business Banking and Streamlined Business Banking. Columbia
OnLine Business Banking 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 Banking is
our free online solution intended for smaller businesses, or those just starting
out. Streamlined Business 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,
inventory and equipment 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 Check 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 your business
needs; as well as the Business Edition® and
Business Edition Plus® 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.
(1) Securities
and insurance products are offered by Primevest Financial Services, Inc., an
independent, registered broker/dealer. Member FINRA/SIPC. Investment
products are * Not FDIC insured * May lose value * Not
bank guaranteed * Not a deposit *
Not insured by any federal government agency.
(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.
Business
clients that utilize Columbia’s Merchant Card Services have the ability to
accept both Visa® and
MasterCard® 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 is highly competitive. 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 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, 2008 our Pierce County
branch locations’ share of the county’s total deposit market was 17%(3),
ranking first amongst 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 represent more than 43,000 jobs, 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, 2008 our share of the King County
deposit market was less than 1%(3);
however, we have made significant 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 10%(3) 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.
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(1)
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Securities
and insurance products are offered by Primevest Financial Services, Inc.,
an independent, registered broker/dealer. Member FINRA/SIPC.
Investment products are * Not FDIC insured * May lose value * Not
bank guaranteed * Not a deposit * Not insured by any federal government
agency.
|
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(3)
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Source:
FDIC Annual Summary of Deposit Report as of June 30,
2008.
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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 33%(3) and
7%(3) of the
deposit market share, respectively. In Clatsop County, we ranked first
amongst our competition in market share as of June 30, 2008. 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, 2008 the Company and its banking subsidiaries employed
approximately 735 full time equivalent employees down from 775 at December 31,
2007. 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 named one of the 2008 Best Workplaces in Washington by the
Puget Sound Business Journal
and selected as one of Washington’s 100 Best Workplaces by Washington CEO
Magazine.
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 describes elements of the extensive regulatory framework
applicable to the Company and Columbia State Bank, which operates under the
names Columbia State Bank and Mt. Rainier Bank in Washington, 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 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 in its entirety 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 interpretation or
implementation thereof, could have a material effect on our business or
operations.
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.
|
(3)
|
Source:
FDIC Annual Summary of Deposit Report as of June 30,
2008.
|
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.
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 its subsidiary banks 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 Banks. Under Federal Reserve policy, the Company is
expected to act as a source of financial and managerial strength to its
subsidiary banks. This means that the Company is required to commit, as
necessary, resources to support Columbia Bank and the Bank of Astoria. 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 State 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, respectively, 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 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, among other things,
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits. Additional standards apply to 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.
State
Assessments.
Washington state banks that hold public funds are considered public depositaries
and are subject to pro rata assessments for the loss of public deposits held at
a failed Washington bank that exceed federal deposit insurance limits. Due to
the current economic climate it is anticipated that there will be bank failures
nationwide, and we may face increased costs if a Washington state public
depositary bank fails and we are assessed for such net losses.
Interstate
Banking And Branching
The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate
Act”) permits 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 its
subsidiary banks, 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 and may in the future
become subject to contractual restrictions that would limit or prohibit 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.
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.
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 and
hybrid capital instruments. 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 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.
In 2007,
the federal banking agencies, including the FDIC and the Federal Reserve,
approved final rules to implement new risk-based capital requirements.
Presently, this new advanced capital adequacy framework, called Basel II, is
applicable only to large and internationally active banking organizations. Basel
II changes the existing risk-based capital framework by enhancing its risk
sensitivity. Whether Basel II will be expanded to apply to banking organizations
like ours is unclear at this time, and what effect such regulations would have
on us cannot be predicted, but we do not expect our operations would be
significantly impacted.
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.
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.
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, 2009. 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.
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 raises 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. The rule also gives the FDIC the
authority to alter the way it calculates federal deposit insurance assessment
rates to adjust for an institutions’ risk beginning in the second quarter of
2009 and thereafter.
In 2006,
federal deposit insurance reform legislation was enacted that (i) required
the FDIC to merge the Bank Insurance Fund and the Savings Association Insurance
Fund into a newly created Deposit Insurance Fund; (ii) increases the amount
of deposit insurance coverage for retirement accounts; (iii) allows for
deposit insurance coverage on individual accounts to be indexed for inflation
starting in 2010; (iv) provides the FDIC more flexibility in setting and
imposing deposit insurance assessments; and (v) provides eligible
institutions credits on future assessments.
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.
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.
The
Securities Purchase Agreement also includes a provision that allows the Treasury
to unilaterally amend the CPP transaction documents to comply with federal
statutes.
Executive Compensation Restrictions
under the CPP.
Entities
that participate in the CPP, must comply with certain limits on executive
compensation and various reporting requirements. These restrictions apply to the
chief executive officer, chief financial officer, plus the next three most
highly compensated executive officers. These restrictions include (1) ensuring
that incentive compensation for senior executives does not encourage unnecessary
and excessive risks that threaten the value of the financial institution; (2)
requiring clawback of any bonus or incentive compensation paid to a senior
executive based on statements of earnings, gains, or other criteria that are
later proven to be materially inaccurate; (3) prohibiting the financial
institution from making any payment which would be deemed to be “golden
parachute” based on the Internal Revenue Code provision, to a senior executive;
and (4) restricting deductions for tax purposes for executive compensation in
excess of $500,000 for each such senior executive. The CEO and board
compensation committee must certify annually that the institution and the board
compensation committee have complied with such standards. In
addition, the CEO and the board compensation committee must certify, within 120
days of receiving financial assistance, that the compensation committee has
reviewed the senior executives' incentive compensation arrangements with the
senior risk officers to ensure that these arrangements do not encourage senior
executives to take unnecessary and excessive risks that could threaten the value
of the financial institution.
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 0.10%
surcharge 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. Under the Debt Guarantee
Program, qualifying unsecured senior debt issued by a participating institution
can be guaranteed by the FDIC. The Company and the Bank chose to participate in
both components of the FDIC Temporary Liquidity Guaranty Program.
Proposed
Legislation
As
indicated by Treasury as of early 2009, additional legislation to be promulgated
under the EESA is pending, which among other things is expected to inject more
capital from Treasury into financial institutions through the Capital Assistance
Program, establish a public-private investment fund for the purchase of troubled
assets, and expand the Term Asset-Backed Securities Loan Facility to include
commercial mortgage backed-securities.
Proposed
legislation is introduced in almost every legislative session that would
dramatically affect the regulation of the banking industry. In light of the 2008
financial crisis and a new administration in the White House, it is anticipated
that legislation reshaping the regulatory landscape could be proposed in 2009.
We cannot predict if any such legislation will be adopted or if it is adopted
how it would affect the business of the Company or the Bank. 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.
Other
Relevant Legislation
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 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 affect 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.
Financial
Services Regulatory Relief Act of 2006. In 2006, the
President signed the Financial Services Regulatory Relief Act of 2006 into law
(the “Relief Act”). The Relief Act amends several existing banking laws and
regulations, eliminates some unnecessary and overly burdensome regulations of
depository institutions and clarifies several existing regulations. The Relief
Act, among other things, (i) authorizes the Federal Reserve Board to set
reserve ratios; (ii) amends regulations of national banks relating to
shareholder voting and granting of dividends; (iii) amends several
provisions relating to loans to insiders, regulatory applications, privacy
notices, and golden parachute payments; and (iv) expands and clarifies the
enforcement authority of federal banking regulators. Our business, expenses, and
operations have not been significantly impacted by this
legislation.
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,
such as the recent lowering of the Federal Reserve’s discount rate, and their
impact on us cannot be predicted with certainty.
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ITEM 1A.
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RISK
FACTORS
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Our
business exposes us to certain risks. The following is a discussion of what we
currently believe are the most significant risks and uncertainties that may
affect our business, financial condition and future results.
We
cannot predict the effect of the national economic situation on our future
results of operations or stock trading price.
The
national economy and the financial services sector in particular, are currently
facing challenges of a scope unprecedented in recent history. No one
can predict the severity or duration of this national downturn, which has
adversely impacted the markets we serve. Any further deterioration in
our markets would have an adverse effect on our business, financial condition
and results of operations.
We cannot
predict the effect of recently and pending federal legislation.
On
October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of
2008 (“EESA”), which provides the United States Treasury Department (“Treasury”)
with broad authority to implement action intended to help restore stability and
liquidity to the US financial markets. As indicated by the Treasury
as of
early
2009, additional related legislation is pending, which among other things is
expected to inject more capital from the Treasury into financial institutions
through the Capital Assistance Program, establish a public-private investment
fund for the purchase of troubled assets, and expand the Term Asset-Backed
Securities Loan Facility to include commercial mortgage
backed-securities.
The full
effect of the broad legislation already enacted and related legislation expected
to be enacted in the near future on the national economy and financial
institutions, particularly on mid-sized institutions like us, cannot be
predicted.
Our
ability to access markets for funding and acquire and retain customers could be
adversely affected to the extent the financial services industry’s reputation is
damaged.
Reputation
risk is the risk to liquidity, earnings and capital arising from negative
publicity regarding the financial services industry. The financial
services industry continues to be featured in negative headlines about the
global 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.
We have a
concentration of loans secured by real estate.
The Company
has a concentration of loans secured by real estate. The effects of
the economic downturn are now significantly impacting our market
area. Further downturn in the market areas we serve may cause us to
have lower earnings and could increase our credit risk associated with our loan
portfolio, as the collateral securing those loans may decrease in
value. A continued downturn in the economy could have a material
adverse effect both on the borrowers’ ability to repay these loans, as well as
the value of the real property held as collateral. Our ability to
recover on defaulted loans by foreclosing and selling the real estate collateral
would then be diminished and we be would more likely to suffer losses on
defaulted loans.
Our loan
portfolio mix could result in increased credit risk in a prolonged economic
downturn.
Our loan
portfolio, is concentrated in permanent commercial real estate loans, commercial
business and real estate construction loans, including acquisition and
development loans related to the for sale housing industry. These
types of loans generally are viewed as having more risk of default than
residential real estate loans or certain other types of loans or
investments. These types of loans typically are larger than
residential real estate loans and other commercial loans. Because our
loan portfolio contains a significant number of commercial business and
commercial real estate loans with relatively large balances, the deterioration
of one or a few of these loans may cause a considerable increase in our
non-performing loans. An increase in non-performing loans could
result in a loss of earnings, an increase in the provision for loan losses, or
an increase in loan charge-offs, all of which could have an adverse impact on
our results of operations and financial condition.
The current
economic downturn in the market areas we serve may cause us to have lower
earnings and could increase our credit risk associated with our loan
portfolio.
The inability
of borrowers to repay loans can erode our earnings. Substantially all
of our loans are to businesses and individuals in Washington and Oregon, and a
continuing decline in the economy of these market areas could impact us
adversely. Recently, a series of large Puget Sound-based companies
have announced or commenced implementation of substantial employee layoffs and
scaled back plans for future growth. A further deterioration in
economic conditions in the market areas we serve could result in the following
consequences, any of which could have an adverse impact on our prospects,
results of operations and financial condition:
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·
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loan
delinquencies may increase further;
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·
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collateral
for loans made may decline in value, in turn reducing customers’ borrowing
power, reducing the value of assets and collateral associated with
existing loans;
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·
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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;
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·
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demand
for banking products and services may
decline
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·
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low
cost or non-interest bearing deposits may decrease;
and
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·
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substantial
increase in office space availability in downtown
Seattle.
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Our allowance for loan and lease losses (“ALLL”) may not be adequate to cover actual loan losses, which could adversely affect earnings.
Future
increases to the ALLL may be required based on changes in the composition of the
loans comprising the portfolio, deteriorating values in underlying collateral
(most of which consists of real estate) and changes in the financial condition
of borrowers, such as may result from changes in economic conditions, or as a
result of incorrect assumptions by management in determining the
ALLL. Additionally, federal banking regulators, as an integral part
of their supervisory function, periodically review our loan portfolio and the
adequacy of our ALLL. These regulatory agencies may require us to
recognize further loan loss provisions or charge-offs based upon their
judgments, which may be difference from ours. Increases in the ALLL
or charge-offs could have a negative effect on our financial condition and
results of operation.
Fluctuating
interest rates can adversely affect our profitability.
Our
profitability is dependent to a large extent upon net interest income, which is
the difference (or “spread”) between the interest earned on loans, securities
and other interest-earning assets and interest paid on deposits, borrowings, and
other interest-bearing liabilities. Because of the differences in
maturities and repricing characteristics of 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 the Company’s interest
rate spread, and, in turn, profitability.
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 stocks 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 an impairment and write-downs, which could be
material.
A continued
tightening of the credit markets may make it difficult to obtain adequate
funding for loan growth, which could adversely affect our earnings.
A continued
tightening of the credit market and the inability to obtain or retain adequate
liquidity to fund continued loan growth may negatively affect our asset growth
and, therefore, our earnings capability. In addition to deposit
growth, maturity of investment securities and loan payments, the Company also
relies on alternative funding sources through correspondent banking, wholesale
certificates of deposit and borrowing lines with the Federal Reserve Bank and
FHLB of Seattle to fund loans. In the event the current economic
downturn continues, particularly in the housing market, these resources could be
negatively affected, both as to price and availability, which would limit and or
raise the cost of the funds available to the Company.
We
may grow through future acquisitions which could, in some circumstances,
adversely affect our profitability measures.
We have in recent
years acquired other financial institutions. We may in the future
engage in selected acquisitions of additional financial
institutions. There are risks associated with any such acquisitions
that could adversely affect our profitability. These risks include,
among other things, assessing the asset quality of a financial institution being
acquired, encountering greater than anticipated cost of incorporating acquired
businesses into our operations, and being unable to profitably deploy funds
acquired in an acquisition.
We may issue
additional equity in connection with any future acquisitions. Such
acquisitions and related issuances of equity may have a dilutive effect on
earnings per share and the percentage ownership of current
shareholders.
Competition
in our market areas may limit our future success.
Commercial
banking is a highly competitive business. We compete with other
commercial banks, savings and loan associations, credit unions, finance,
insurance and other non-depository companies operating in our market
areas. We are subject to substantial competition for loans and
deposits from other financial institutions. Some of our competitors
are not subject to the same degree of regulation and restriction as we
are. Some of our competitors have greater financial resources than we
do. If we are unable to effectively compete in our market areas, our
business, results of operations and prospects could be adversely
affected.
The FDIC has
increased insurance premiums to rebuild and maintain the federal deposit
insurance fund and we may separately incur state statutory assessments in the
future.
Based on
recent events and the state of the economy, the FDIC has increased federal
deposit insurance premiums beginning in the first quarter of
2009. The increase of these premiums will add to our cost of
operations and could have a significant impact on the
Company. Depending on any future losses that the FDIC insurance fund
may suffer due to failed institutions, there can be no assurance that there will
not be additional significant premium increases in order to replenish the
fund.
On February
27, 2009 the FDIC issued a press release announcing their intent to levy a
special Deposit Insurance Fund assessment of 20 basis points on insured
institutions. The proposed assessment will be calculated on June 30, 2009
deposit balances and collected on September 30, 2009. Based upon the Company’s
December 31, 2008 deposits subject to FDIC insurance assessments, if enacted,
the special assessment will be approximately $4.7 million.
Further,
under Washington state laws, the Company may incur additional costs if one or
more Washington state banks that hold public deposits fail, since, as a public
depositary, we are subject to Washington statutory pro-rata assessments to cover
any net losses in public deposits not otherwise covered by federal deposit
insurance or other means.
We operate in
a highly regulated environment and may be adversely affected by changes in
federal state and local laws and regulations.
We are
subject to extensive regulation, supervision and examination by federal and
state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on us and
our operations. Additional legislation and regulations that could
significantly affect our powers, authority and operations may be enacted or
adopted in the future, which could have a material adverse effect on our
financial condition and results of operations. Further, regulators
have significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws or regulations by financial institutions and
holding companies in the performance of their supervisory and enforcement
duties. These powers recently have been utilized more frequently due
to the current economic conditions we are facing. The exercise of
regulatory authority may have a negative impact on our financial condition and
results of operations.
|
UNRESOLVED
STAFF COMMENTS
|
None.
|
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 58 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 additional branch locations, fourteen of
which are owned and six of which are leased under various operating lease
agreements. In King County we conduct business in nine branch locations, six of
which are owned and three of which are leased. In Kitsap, Thurston, Cowlitz and
Whatcom counties we conduct business in six branch locations, five of which are
owned and one that is leased under various operating lease
agreements. In addition, Columbia Bank, dba Mt. Rainier Bank,
conducts business in five branch locations in King and Pierce
counties. In the Portland metropolitan area, Columbia Bank conducts
business in five branch locations in Clackamas and Multnomah
counties. Finally, Columbia Bank, dba Bank of Astoria, conducts
business in six branch locations in Clatsop and Tillamook counties, of which all
are owned.
During
2008 we consolidated three branches due to overlapping service areas while
expanding our geographic footprint along the Oregon coast with the addition of a
new branch in Tillamook. During 2009 we intend to continue to
evaluate additional opportunities for branch consolidations.
For
additional information concerning our premises and equipment and lease
obligations, see Note 8 and 16, respectively, to the Consolidated Financial
Statements in “Item 8. Financial Statements and Supplementary Data” of this
report.
|
LEGAL
PROCEEDINGS
|
The
Company and its banking subsidiaries are parties to routine litigation arising
in the ordinary course of business. Management believes that, based on the
information currently known to them, any liabilities arising from such
litigation will not have a material adverse impact on the Company’s financial
condition, results of operations or cash flows.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
PART
II
|
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 closing 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:
|
Cash
Dividend
|
||||||||||||
|
2008
|
High
|
Low
|
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 | ||||||
|
Cash
Dividend
|
||||||||||||
|
2007
|
High
|
Low
|
Declared
|
|||||||||
|
First
quarter
|
$ | 35.96 | $ | 32.36 | $ | 0.15 | ||||||
|
Second
quarter
|
$ | 34.18 | $ | 28.35 | 0.17 | |||||||
|
Third
quarter
|
$ | 33.41 | $ | 24.71 | 0.17 | |||||||
|
Fourth
quarter
|
$ | 34.00 | $ | 27.19 | 0.17 | |||||||
|
For
the year
|
$ | 35.96 | $ | 24.71 | $ | 0.66 | ||||||
On December 31, 2008,
the last sale price for our stock in the over-the-counter market was $11.93. At
January 31, 2009, the number of shareholders of record was 2,284. 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, 2008, a total of 201,981 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
CPP. 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.
Equity
Compensation Plan Information
|
Year
Ended December 31, 2008
|
||||||||||||
|
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
|
201,981 | $ | 16.49 | 116,752 | ||||||||
|
Equity compensation plans not approved by security holders
|
- - | - - | - - | |||||||||
|
(1)
|
Consists
of shares that are subject to outstanding
options.
|
|
(2)
|
Includes
87,611shares available for future issuance under the stock option and
equity compensation plan and 29,141 shares available for purchase under
the Employee Stock Purchase Plan as of December 31,
2008.
|
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, 2003, and
that all dividends were reinvested.
|
Period Ending
December 31,
|
||||||||||||||||||||||||
|
Index
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||||
|
Columbia
Banking System, Inc.
|
100.00 | 122.54 | 142.13 | 177.95 | 154.04 | 63.61 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 108.59 | 110.08 | 120.56 | 132.39 | 78.72 | ||||||||||||||||||
|
Columbia
Peer Group
|
100.00 | 130.01 | 140.31 | 163.99 | 115.95 | 67.67 | ||||||||||||||||||
Source: SNL Financial LC, Charlottesville, VA
ITEM 6. SELECTED
FINANCIAL DATA
Five-Year
Summary of Selected Consolidated Financial Data (1)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
For
the Year
|
(dollars
in thousands except per share)
|
|||||||||||||||||||
|
Total
revenue
|
$ | 134,363 | $ | 136,568 | $ | 122,435 | $ | 115,698 | $ | 94,187 | ||||||||||
|
Net
interest income
|
$ | 119,513 | $ | 108,820 | $ | 97,763 | $ | 90,912 | $ | 71,943 | ||||||||||
|
Provision
for loan and lease losses
|
$ | 41,176 | $ | 3,605 | $ | 2,065 | $ | 1,520 | $ | 995 | ||||||||||
|
Noninterest
income
|
$ | 14,850 | $ | 27,748 | $ | 24,672 | $ | 24,786 | $ | 22,244 | ||||||||||
|
Noninterest
expense
|
$ | 92,125 | $ | 88,829 | $ | 76,134 | $ | 72,855 | $ | 61,326 | ||||||||||
|
Net
income
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | $ | 29,631 | $ | 22,513 | ||||||||||
|
Per
Common Share
|
||||||||||||||||||||
|
Net
Income (Basic)
|
$ | 0.31 | $ | 1.93 | $ | 2.01 | $ | 1.89 | $ | 1.55 | ||||||||||
|
Net
Income (Diluted)
|
$ | 0.31 | $ | 1.91 | $ | 1.99 | $ | 1.87 | $ | 1.52 | ||||||||||
|
Book
Value
|
$ | 18.82 | $ | 19.03 | $ | 15.71 | $ | 14.29 | $ | 13.03 | ||||||||||
|
Averages
|
||||||||||||||||||||
|
Total
Assets
|
$ | 3,134,054 | $ | 2,837,162 | $ | 2,473,404 | $ | 2,290,746 | $ | 1,919,134 | ||||||||||
|
Interest-earning
assets
|
$ | 2,851,555 | $ | 2,599,379 | $ | 2,265,393 | $ | 2,102,513 | $ | 1,769,470 | ||||||||||
|
Loans
|
$ | 2,264,486 | $ | 1,990,622 | $ | 1,629,616 | $ | 1,494,567 | $ | 1,186,506 | ||||||||||
|
Securities
|
$ | 565,299 | $ | 581,122 | $ | 623,631 | $ | 605,395 | $ | 552,742 | ||||||||||
|
Deposits
|
$ | 2,382,484 | $ | 2,242,134 | $ | 1,976,448 | $ | 1,923,778 | $ | 1,690,513 | ||||||||||
|
Core
deposits
|
$ | 1,911,897 | $ | 1,887,391 | $ | 1,664,247 | $ | 1,689,270 | $ | 1,502,843 | ||||||||||
|
Shareholders'
equity
|
$ | 354,387 | $ | 289,297 | $ | 237,843 | $ | 214,612 | $ | 169,414 | ||||||||||
|
Financial
Ratios
|
||||||||||||||||||||
|
Net
interest margin
|
4.38 | % | 4.35 | % | 4.49 | % | 4.44 | % | 4.19 | % | ||||||||||
|
Return
on average assets
|
0.19 | % | 1.14 | % | 1.30 | % | 1.29 | % | 1.17 | % | ||||||||||
|
Return
on average common equity
|
1.59 | % | 11.19 | % | 13.50 | % | 13.81 | % | 13.29 | % | ||||||||||
|
Return
on average tangible common equity (2)
|
2.72 | % | 14.53 | % | 15.88 | % | 16.63 | % | 14.02 | % | ||||||||||
|
Efficiency
ratio (3)
|
59.88 | % | 61.33 | % | 58.95 | % | 61.20 | % | 63.20 | % | ||||||||||
|
Average
equity to average assets
|
11.31 | % | 10.20 | % | 9.62 | % | 9.37 | % | 8.83 | % | ||||||||||
|
At
Year End
|
||||||||||||||||||||
|
Total
assets
|
$ | 3,097,079 | $ | 3,178,713 | $ | 2,553,131 | $ | 2,377,322 | $ | 2,176,730 | ||||||||||
|
Loans
|
$ | 2,232,332 | $ | 2,282,728 | $ | 1,708,962 | $ | 1,564,704 | $ | 1,359,743 | ||||||||||
|
Allowance
for loan and lease losses
|
$ | 42,747 | $ | 26,599 | $ | 20,182 | $ | 20,829 | $ | 19,881 | ||||||||||
|
Securities
|
$ | 540,525 | $ | 572,973 | $ | 605,133 | $ | 585,332 | $ | 642,759 | ||||||||||
|
Deposits
|
$ | 2,382,151 | $ | 2,498,061 | $ | 2,023,351 | $ | 2,005,489 | $ | 1,862,866 | ||||||||||
|
Core
deposits
|
$ | 1,941,047 | $ | 1,996,393 | $ | 1,701,528 | $ | 1,703,030 | $ | 1,605,938 | ||||||||||
|
Shareholders'
equity
|
$ | 415,385 | $ | 341,731 | $ | 252,347 | $ | 226,242 | $ | 203,154 | ||||||||||
|
Full-time
equivalent employees
|
735 | 775 | 657 | 651 | 625 | |||||||||||||||
|
Banking
offices
|
53 | 55 | 40 | 40 | 39 | |||||||||||||||
|
Nonperforming
Assets
|
||||||||||||||||||||
|
Nonaccrual
loans
|
$ | 106,163 | $ | 14,005 | $ | 2,414 | $ | 4,733 | $ | 8,222 | ||||||||||
|
Restructured
loans
|
587 | 456 | 1,066 | 124 | 227 | |||||||||||||||
|
Other
real estate owned
|
2,874 | 181 | - | 18 | 680 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 109,624 | $ | 14,642 | $ | 3,480 | $ | 4,875 | $ | 9,129 | ||||||||||
|
Nonperforming
loans to year end loans
|
4.78 | % | 0.63 | % | 0.20 | % | 0.31 | % | 0.62 | % | ||||||||||
|
Nonperforming
assets to year end assets
|
3.54 | % | 0.46 | % | 0.14 | % | 0.21 | % | 0.42 | % | ||||||||||
|
Allowance
for loan and lease losses to year end loans
|
1.91 | % | 1.17 | % | 1.18 | % | 1.33 | % | 1.46 | % | ||||||||||
|
Allowance
for loan and lease losses to nonperfomring loans
|
40.04 | % | 183.94 | % | 579.94 | % | 428.84 | % | 235.31 | % | ||||||||||
|
Allowance
for loan and lease losses to nonperfomring assets
|
38.99 | % | 181.66 | % | 579.94 | % | 427.26 | % | 217.78 | % | ||||||||||
|
Net
loan charge-offs
|
$ | 25,028 | $ | 380 | $ | 2,712 | $ | 572 | $ | 2,742 | ||||||||||
|
Risk-Based
Capital Ratios
|
||||||||||||||||||||
|
Total
capital
|
14.25 | % | 10.90 | % | 13.23 | % | 12.97 | % | 12.99 | % | ||||||||||
|
Tier
1 capital
|
12.99 | % | 9.87 | % | 12.21 | % | 11.82 | % | 11.75 | % | ||||||||||
|
Leverage
ratio
|
11.27 | % | 8.54 | % | 9.86 | % | 9.54 | % | 8.99 | % | ||||||||||
|
(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)
|
Net
income, excluding core deposit intangible amortization, divided by average
daily shareholders’ equity, excluding average goodwill and average core
deposit intangible asset.
|
|
(3)
|
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 (gain) of OREO, reserve for VISA litigation liability
and mark-to-market adjustments of interest rate floor
instruments.
|
In
managing our business, we review the efficiency ratio, on a fully
taxable-equivalent basis (see definition in table below), which is not defined
in accounting principles generally accepted in the United States (“GAAP”). The
efficiency ratio is calculated by dividing noninterest expense by the sum of net
interest income and noninterest income on a tax equivalent basis, excluding
gains and losses on investment securities, redemption of Visa and MasterCard
shares, death benefit proceeds on a former officer, net cost or gain of other
real estate owned (“OREO”), reserve for (reversal of) VISA litigation liability,
BOLI policy swap income and mark-to-market adjustments of interest rate floor
instruments. Other companies may define or calculate this data differently. We
believe this presentation provides investors with a more accurate picture of our
operating efficiency. In this presentation, net interest income is adjusted to
reflect tax-exempt interest income on an equivalent before-tax basis using the
federal statutory tax rate of 35 percent for all years presented. Noninterest
income and noninterest expense are adjusted for certain items as discussed
above. The efficiency ratio improved during 2008 due to the realization of
planned operating efficiencies from the mid-year 2007 acquisitions of Mountain
Bank Holding Company and Town Center Bancorp and other expense reduction
initiatives implemented by management. Further improvement of the
efficiency ratio will depend on increases in net interest income, growth of
noninterest income and continued expense control. For additional
information see the “Noninterest Expense” section in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation” of this
report.
Reconciliation
of Selected Financial Data to GAAP Financial Measures (3)
|
Years
ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Net
interest income (1)
|
$ | 119,513 | $ | 108,820 | $ | 97,763 | $ | 90,912 | $ | 71,943 | ||||||||||
|
Tax
equivalent adjustment for non-taxable loan and investment securities
interest income (2)
|
5,302 | 4,337 | 3,882 | 2,508 | 2,161 | |||||||||||||||
|
Adjusted
net interest income
|
$ | 124,815 | $ | 113,157 | $ | 101,645 | $ | 93,420 | $ | 74,104 | ||||||||||
|
Noninterest
income
|
$ | 14,850 | $ | 27,748 | $ | 24,672 | $ | 24,786 | $ | 22,244 | ||||||||||
|
Other-than-temporary
security impairment
|
19,541 | |||||||||||||||||||
|
Gain
on sale of investment securities, net
|
(846 | ) | - - | (36 | ) | (6 | ) | 6 | ||||||||||||
|
Redemption
of Visa and MasterCard shares
|
(3,028 | ) | - - | - - | - - | - - | ||||||||||||||
|
Death
benefit proceeds on former officer covered by BOLI
|
(612 | ) | - - | - - | - - | - - | ||||||||||||||
|
Tax
equivalent adjustment for BOLI income (2)
|
1,145 | 1,016 | 908 | 849 | 710 | |||||||||||||||
|
Adjusted
noninterest income
|
$ | 31,050 | $ | 28,764 | $ | 25,544 | $ | 25,629 | $ | 22,960 | ||||||||||
|
Noninterest
expense
|
$ | 92,125 | $ | 88,829 | $ | 76,134 | $ | 72,855 | $ | 61,326 | ||||||||||
|
Net
gain(cost) on sale of OREO
|
49 | (5 | ) | 11 | 8 | 13 | ||||||||||||||
|
Interest
rate floor valuation adjustment
|
- - | - - | (1,164 | ) | - - | - - | ||||||||||||||
|
BOLI
policy swap net income
|
(133 | ) | - - | - - | - - | - - | ||||||||||||||
|
(Reserve
for)reversal of accrued Visa litigation expense
|
1,292 | (1,777 | ) | - - | - - | - - | ||||||||||||||
|
Adjusted
noninterest expense
|
$ | 93,333 | $ | 87,047 | $ | 74,981 | $ | 72,863 | $ | 61,339 | ||||||||||
|
Efficiency
ratio
|
62.46 | % | 65.04 | % | 62.18 | % | 62.97 | % | 65.11 | % | ||||||||||
|
Efficiency
ratio (fully taxable-equivalent)
|
59.88 | % | 61.33 | % | 58.95 | % | 61.20 | % | 63.19 | % | ||||||||||
|
(1)
|
Amount
represents net interest income before provision for loan and lease
losses.
|
|
(2)
|
Fully
Taxable-equivalent basis: Non-taxable revenue is increased by the
statutory tax rate of 35% to recognize the income tax benefit of the
income realized.
|
|
(3)
|
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.
|
Consolidated
Five-Year Financial Data (1)
|
Years
ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Interest
Income:
|
||||||||||||||||||||
|
Loans
|
$ | 147,830 | $ | 156,253 | $ | 123,998 | $ | 99,535 | $ | 68,908 | ||||||||||
|
Taxable
securities
|
18,852 | 18,614 | 20,018 | 18,135 | 17,051 | |||||||||||||||
|
Tax-exempt
securities
|
7,976 | 7,923 | 7,042 | 4,452 | 3,770 | |||||||||||||||
|
Federal
funds sold and deposits with banks
|
402 | 1,427 | 617 | 85 | 337 | |||||||||||||||
|
Total
interest income
|
175,060 | 184,217 | 151,675 | 122,207 | 90,066 | |||||||||||||||
|
Interest
Expense:
|
||||||||||||||||||||
|
Deposits
|
45,307 | 59,930 | 40,838 | 25,983 | 16,537 | |||||||||||||||
|
Federal
Home Loan Bank advances
|
7,482 | 11,065 | 10,944 | 3,515 | 370 | |||||||||||||||
|
Long-term
obligations
|
1,800 | 2,177 | 1,992 | 1,583 | 1,162 | |||||||||||||||
|
Other
borrowings
|
958 | 2,225 | 138 | 214 | 54 | |||||||||||||||
|
Total
interest expense
|
55,547 | 75,397 | 53,912 | 31,295 | 18,123 | |||||||||||||||
|
Net
Interest Income
|
119,513 | 108,820 | 97,763 | 90,912 | 71,943 | |||||||||||||||
|
Provision
for loan and lease losses
|
41,176 | 3,605 | 2,065 | 1,520 | 995 | |||||||||||||||
|
Net
interest income after provision for loan and lease
losses
|
78,337 | 105,215 | 95,698 | 89,392 | 70,948 | |||||||||||||||
|
Noninterest
income
|
14,850 | 27,748 | 24,672 | 24,786 | 22,244 | |||||||||||||||
|
Noninterest
expense
|
92,125 | 88,829 | 76,134 | 72,855 | 61,326 | |||||||||||||||
|
Income
before income taxes
|
1,062 | 44,134 | 44,236 | 41,323 | 31,866 | |||||||||||||||
|
Provision
for income taxes
|
(4,906 | ) | 11,753 | 12,133 | 11,692 | 9,353 | ||||||||||||||
|
Net
Income
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | $ | 29,631 | $ | 22,513 | ||||||||||
|
Net
Income Applicable to Common Shareholders
|
$ | 5,498 | $ | 32,381 | $ | 32,103 | $ | 29,631 | $ | 22,513 | ||||||||||
|
Earnings
per Common Share
|
||||||||||||||||||||
|
Basic
|
$ | 0.31 | $ | 1.93 | $ | 2.01 | $ | 1.89 | $ | 1.55 | ||||||||||
|
Diluted
|
$ | 0.31 | $ | 1.91 | $ | 1.99 | $ | 1.87 | $ | 1.52 | ||||||||||
|
Average
number of common shares outstanding (basic)
|
17,914 | 16,802 | 15,946 | 15,708 | 14,558 | |||||||||||||||
|
Average
number of common shares outstanding (diluted)
|
18,010 | 16,972 | 16,148 | 15,885 | 14,816 | |||||||||||||||
|
Total
assets at year end
|
$ | 3,097,079 | $ | 3,178,713 | $ | 2,553,131 | $ | 2,377,322 | $ | 2,176,730 | ||||||||||
|
Long-term
obligations
|
$ | 25,603 | $ | 25,519 | $ | 22,378 | $ | 22,312 | $ | 22,246 | ||||||||||
|
Cash
dividends declared on common stock
|
$ | 0.58 | $ | 0.66 | $ | 0.57 | $ | 0.39 | $ | 0.26 | ||||||||||
|
(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.
|
Selected
Quarterly Financial Data (1)
The
following table presents selected unaudited consolidated quarterly financial
data for each quarter of 2008 and 2007. 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
|
Second
|
Third
|
Fourth
|
Year
Ended
|
||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
December
31,
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
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 | |||||||||
|
Net
Income (Loss) Per Common Share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.61 | $ | 0.11 | $ | (0.49 | ) | $ | 0.07 | $ | 0.31 | |||||||||
|
Diluted
|
$ | 0.61 | $ | 0.11 | $ | (0.49 | ) | $ | 0.07 | $ | 0.31 | |||||||||
|
2007
|
||||||||||||||||||||
|
Total
interest income
|
$ | 41,146 | $ | 43,255 | $ | 49,378 | $ | 50,438 | $ | 184,217 | ||||||||||
|
Total
interest expense
|
16,443 | 17,560 | 20,518 | 20,876 | 75,397 | |||||||||||||||
|
Net
interest income
|
24,703 | 25,695 | 28,860 | 29,562 | 108,820 | |||||||||||||||
|
Provision
for loan and lease losses
|
638 | 329 | 1,231 | 1,407 | 3,605 | |||||||||||||||
|
Noninterest
income
|
6,177 | 6,741 | 7,631 | 7,199 | 27,748 | |||||||||||||||
|
Noninterest
expense
|
20,402 | 20,266 | 22,425 | 25,736 | 88,829 | |||||||||||||||
|
Income
before income taxes
|
9,840 | 11,841 | 12,835 | 9,618 | 44,134 | |||||||||||||||
|
Provision
for income taxes
|
2,557 | 3,297 | 3,579 | 2,320 | 11,753 | |||||||||||||||
|
Net
Income
|
$ | 7,283 | $ | 8,544 | $ | 9,256 | $ | 7,298 | $ | 32,381 | ||||||||||
|
Net
Income Per Common Share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.45 | $ | 0.53 | $ | 0.53 | $ | 0.41 | $ | 1.93 | ||||||||||
|
Diluted
|
$ | 0.45 | $ | 0.53 | $ | 0.53 | $ | 0.41 | $ | 1.91 | ||||||||||
|
(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.
|
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.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, and any prospectus supplement, including information included or
incorporated by reference, 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. The following factors, among others, could cause
actual results to differ materially from the anticipated results or other
expectations in the forward-looking statements, including those set forth in
this prospectus, any accompanying prospectus supplement or the documents
incorporated by reference, including the “Risk Factors,” “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” sections of our reports and other documents filed with the
SEC:
|
|
|
the
risks associated with lending and potential adverse changes in credit
quality;
|
|
|
|
increased
delinquency rates;
|
|
|
|
competition
from other financial services companies in our
markets;
|
|
|
|
the
risks presented by a continuing economic slowdown, which could adversely
affect credit quality, collateral values, including real estate
collateral, investment values, liquidity and loan
originations;
|
|
|
|
demand
for banking products and services may
decline;
|
|
|
|
legislative
or regulatory changes that adversely affect our business or our ability to
complete prospective future
acquisitions;
|
|
|
|
the
risks presented by a continued economic slowdown and the public stock
market volatility, which could adversely affect our stock value and our
ability to raise capital in the future;
and
|
|
|
|
our
success in managing risks involved in the
foregoing.
|
Additional
factors that could cause actual results to differ materially from those
expressed in the forward-looking statements are discussed in “Risk Factors” above, in our
prospectus supplement and in our reports filed with the SEC. We
believe the expectations reflected in our forward-looking statements are
reasonable, based on information available to us on the date hereof. However,
given the described uncertainties and risks, we cannot guarantee our future
performance or results of operations and you should not place undue reliance on
these forward-looking statements. We undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Critical
Accounting Policies
We have
established certain accounting policies in preparing our Consolidated Financial
Statements that are in accordance with accounting principles generally accepted
in the United States. Our significant accounting policies are presented in Note
1 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data” 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 Statement of Financial Accounting Standards
(“SFAS”) No. 5, Accounting for Contingencies,
a specific valuation allowance in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan and an unallocated component. Both quantitative and
qualitative factors are considered in determining the appropriate level of the
ALLL. Quantitative factors include historical loss experience, delinquency and
charge-off trends, collateral values, past-due and nonperforming loan trends and
the evaluation of specific loss estimates for problem loans. Qualitative factors
include existing general economic and business conditions in our market areas as
well as the duration of the current business cycle. Changes in any of the
factors mentioned could have a significant impact on our calculation of the
ALLL. Our ALLL policy and the judgments, estimates and economic assumptions
involved are described in greater detail in 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 $3.10 billion in total assets and $415.4
million in total shareholders’ equity as of December 31,
2008. Goodwill is assigned to reporting units for purposes of
impairment testing. The Company has three reporting units: retail
banking, commercial banking, and private banking. The products
and services of companies previously acquired are comparable to the Company's
retail banking operations. Accordingly, all of the Company's goodwill has
been assigned to the retail banking reporting unit for purposes of impairment
testing. We review our goodwill for impairment annually, during the third
quarter. Goodwill of a reporting unit is also tested for impairment
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. Such indicators may include, among others: a significant
adverse change in legal factors or in the general business climate; significant
decline in our stock price and market capitalization; unanticipated competition;
the testing for recoverability of a significant asset group within a reporting
unit; and an adverse action or assessment by a regulator. Any adverse
change in these factors could have a significant impact on the recoverability of
goodwill and could have a material impact on our consolidated financial
statements.
When
required, the goodwill impairment test involves a two-step
process. We first test goodwill for impairment by comparing the fair
value of the retail banking reporting unit with its carrying
amount. If the fair value of the retail banking reporting unit
exceeds the carrying amount of the reporting unit, goodwill is not deemed to be
impaired, and no further testing would be necessary. If the carrying
amount of the retail banking reporting unit were to exceed the fair value of the
reporting unit, we would perform a second test to measure the amount of
impairment loss, if any. To measure the amount of any impairment
loss, we would determine the implied fair value of goodwill in the same manner
as if the retail banking reporting unit were being acquired in a business
combination. Specifically, we would allocate the fair value of the
retail banking reporting unit to all of the assets and liabilities of the
reporting unit in a hypothetical calculation that would determine the implied
fair value of goodwill. If the implied fair value of goodwill is less
than the recorded goodwill, we would record an impairment charge for the
difference.
The
accounting estimates related to our goodwill require us to make considerable
assumptions about fair values. Our assumptions regarding fair values
require significant judgment about economic factors, industry factors and
technology considerations, as well as our views regarding the growth and
earnings prospects of the retail banking unit. Changes in these
judgments, either individually or collectively, may have a significant effect on
the estimated fair values.
During
the fourth quarter of 2008, due to the poor overall economic conditions,
declines in our stock price as well as financial stocks in general, and a
challenging operating environment for the financial services industry, we
determined a triggering event had occurred and we conducted an interim
impairment test of our goodwill. Based on the results of the test, we
determined no goodwill impairment charges were required for the year ended
December 31, 2008. Even though we determined that there was no
goodwill impairment during 2008, continued declines in the value of our stock
price and additional adverse changes in the operating environment for the
financial services industry may result in a future impairment
charge.
Please
refer to Note 9 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data” of this report for further
discussion.
Executive
Summary
At
December 31, 2008, total loans were $2.23 billion compared with $2.28
billion in the prior year, a decrease of $50 million or 2%. Our
decrease in total loans during the year was the result of a lack of demand from
qualified borrowers coupled with a deliberate reduction in our residential real
estate construction portfolio. Despite the decrease in 2008, over the
past five years our banking team has generated a compound annual growth rate for
year end loans of 15.7% inclusive of the impact of our three acquisitions during
this time period. Nonperforming loans represented 4.78% of total
loans at December 31, 2008 compared to 0.63% at the end of 2007. At
year end our allowance for loan and lease losses was $42.7 million compared to
$26.6 million a year ago. The allowance for loan and lease losses represented
1.91% of our total loan portfolio and 40.04% of total nonperforming loans at
year end compared to 1.17% and 183.94%, respectively, one year ago. Net
charge-offs of $25.0 million for 2008 were up significantly from $380 thousand
in the prior year. The increase in non-performing loans coupled with
the deteriorating economy, caused us to increase our provision for loan and
lease losses to $41.2 million during 2008 from $3.6 million during
2007.
Deposits
decreased $115.9 million to $2.38 billion on December 31, 2008 compared to
$2.50 billion one year earlier. Core deposits defined as nonmaturity deposits
and time certificate of deposit balances less than $100,000, declined $55.3
million or 3%, to $1.94 billion at year end. Over the past five years
core deposits have proven to be a stable source of funds with a compound annual
growth rate of 8%. Certificates of deposits over $100,000 decreased
$60.6 million for 2008. Short-term borrowings decreased $37.5
million from the prior year to $225.2 million at December 31,
2008.
Total
revenues (net interest income plus noninterest income) decreased 2% to $134.4
million during 2008 as compared to $136.6 million during 2007. Net interest
income increased $11 million to $119.5 million from $108.8 million in 2007.
Noninterest income decreased $12.9 million to $14.9 million from $27.8 million
in 2007. The decrease in noninterest income was attributed primarily
to a $19.5 million other-than-temporary-impairment charge related to the decline
of our investment in Federal Home Loan Mortgage Corporation (“Freddie Mac”) and
the Federal National Mortgage Association (“Fannie Mae”) preferred
stock.
Our net
interest margin increased 3 basis points to 4.38% during 2008 from 4.35% in the
prior year. For the twelve month period, funding costs have decreased as a
result of declining rates. The average cost of interest bearing
deposits decreased 96 basis points to 2.36% from 3.32% in the prior year while
our average borrowing costs decreased to 2.88%, down from 5.69% in the prior
year.
Earnings
per diluted share common decreased $1.60 to $0.31 during 2008 as compared to
$1.91 in 2007. The decrease in earnings per diluted share is reflective of the
reduced income resulting from the impairment charge on the Freddie Mac and
Fannie Mae preferred stock and the significantly increased loan loss
provision. Our return on average tangible common equity, which
removes from equity the impact of goodwill arising from acquisitions, was 2.72%
for the year as compared to 14.53% in 2007. Return on average common equity
declined to 1.59% in 2008 from 11.19% in 2007.
During
2008 our noninterest expense increased 4%, or $3.3 million, to $92.1 million.
This increase is primarily attributable to increased employee compensation and
benefits expense of $2.6 million and increased regulatory premiums of $1.6
million. The increase in compensation costs was attributed to net
costs of $2.0 million associated with the BOLI replacement policy transaction
resulting from the implementation of EITF 06-4. Compensation costs were also
increased in excess of $1.7 million due to our two mid-year 2007
acquisitions. Employee compensation and benefits were also impacted
by increased group medical costs, general wage increases, and expenses related
to share-based payments.
Our
efficiency ratio [noninterest expense divided by the sum of net interest income
and noninterest income on a tax equivalent basis, excluding gain (loss) on sale
of investment securities, net cost (gain) of OREO, BOLI policy swap income and
expense, recovery of the VISA litigation liability expense, death benefits
payable and other than temporary security impairments] was 59.88% for 2008 and
61.33% for 2007. The year over year improvement (decrease) in our efficiency
ratio is due to an increase in net interest income coupled with a higher growth
rate of noninterest income in proportion to noninterest expense. For discussion
over the variances in
noninterest
expense and noninterest income see the following “Noninterest Income” and
“Noninterest Expense” sections of this discussion.
A
priority for us during 2009 is to continue to focus on actively managing our
balance sheet in a manner that minimizes our exposure to potential contraction
of our net interest margin in light of the current low interest rate
environment. In addition, we will continue to focus on expense control and
pursue opportunities to reduce expenses including measures such as additional
branch consolidations. We will continue in our efforts to increase
market share in all the communities we serve through leveraging our strong base
of branches in both Washington and Oregon. As strategic opportunities are
identified, we will consider new markets and branch locations that fit both our
economic model and our corporate culture but such activities will be tempered by
the need for fiscal restraint based upon the current general economic
conditions.
Results
of Operations
Net
income for the year decreased to $6.0 million compared to $32.4 million in 2007
and $32.1 million in 2006. On a diluted per share basis, net income for the year
was $0.31 per share, compared with $1.91 per share in 2007, and $1.99 per share
in 2006.
Our
results of operations are dependent to a large degree on net interest income. We
also generate noninterest income through service charges and fees and merchant
services fees. Our operating expenses consist primarily of compensation,
employee benefits, and occupancy. Like most financial institutions, our interest
income and cost of funds are affected significantly by general economic
conditions, particularly changes in market interest rates, and by government
policies and the actions of regulatory authorities.
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 7 branches in King and Pierce counties and 5 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, 2008 year-to-date
operating results are not directly comparable to the 2007 and 2006 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.
Net
Interest Income
Net
interest income is the single largest component of our total revenue. Our net
interest income increased 10%, to $119.5 million in 2008 as compared to $108.8
million in 2007 and $97.8 million in 2006. In the current year a decline in
interest expense was the primary factor in the growth of our net interest
income, decreasing 26% to $55.5 million. This compares to 2007 and 2006 interest
expense of $75.4 million and $53.9 million, respectively. The
decrease in interest expense during 2008 is primarily due to decreased average
rates, whereas the increase during 2007 was attributable to increased volumes of
interest bearing liabilities. Interest income decreased $9.2 million,
or 5%, to $175.1 million during 2008 as compared to $184.7 million in 2007 and
$151.7 million in 2006. The decline in interest income for 2008 is primarily due
to the decline in the yield on earning assets. Net interest reversals
in 2008 related to nonaccrual loans totaled approximately $1.3 million which
resulted in a decline of 5 basis points in loan yields. Net interest
reversals for the first, second, third and fourth quarters of 2008 were $83
thousand, $335 thousand, $355 thousand and $506 thousand, respectively.
The increase in interest income in 2007 compared to 2006 was attributed to
higher loan volumes.
The net
interest margin improved slightly due to the decline in interest expense,
increasing 3 basis points to 4.38% from 4.35% in 2007 versus 4.49% in
2006. Approximately 32% of our loans are floating rate and tied to
short-term indices such as Prime, LIBOR, and the CB Base Rate. The CB
Base Rate is an internally derived index established by our pricing committee.
Average loan yields decreased 130 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. Additional decreases in the Prime rate will negatively impact our
net interest margin.
In
2006, we began using derivative instruments to add stability to interest income
and to manage our exposure to changes in interest rates. One of the
initiatives we undertook to accomplish this objective was the purchase of three
prime interest rate floors for a combined notional amount of $200 million. We
utilized these floors to establish a cash flow hedge with several pools of our
prime based loans to assist in diminishing our exposure to margin compression in
a falling rate environment. Essentially, when the prime rate fell
below the strike rate the Company received payment on the difference between the
two rates. In March 2006 we paid approximately $3.1 million for the floors which
had an April 2011 expiration date. In January 2008 we elected to take
advantage of what we felt was favorable pricing and sold the floors for $8.1
million. At the time of their sale the floors had a book value of
$1.9 million resulting in a deferred gain of $6.2 million to be recognized
through interest income as the originally hedged forecasted transactions
(interest payments on variable-rate loans) affect earnings. We recorded $1.7
million of the deferred gain to income in 2008 and expect to accrete the
remaining deferred gains of $2.4 million, $1.7 million, and $290
thousand in 2009, 2010, and 2011, respectively. Our decision to monetize
the gain on these floors removed the uncertainty changing interest rates would
have on their realizable value had we held them to maturity and it eliminated
the risk that our counterparty to this transaction would not be able to honor
their financial commitment. For additional information on our
derivatives and hedging activities, see Note 21 to the Consolidated Financial
Statements in “Item 8. Financial Statements and Supplementary Data” of this
report.
Average
Balances and Net Interest Revenue
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:
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
Interest
|
Interest
|
Interest
|
||||||||||||||||||||||||||||||||||
|
Average
|
Earned/
|
Average
|
Average
|
Earned/
|
Average
|
Average
|
Earned/
|
Average
|
||||||||||||||||||||||||||||
|
Balances(1)
|
Paid
|
Rate
|
Balances
(1)
|
Paid
|
Rate
|
Balances
(1)
|
Paid
|
Rate
|
||||||||||||||||||||||||||||
|
ASSETS
|
(dollars
in thousands)
|
|||||||||||||||||||||||||||||||||||
|
Loans
(1)(2)
|
2,264,486 | $ | 148,240 | 6.55 | % | 1,990,622 | $ | 156,253 | 7.85 | % | $ | 1,629,616 | $ | 123,998 | 7.61 | % | ||||||||||||||||||||
|
Taxable
securities
|
379,052 | 18,852 | 4.97 | % | 395,512 | 18,685 | 4.72 | % | 459,638 | 20,108 | 4.96 | % | ||||||||||||||||||||||||
|
Tax
exempt securities (2)
|
186,246 | 12,868 | 6.91 | % | 185,610 | 12,189 | 6.57 | % | 163,993 | 10,834 | 6.61 | % | ||||||||||||||||||||||||
|
Interest-earning
deposits with banks and federal funds sold
|
21,771 | 402 | 1.85 | % | 27,635 | 1,427 | 5.16 | % | 12,146 | 617 | 5.08 | % | ||||||||||||||||||||||||
|
Total
interest-earning assets
|
$ | 2,851,555 | $ | 180,362 | 6.33 | % | $ | 2,599,379 | $ | 188,554 | 7.25 | % | $ | 2,265,393 | $ | 155,557 | 6.87 | % | ||||||||||||||||||
|
Other
earning assets
|
47,753 | 42,334 | 37,725 | |||||||||||||||||||||||||||||||||
|
Noninterest-earning
assets
|
234,746 | 195,449 | 170,286 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 3,134,054 | $ | 2,837,162 | $ | 2,473,404 | ||||||||||||||||||||||||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Certificates
of deposit
|
$ | 780,092 | $ | 28,120 | 3.60 | % | $ | 698,078 | $ | 31,274 | 4.48 | % | $ | 543,053 | $ | 20,985 | 3.86 | % | ||||||||||||||||||
|
Savings
accounts
|
118,073 | 437 | 0.37 | % | 111,265 | 467 | 0.42 | % | 115,802 | 436 | 0.38 | % | ||||||||||||||||||||||||
|
Interest-bearing
demand
|
445,449 | 6,009 | 1.35 | % | 435,807 | 11,026 | 2.53 | % | 361,618 | 7,507 | 2.08 | % | ||||||||||||||||||||||||
|
Money
market accounts
|
578,123 | 10,741 | 1.86 | % | 558,510 | 17,163 | 3.07 | % | 518,156 | 11,910 | 2.30 | % | ||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
1,921,737 | 45,307 | 2.36 | % | 1,803,660 | 59,930 | 3.32 | % | 1,538,629 | 40,838 | 2.65 | % | ||||||||||||||||||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
297,193 | 7,573 | 2.55 | % | 207,521 | 11,065 | 5.33 | % | 208,593 | 10,944 | 5.25 | % | ||||||||||||||||||||||||
|
Long-term
subordinated debt
|
25,558 | 1,800 | 7.04 | % | 23,777 | 2,177 | 9.16 | % | 22,343 | 1,992 | 8.92 | % | ||||||||||||||||||||||||
|
Other
borrowings and interest-bearing liabilities
|
32,934 | 867 | 2.63 | % | 40,606 | 2,225 | 5.48 | % | 2,413 | 138 | 5.72 | % | ||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
$ | 2,277,422 | $ | 55,547 | 2.44 | % | $ | 2,075,564 | $ | 75,397 | 3.63 | % | $ | 1,771,978 | $ | 53,912 | 3.04 | % | ||||||||||||||||||
|
Noninterest-bearing
deposits
|
460,747 | 438,474 | 437,819 | |||||||||||||||||||||||||||||||||
|
Other
noninterest-bearing liabilities
|
41,498 | 33,827 | 25,764 | |||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
354,387 | 289,297 | 237,843 | |||||||||||||||||||||||||||||||||
|
Total
liabilities & shareholders' equity
|
$ | 3,134,054 | $ | 2,837,162 | $ | 2,473,404 | ||||||||||||||||||||||||||||||
|
equity
|
||||||||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 124,815 | $ | 113,157 | $ | 101,645 | ||||||||||||||||||||||||||||||
|
Net
interest spread
|
3.89 | % | 3.62 | % | 3.83 | % | ||||||||||||||||||||||||||||||
|
Net
interest margin
|
4.38 | % | 4.35 | % | 4.49 | % | ||||||||||||||||||||||||||||||
|
(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 $3.5 million in 2008, $3.5 million in 2007, $2.1
million in 2006.
|
|
(2)
|
Yields
on fully taxable equivalent basis, based on a marginal tax rate of
35%.
|
A
performance metric that we consistently use to evaluate our success in managing
our interest-earning assets and interest-bearing liabilities is the level of our
net interest margin. Our net interest margin (net interest income on a
fully-taxable equivalent basis divided by average interest-earning assets)
remained relatively stable during 2008 and 2007 increasing 3 basis points [A
basis point is 1/100th of 1%, alternatively 100 basis points equals 1.00]. The
increase in our net interest margin during 2008 was primarily due to the decline
in yield on interest bearing liabilities. While our net interest
margin experienced a very modest increase from 2007 to 2008, for comparative
purposes one basis point in the margin equates to approximately $285,000 per
year in net interest income. Accordingly, the 3 basis point increase
in the margin during 2008 positively impacted pre-tax earnings by
$855,000.
Net
Interest Income Rate & Volume Analysis
The
following table sets forth the total dollar amount of change in interest income
and interest expense. The changes have been segregated for each major category
of interest-earning assets and interest-bearing liabilities into amounts
attributable to changes in volume, changes in rates and changes in rates
multiplied by volume. 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:
|
2008
Compared to 2007
|
2007
Compared to 2006
|
|||||||||||||||||||||||
|
Increase
(Decrease) Due to
|
Increase
(Decrease) Due to
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Interest
Income
|
||||||||||||||||||||||||
|
Loans
(TE)(1)
|
$ | 17,938 | $ | (25,951 | ) | $ | (8,013 | ) | $ | 28,337 | $ | 3,918 | $ | 32,255 | ||||||||||
|
Securities
(TE)
|
(888 | ) | 1,734 | 846 | (2,258 | ) | 2,190 | (68 | ) | |||||||||||||||
|
Interest
earning deposits with banks and federal funds sold
|
(108 | ) | (917 | ) | (1,025 | ) | 800 | 10 | 810 | |||||||||||||||
|
Interest
income (TE)
|
$ | 16,942 | $ | (25,134 | ) | $ | (8,192 | ) | $ | 26,879 | $ | 6,118 | $ | 32,997 | ||||||||||
|
Interest
Expense
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Certificates
of deposit
|
$ | 2,956 | $ | (6,110 | ) | $ | (3,154 | ) | $ | 6,945 | $ | 3,344 | $ | 10,289 | ||||||||||
|
Savings
accounts
|
25 | (55 | ) | (30 | ) | (19 | ) | 50 | 31 | |||||||||||||||
|
Interest-bearing
demand
|
130 | (5,147 | ) | (5,017 | ) | 1,877 | 1,642 | 3,519 | ||||||||||||||||
|
Money
market accounts
|
364 | (6,786 | ) | (6,422 | ) | 1,240 | 4,013 | 5,253 | ||||||||||||||||
|
Total
interest on deposits
|
3,475 | (18,098 | ) | (14,623 | ) | 10,043 | 9,049 | 19,092 | ||||||||||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
2,284 | (5,776 | ) | (3,492 | ) | (57 | ) | 178 | 121 | |||||||||||||||
|
Long-term
subordinated debt
|
126 | (503 | ) | (377 | ) | 131 | 54 | 185 | ||||||||||||||||
|
Other
borrowings and interest-bearing liabilities
|
(202 | ) | (1,156 | ) | (1,358 | ) | 2,093 | (6 | ) | 2,087 | ||||||||||||||
|
Interest
expense
|
$ | 5,683 | $ | (25,533 | ) | $ | (19,850 | ) | $ | 12,210 | $ | 9,275 | $ | 21,485 | ||||||||||
|
|
TE = Taxable
equivalent, based on a marginal tax rate of
35%.
|
|
(1)
|
Nonaccrual
loans were included in their respective loan categories. Amortized net
deferred loan fees were included in the interest income calculations. The
amortization of net deferred loan fees was $3.5 million in 2008, $3.5
million in 2007, $2.1 million in
2006.
|
As
evidenced by the table presented above, the $8 million decrease in total
interest revenue during 2008 as compared to 2007 was primarily due to the
decreased rates on loans. The $33 million increase in total interest
revenue during 2007, as compared to 2006, was primarily due to increased volume
of loans. The $19.8 million decrease in total interest expense in 2008, as
compared to 2007, was primarily a result of decreased rates on interest bearing
deposits and FHLB advances. The $21.5 million increase in total
interest expense in 2007, as compared to 2006, was a result of increased volume
and rates on certificate of deposits and interest bearing demand accounts and
the increased volume in other borrowings.
Provision for Loan and Lease
Losses
Our
provision for loan and lease losses (“the provision”) was $41.2 million for
2008, compared with $3.6 million for 2007, and $2.1 million for 2006. For the
years ended December 31, 2008, 2007, and 2006, net loan charge-offs
amounted to $25 million, $380,000 and $2.7 million, respectively. Expressed as a
percentage of average loans, net charge-offs for the years ended
December 31, 2008, 2007 and 2006 were 111 basis points, 2 basis points, and
17 basis points, respectively. The charge-offs during 2008 and 2007 were
comprised of several loans. The net charge offs for 2006 were primarily centered
in one “legacy credit” originated in December of 1999, which was classified as
non-performing in November of 2003. The increased provision in 2008 is due to
the weakness in the for-sale housing industry resulting from the declining
economic environment and a significant increase in non-accrual loans within this
sector of the loan portfolio. This resulted in net loan charge-offs
of $25.0 million, which depleted the allowance. The increased provision in 2007
as compared to 2006 was primarily due to growth in our loan portfolio. The
provision is based on management’s estimates resulting from ongoing modeling and
qualitative analysis of the characteristics and composition of the loan
portfolio. 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” section of this
discussion.
Noninterest
Income
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,
|
||||||||||||||||||||||||||||
|
2008
|
$
Change
|
%
Change
|
2007
|
$
Change
|
%
Change
|
2006
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Fees
and Other Income
|
||||||||||||||||||||||||||||
|
Service
charges, loan fees and other fees
|
$ | 14,813 | $ | 1,315 | 10 | % | $ | 13,498 | $ | 1,847 | 16 | % | $ | 11,651 | ||||||||||||||
|
Merchant
services fees
|
8,040 | (333 | ) | (4) | % | 8,373 | 59 | 1 | % | 8,314 | ||||||||||||||||||
|
Redemption
of Visa and Mastercard Shares
|
3,028 | 3,028 | 100 | % | - - | - - | 0 | % | - - | |||||||||||||||||||
|
Gain
(loss) on sale of securities, net
|
846 | 846 | 100 | % | - - | (36 | ) | (100) | % | 36 | ||||||||||||||||||
|
Impairment
charge on investment securities
|
(19,541 | ) | (19,541 | ) | 100 | % | - - | - - | 0 | % | - - | |||||||||||||||||
|
Bank
owned life insurance (BOLI)
|
2,075 | 189 | 10 | % | 1,886 | 199 | 12 | % | 1,687 | |||||||||||||||||||
|
Other
Income
|
5,589 | 1,598 | 40 | % | 3,991 | 1,007 | 34 | % | 2,984 | |||||||||||||||||||
|
Total
noninterest income
|
$ | 14,850 | $ | (12,898 | ) | (46) | % | $ | 27,748 | $ | 3,076 | 12 | % | $ | 24,672 | |||||||||||||
The
decrease in noninterest income during 2008 was primarily due to the $19.5
million impairment charge on Fannie Mae and Freddie Mac investment
securities. This decrease was partially offset with proceeds from the
redemption of Visa and MasterCard shares of $3.0 million and a net gain on sale
of securities of $846,000. Service charges and other fees increased
$1.3 million or 10%, reflecting a change in our deposit account fee structure in
conjunction with an increase in the number of deposit accounts. The
increase in deposit accounts results from a combination of organic growth and
accounts obtained from our two acquisitions which closed early in the third
quarter of 2007.
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,
|
||||||||||||||||||||||||||||
|
2008
|
$
Change
|
%
Change
|
2007
|
$
Change
|
%
Change
|
2006
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Gain
on disposal of assets
|
$ | 492 | $ | 227 | 86 | % | $ | 265 | $ | (60 | ) | (18) | % | $ | 325 | |||||||||||||
|
Mortgage
banking
|
628 | 91 | 17 | % | 537 | 249 | 86 | % | 288 | |||||||||||||||||||
|
Cash
management 12-b1 fees
|
466 | 67 | 17 | % | 399 | 71 | 22 | % | 328 | |||||||||||||||||||
|
Letter
of credit fees
|
399 | - - | 0 | % | 399 | 95 | 31 | % | 304 | |||||||||||||||||||
|
Late
charges
|
338 | 88 | 35 | % | 250 | 18 | 8 | % | 232 | |||||||||||||||||||
|
Currency
exchange income
|
356 | 40 | 13 | % | 316 | 50 | 19 | % | 266 | |||||||||||||||||||
|
New
Markets Tax Credit dividend
|
74 | (19 | ) | (20) | % | 93 | 1 | 1 | % | 92 | ||||||||||||||||||
|
Miscellaneous
fees on loans
|
915 | 45 | 5 | % | 870 | 633 | 267 | % | 237 | |||||||||||||||||||
|
Interest
rate swap income
|
647 | 422 | 188 | % | 225 | 225 | 100 | % | - - | |||||||||||||||||||
|
Credit
card fees
|
142 | 61 | 75 | % | 81 | (2 | ) | (2) | % | 83 | ||||||||||||||||||
|
Life
insurance death benefit
|
612 | 612 | 100 | % | 0 | - - | 0 | % | - - | |||||||||||||||||||
|
Miscellaneous
|
520 | (36 | ) | (6) | % | 556 | (273 | ) | (33) | % | 829 | |||||||||||||||||
|
Total
noninterest income
|
$ | 5,589 | $ | 1,598 | 40 | % | $ | 3,991 | $ | 1,007 | 34 | % | $ | 2,984 | ||||||||||||||
The gain
on disposal of assets increased due to the sale of a consolidated branch office
with the remainder consisting of the amortized gain on 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, 2008 and 2007 was $483,000 and
$565,000, respectively, and is included in other liabilities on our consolidated
balance sheets. During 2008, 2007 and 2006 the Company recognized amortized
gains associated with the sale and lease-back transaction of $83,000, $219,000
and $246,000, respectively. Interest rate swap income increased due
to the addition of approximately $74 million of notional amount interest rate
swap agreements originated during the year. The life insurance death
benefit was related to the death of a former officer covered by
BOLI.
Noninterest
Expense
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,
|
||||||||||||||||||||||||||||
|
2008
|
$
Change
|
%
Change
|
2007
|
$
Change
|
%
Change
|
2006
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Compensation
|
$ | 36,895 | $ | 2,387 | 7 | % | $ | 34,508 | $ | 6,322 | 22 | % | $ | 28,186 | ||||||||||||||
|
Employee
benefits
|
12,420 | 225 | 2 | % | 12,195 | 1,612 | 15 | % | 10,583 | |||||||||||||||||||
|
Occupancy
|
12,838 | 516 | 4 | % | 12,322 | 1,562 | 15 | % | 10,760 | |||||||||||||||||||
|
Merchant
processing
|
3,558 | 88 | 3 | % | 3,470 | 109 | 3 | % | 3,361 | |||||||||||||||||||
|
Advertising
and promotion
|
2,324 | (67 | ) | (3) | % | 2,391 | (191 | ) | (7) | % | 2,582 | |||||||||||||||||
|
Data
processing
|
3,486 | 922 | 36 | % | 2,564 | 250 | 11 | % | 2,314 | |||||||||||||||||||
|
Legal
and professional services
|
1,969 | (2,943 | ) | (60) | % | 4,912 | 2,813 | 134 | % | 2,099 | ||||||||||||||||||
|
Taxes,
license and fees
|
2,917 | 35 | 1 | % | 2,882 | 383 | 15 | % | 2,499 | |||||||||||||||||||
|
Net
(gain) loss on sale of other real estate owned
|
(49 | ) | (54 | ) | (1080) | % | 5 | 16 | (145) | % | (11 | ) | ||||||||||||||||
|
Regulatory
premiums
|
2,141 | 1,634 | 322 | % | 507 | 238 | 88 | % | 269 | |||||||||||||||||||
|
Other
|
13,626 | 553 | 4 | % | 13,073 | (419 | ) | (3) | % | 13,492 | ||||||||||||||||||
|
Total
noninterest expense
|
$ | 92,125 | $ | 3,296 | 4 | % | $ | 88,829 | $ | 12,695 | 17 | % | $ | 76,134 | ||||||||||||||
The
current year increase in noninterest expense is primarily attributed to
increased employee compensation and benefit costs, higher occupancy expense,
data processing expense, regulatory premiums and other miscellaneous
expenses. The increase in compensation costs was primarily due to a
full year of employee
expenses
related to our two acquisitions as well as the BOLI replacement policy
transaction we completed upon the implementation of EITF
06-4. For additional information regarding the BOLI replacement
policy transaction, please refer to the Compensation Discussion and Analysis
disclosure contained within our 2008 Proxy. The increase in
compensation and employee benefits for both periods was also impacted by
increased group medical costs, general wage increases, and expenses related to
share based payments. The increase in occupancy expense during 2007
was primarily related to our expansion efforts within King, Thurston and Whatcom
County markets and our two acquisitions. The increase in data
processing costs was attributed to the increase in transaction volumes
associated with the acquisitions as well as the core software conversion of the
Bank of Astoria. The 2008 increase in other expense was primarily in
the core deposit intangible amortization and telephone and network expenses,
both related to the acquisitions. The decrease in legal and
professional fees 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, 2008 our remaining accrual for the Visa
litigation liability was $485,355.
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,
|
||||||||||||||||||||||||||||
|
2008
|
$
Change
|
%
Change
|
2007
|
$
Change
|
%
Change
|
2006
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
CRA
partnership investment expense (1)
|
$ | 668 | $ | (64 | ) | (9) | % | $ | 732 | $ | (38 | ) | (5) | % | $ | 770 | ||||||||||||
|
Core
deposit intangible amortization ("CDI")
|
1,142 | 423 | 59 | % | 719 | 267 | 59 | % | 452 | |||||||||||||||||||
|
Software
support & maintenance
|
713 | (133 | ) | (16) | % | 846 | 126 | 18 | % | 720 | ||||||||||||||||||
|
Federal
Reserve Bank processing fees
|
422 | (18 | ) | (4) | % | 440 | (400 | ) | (48) | % | 840 | |||||||||||||||||
|
Telephone
& network communications
|
1,527 | 293 | 24 | % | 1,234 | 114 | 10 | % | 1,120 | |||||||||||||||||||
|
Supplies
|
1,064 | (300 | ) | (22) | % | 1,364 | 166 | 14 | % | 1,198 | ||||||||||||||||||
|
Postage
|
1,420 | 53 | 4 | % | 1,367 | 128 | 10 | % | 1,239 | |||||||||||||||||||
|
Sponsorships
& charitable contributions
|
642 | 19 | 3 | % | 623 | (38 | ) | (6) | % | 661 | ||||||||||||||||||
|
Travel
|
471 | 18 | 4 | % | 453 | 115 | 34 | % | 338 | |||||||||||||||||||
|
Investor
relations
|
182 | (46 | ) | (20) | % | 228 | 59 | 35 | % | 169 | ||||||||||||||||||
|
Insurance
|
505 | 57 | 13 | % | 448 | (25 | ) | (5) | % | 473 | ||||||||||||||||||
|
Director
expenses
|
453 | 30 | 7 | % | 423 | (19 | ) | (4) | % | 442 | ||||||||||||||||||
|
Employee
expenses
|
599 | (64 | ) | (10) | % | 663 | 83 | 14 | % | 580 | ||||||||||||||||||
|
ATM
Network
|
659 | 3 | 0 | % | 656 | 63 | 11 | % | 593 | |||||||||||||||||||
|
Miscellaneous
|
3,159 | 282 | 10 | % | 2,877 | (1,020 | ) | (26) | % | 3,897 | ||||||||||||||||||
|
Total
other noninterest expense
|
$ | 13,626 | $ | 553 | 4 | % | $ | 13,073 | $ | (419 | ) | (3) | % | $ | 13,492 | |||||||||||||
|
(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,
2008, $511,201 of such credits was taken as a reduction in our current
period income tax expense. In addition, our taxable income was
decreased by $237,000 during the twelve months ended December 31, 2008 as
a result of the tax benefit associated with this investment
expense.
|
Income
Tax
For the
years ended December 31, 2008, 2007, and 2006, we recorded an income tax
benefit of $4.9 million, and income tax provisions of $11.8 million, and $12.1
million, respectively. The effective tax benefit was 463% in 2008 and the
effective tax rate was 26.6% in 2007 and 27.4% in 2006. 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 declined 3% to $3.10 billion at December 31, 2008 from $3.18 billion
at December 31, 2007. The decrease in total assets was attributed to a
decline in our loan and investment portfolios. The loan portfolio
decreased 2% or $50.4 million to $2.23 billion. The decline in the loan
portfolio can be attributed to a combination of loan payoffs, pay downs, an
intentional decline within certain sectors of the portfolio, and loan
charge-offs. Our investment portfolio decreased 6% or $32.4
million. This decrease was primarily a result of investment
maturities and scheduled principal reductions and prepayments on mortgage-backed
securities. Deposit balances also decreased $115.9 million or 5% to
$2.4 billion. Noninterest bearing deposits decreased $2.2 million to $466.1
million while interest bearing deposits decreased $113.7 million to $1.9
billion. Short-term borrowings decreased 14% or $37.5 million to $225.2 million.
The decreased borrowings were a result of lagging loan demand and the Company’s
participation in the U.S. Treasury’s Capital Purchase Program (“CPP”). The
Company received $76.9 million in proceeds from the issuance of preferred stock
and warrants to the U.S. Treasury. In the near-term, these proceeds
have been held as short-term investments.
Investment
Portfolio
Securities
Available for Sale
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, 2008 we had 130
available for sale securities in an unrealized loss position. Based on past
experience with these types of securities and our own financial performance, we
have the ability and intent to hold these investments to maturity or until fair
value recovers above cost. We review these investments for other-than-temporary
impairment on an ongoing basis.
In the
third quarter, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and
the Federal National Mortgage Association (“Fannie Mae”) were placed into
conservatorship in a plan announced by the U.S. Treasury Department (“Treasury”)
and the Federal Housing Finance Agency (“FHFA”). The Company
holds 400,000 shares of Series Z preferred stock issued by Freddie Mac and
400,000 shares of Series S preferred stock issued by Fannie Mae. Such
securities are held in the Company’s available-for-sale investment securities
portfolio and, as such, declines in fair value below cost are subject to a
potential other than temporary impairment charge to earnings under Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The Company’s cost for these
securities was $20 million. The estimated fair market value of these
securities declined from $20 million to $488 thousand at December 31,
2008. In light of the actions taken by Treasury and FHFA and the
accompanying significant decline in the fair value of these securities below
cost, the Company has deemed the impairment to be other than temporary and,
accordingly, recognized a pre-tax charge to earnings totaling $19.5
million. While our review did not result in any additional securities
with an other-than-temporary impairment adjustment as of December 31, 2008,
we will continue to review our investments for possible adjustments in the
future.
Purchases
during 2008 totaled $89.1 million while maturities, repayments and sales totaled
$49.7 million compared to purchases of $3.7 million and maturities and
repayments of $49.2 million during 2007. At December 31, 2008 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%. There was no impairment charge recognized during 2007 or 2006.
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 4 years and 10 months at December 31, 2008. 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.
The
following table presents the contractual maturities and weighted average yield
of term securities in our investment portfolio:
Securities
Available for Sale
|
December
31, 2008
|
||||||||||||
|
Amortized
Cost
|
Fair Value
|
Yield
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
U.S.
Government agency and government-sponsored enterprise mortgage-backed
securities & collateralized mortgage obligations (1)
|
||||||||||||
|
Due
through 1 year
|
$ | 58 | $ | 59 | 4.01 | % | ||||||
|
Over
1 through 5 years
|
2,057 | 2,078 | 4.50 | % | ||||||||
|
Over
5 through 10 years
|
139,046 | 140,318 | 4.66 | % | ||||||||
|
Over
10 years
|
194,046 | 199,383 | 5.26 | % | ||||||||
|
Total
|
$ | 335,207 | $ | 341,838 | 5.01 | % | ||||||
|
State
and municipal securities (2)
|
||||||||||||
|
Due
through 1 year
|
$ | 1,801 | $ | 1,804 | 3.89 | % | ||||||
|
Over
1 through 5 years
|
16,091 | 16,839 | 6.47 | % | ||||||||
|
Over
5 through 10 years
|
36,028 | 36,444 | 5.60 | % | ||||||||
|
Over
10 years
|
134,495 | 130,566 | 6.25 | % | ||||||||
|
Total
|
$ | 188,415 | $ | 185,653 | 6.12 | % | ||||||
|
(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 Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The FHLB recently reported
that, due to ongoing turmoil in the capital and mortgage markets, they will
likely report a risk-based capital deficiency as of December 31,
2008. Under Federal Housing 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,
the FHLB believes, despite the risk-based capital deficiency, they have adequate
capital to cover the risks reflected on their balance
sheet. Accordingly, as of December 31, 2008 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.
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,
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
%
of Total
|
2007
|
%
of Total
|
2006
|
%
of Total
|
2005
|
%
of Total
|
2004
|
%
of Total
|
|||||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial
business
|
$ | 810,922 | 36.3 | % | $ | 762,365 | 33.4 | % | $ | 617,899 | 36.1 | % | $ | 570,974 | 36.5 | % | $ | 488,157 | 35.9 | % | ||||||||||||||||||||
|
Real
estate:
|
||||||||||||||||||||||||||||||||||||||||
|
One-to-four
family residential
|
57,237 | 2.6 | % | 60,991 | 2.7 | % | 51,277 | 3.0 | % | 74,930 | 4.8 | % | 49,580 | 3.7 | % | |||||||||||||||||||||||||
|
Commercial
and five or more family residential properties
|
862,595 | 38.6 | % | 852,139 | 37.3 | % | 687,635 | 40.3 | % | 651,393 | 41.6 | % | 595,775 | 43.8 | % | |||||||||||||||||||||||||
|
Total
real estate
|
919,832 | 41.2 | % | 913,130 | 40.0 | % | 738,912 | 43.3 | % | 726,323 | 46.4 | % | 645,355 | 47.5 | % | |||||||||||||||||||||||||
|
Real
estate construction:
|
||||||||||||||||||||||||||||||||||||||||
|
One-to-four
family residential
|
209,682 | 9.4 | % | 269,115 | 11.8 | % | 92,124 | 5.4 | % | 41,033 | 2.6 | % | 26,832 | 2.0 | % | |||||||||||||||||||||||||
|
Commercial
and five or more family residential properties
|
81,176 | 3.6 | % | 165,490 | 7.2 | % | 115,185 | 6.8 | % | 89,134 | 5.7 | % | 70,108 | 5.1 | % | |||||||||||||||||||||||||
|
Total
real estate construction
|
290,858 | 13.0 | % | 434,605 | 19.0 | % | 207,309 | 12.2 | % | 130,167 | 8.3 | % | 96,940 | 7.1 | % | |||||||||||||||||||||||||
|
Consumer
|
214,753 | 9.7 | % | 176,559 | 7.8 | % | 147,782 | 8.6 | % | 140,110 | 9.0 | % | 132,130 | 9.7 | % | |||||||||||||||||||||||||
|
Subtotal
|
2,236,365 | 100.2 | % | 2,286,659 | 100.2 | % | 1,711,902 | 100.2 | % | 1,567,574 | 100.2 | % | 1,362,582 | 100.2 | % | |||||||||||||||||||||||||
|
Less
deferred loan fees and other
|
(4,033 | ) | (0.2) | % | (3,931 | ) | (0.2) | % | (2,940 | ) | (0.2) | % | (2,870 | ) | (0.2) | % | (2,839 | ) | (0.2) | % | ||||||||||||||||||||
|
Total
loans
|
$ | 2,232,332 | 100.0 | % | $ | 2,282,728 | 100.0 | % | $ | 1,708,962 | 100.0 | % | $ | 1,564,704 | 100.0 | % | $ | 1,359,743 | 100.0 | % | ||||||||||||||||||||
|
Loans
held for sale
|
$ | 1,964 | $ | 4,482 | $ | 933 | $ | 1,850 | $ | 6,019 | ||||||||||||||||||||||||||||||
At
December 31, 2008, total loans were $2.23 billion compared with $2.28
billion in the prior year, a decrease of $50.4 million or 2%. We experienced
growth in commercial business, commercial real estate and consumer loans while
real estate construction loans declined significantly. Total loans represented
72% of total assets at both December 31, 2008 and December 31, 2007.
Although balances declined during 2008, the compound annual growth rate of our
loan portfolio over the last five years is 16%.
Commercial
Business Loans: Commercial loans increased $48.6 million, or 6%, to
$810.9 million from year-end 2007, representing 36% 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 one to four family loans are used by us to
collateralize advances from the FHLB. Our underwriting standards require that
one-to-four family portfolio loans generally be owner-occupied and that loan
amounts not exceed 80% (90% with private mortgage insurance) of the appraised
value or cost, whichever is lower, of the underlying collateral at origination.
We utilize an outsourced residential lending underwriting platform. Residential
loans are originated on a pre-sold basis provided they meet the underwriting
criteria established by our third party provider. If circumstances warrant, we
may originate and retain loans that fall outside the scope of our third party
provider’s underwriting guidelines. However, we do not underwrite
residential real estate loans for the subprime market.
Commercial
and five or more family residential real estate loans reflect a mix of owner
occupied and income property transactions. Generally, these 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 or cost, whichever is lower, 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, economic conditions, and other factors. We
endeavor to maintain the highest practical underwriting standards while
balancing the need to remain competitive in our lending practices.
Real Estate
Construction Loans: We originate a variety of real estate
construction loans. One-to-four family residential construction loans are
originated for the construction of custom homes (where the home buyer is the
borrower) and to provide financing to builders for the construction of pre-sold
homes and speculative residential construction. This segment of the portfolio
declined $143.7 million or 33% to $290.9 million at year end. The
decline in real estate construction loans is a result of loan payoffs and pay
downs as well as charge-offs. In addition, commercial real estate
construction loans were reduced though conversion to permanent loans as well as
pay-offs and charge-offs. We endeavor to limit our construction
lending risk through adherence to strict underwriting
procedures. Total real estate and real estate construction loans
comprised 13% of our loan portfolio as of December 31, 2008 which is a decrease
from the 19% at December 31, 2007.
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. Consumer loans increased $38.2 million
or 22% to $214.8 million at December 31, 2008.
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, 2008:
|
Maturing
|
||||||||||||||||
|
Due
Through
1
Year
|
Over
1
Through
5
Years
|
Over
5
Years
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Commercial
business
|
$ | 559,938 | $ | 180,509 | $ | 70,475 | $ | 810,922 | ||||||||
|
Real
estate construction
|
244,991 | 41,473 | 4,394 | 290,858 | ||||||||||||
|
Total
|
$ | 804,929 | $ | 221,982 | $ | 74,869 | $ | 1,101,780 | ||||||||
|
Fixed
rate loans due after 1 year
|
$ | 150,006 | $ | 70,232 | $ | 220,238 | ||||||||||
|
Variable
rate loans due after 1 year
|
71,976 | 4,637 | 76,613 | |||||||||||||
|
Total
|
$ | 221,982 | $ | 74,869 | $ | 296,851 | ||||||||||
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.
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. Nonperforming assets totaled $109.6 million, or 3.54% of
year-end assets at December 31, 2008, compared to $14.6 million or 0.46% of
year end assets at December 31, 2007.
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:
|
December
31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Nonaccrual:
|
||||||||||||||||||||
|
Commercial
business
|
$ | 2,976 | $ | 2,170 | $ | 1,777 | $ | 4,316 | $ | 6,587 | ||||||||||
|
Real
Estate:
|
||||||||||||||||||||
|
One-to-four
family residential
|
905 | 204 | 366 | 376 | 375 | |||||||||||||||
|
Commercial
and five or more family residential real estate
|
5,710 | 3,476 | 217 | - - | 440 | |||||||||||||||
|
Real
Estate Construction:
|
||||||||||||||||||||
|
One-to-four
family residential
|
69,668 | 7,317 | - - | - - | - - | |||||||||||||||
|
Commercial
and five or more family residential real estate
|
25,752 | - - | - - | - - | - - | |||||||||||||||
|
Consumer
|
1,152 | 838 | 54 | 41 | 820 | |||||||||||||||
|
Total
nonaccrual loans:
|
106,163 | 14,005 | 2,414 | 4,733 | 8,222 | |||||||||||||||
|
Restructured
loans:
|
||||||||||||||||||||
|
Commercial
business
|
587 | 456 | 1,066 | 124 | 227 | |||||||||||||||
|
Total
nonperforming loans
|
106,750 | 14,461 | 3,480 | 4,857 | 8,449 | |||||||||||||||
|
Other
real estate owned
|
2,874 | 181 | - - | 18 | 680 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 109,624 | $ | 14,642 | $ | 3,480 | $ | 4,875 | $ | 9,129 | ||||||||||
|
Accruing
loans past-due 90 days or more
|
$ | - - | $ | - - | $ | - - | $ | - - | $ | 4 | ||||||||||
|
Foregone
interest on nonperforming loans
|
$ | 4,072 | $ | 814 | $ | 497 | $ | 106 | $ | 920 | ||||||||||
|
Interest
recognized on nonperforming loans
|
$ | 4,550 | $ | 244 | $ | 202 | $ | 45 | $ | 101 | ||||||||||
|
Potential
problem loans
|
$ | 17,736 | $ | 2,343 | $ | 2,288 | $ | 2,269 | $ | 2,321 | ||||||||||
|
Allowance
for loan and lease losses
|
$ | 42,747 | $ | 26,599 | $ | 20,182 | $ | 20,829 | $ | 19,881 | ||||||||||
|
Allowance
for loan and lease losses to nonperforming loans
|
40.04 | % | 183.94 | % | 579.94 | % | 428.84 | % | 235.31 | % | ||||||||||
|
Allowance
for loan and lease losses to nonperforming assets
|
38.99 | % | 181.66 | % | 579.94 | % | 427.26 | % | 217.78 | % | ||||||||||
|
Nonperforming
loans to year end loans
|
4.78 | % | 0.63 | % | 0.20 | % | 0.31 | % | 0.62 | % | ||||||||||
|
Nonperforming
assets to year end assets
|
3.54 | % | 0.46 | % | 0.14 | % | 0.21 | % | 0.42 | % | ||||||||||
At
December 31, 2008 nonperforming assets increased to 3.54% of period end assets
up from 0.46% of period-end assets at December 31, 2007. Residential
construction loans continue to be the primary driver of nonperforming assets,
representing $69.7 million, or 64% of nonperforming
assets. Commercial real estate loans account for another $30.3
million, or 28% of nonperforming loans. These commercial real estate
nonperforming assets are primarily centered in condominium development loans of
approximately $9.1 million and retail development of approximately $15.0
million. The increase in both of these categories reflects the
continued weakness in the for sale housing industry. In addition, the
more recent decline in retail sales and consumer spending has negatively
affected retail leasing activity in a few of our borrowers’ more recently
completed retail development projects.
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, where most of our challenges are centered, now
represent less than 10% of our entire loan portfolio. While we
believe both of these segments will remain challenged during 2009, 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, 2008 there was $2.9 million in other
real estate loans which is comprised of property from foreclosed real estate
loans. This reflects a current year increase of $2.7 million compared to an
increase of $181,000 at December 31, 2007.
Other Personal
Property Owned: Other personal property owned (“OPPO”) is comprised
of other, non-real estate property from foreclosed loans. There were no OPPO
assets at December 31, 2008 and 2007.
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 sufficient 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 $17.7 million at
year end 2008, compared to $2.3 million at year end 2007. 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.
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 SFAS No. 5, “Accounting for
Contingencies.”
|
|
|
2.
|
Criticized/classified
loss reserves on specific relationships. Specific allowances for
identified problem loans are determined in accordance with SFAS
No. 114, “Accounting by Creditors for Impairment of a
Loan.”
|
|
|
3.
|
The
unallocated allowance provides for other credit losses inherent in our
loan portfolio that may not have been contemplated in the general and
specific components of the allowance. This unallocated amount generally
comprises less than 5% of the allowance. The unallocated amount is
reviewed periodically based on trends in credit losses, the results of
credit reviews and overall economic
trends.
|
On a
quarterly basis our Chief Credit Officer reviews with Executive Management and
the Board of Directors the various additional factors that management considers
when determining the adequacy of the ALLL, including economic and business
condition reviews. Factors which influenced management’s judgment in determining
the amount of the additions to the ALLL charged to operating expense include the
following as of the applicable balance sheet dates:
|
|
1.
|
Existing
general economic and business conditions affecting our market
place
|
|
|
2.
|
Credit
quality trends, including trends in nonperforming
loans
|
|
|
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
|
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.
Analysis
of the ALLL
The
following table provides an analysis of our loss experience by loan type for the
last five years:
|
December
31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Total
loans, net at year end (1)
|
$ | 2,232,332 | $ | 2,282,728 | $ | 1,708,962 | $ | 1,564,704 | $ | 1,359,743 | ||||||||||
|
Daily
average loans
|
$ | 2,264,486 | $ | 1,990,622 | $ | 1,629,616 | $ | 1,494,567 | $ | 1,186,506 | ||||||||||
|
Balance
of ALLL at beginning of period
|
$ | 26,599 | $ | 20,182 | $ | 20,829 | $ | 19,881 | $ | 20,261 | ||||||||||
|
Balance
established through acquisition
|
- - | 3,192 | - - | - - | 1,367 | |||||||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial
business
|
(2,023 | ) | (781 | ) | (2,077 | ) | (386 | ) | (2,490 | ) | ||||||||||
|
Real
Estate:
|
||||||||||||||||||||
|
One-to-four
family residential
|
(46 | ) | - - | - - | - - | - - | ||||||||||||||
|
Commercial
and five or more family residential properties
|
(3,136 | ) | - - | (9 | ) | - - | - - | |||||||||||||
|
Real
Estate Construction:
|
||||||||||||||||||||
|
One-to-four
family residential
|
(18,919 | ) | - - | - - | - - | - - | ||||||||||||||
|
Commercial
and five or more family residential properties
|
- - | - - | - - | (665 | ) | (260 | ) | |||||||||||||
|
Consumer
|
(1,863 | ) | (432 | ) | (1,109 | ) | (221 | ) | (292 | ) | ||||||||||
|
Total
charge-offs
|
(25,987 | ) | (1,213 | ) | (3,195 | ) | (1,272 | ) | (3,042 | ) | ||||||||||
|
Recoveries
|
||||||||||||||||||||
|
Commercial
business
|
417 | 530 | 233 | 218 | 124 | |||||||||||||||
|
Real
Estate:
|
||||||||||||||||||||
|
One-to-four
family residential
|
- - | - - | 20 | - - | 1 | |||||||||||||||
|
Commercial
and five or more family residential properties
|
304 | 12 | 83 | - - | - - | |||||||||||||||
|
Real
Estate Construction:
|
||||||||||||||||||||
|
One-to-four
family residential
|
16 | - - | 7 | - - | 25 | |||||||||||||||
|
Commercial
and five or more family residential properties
|
- - | - - | - - | 326 | - - | |||||||||||||||
|
Consumer
|
222 | 291 | 140 | 156 | 150 | |||||||||||||||
|
Total
recoveries
|
959 | 833 | 483 | 700 | 300 | |||||||||||||||
|
Net
charge-offs
|
(25,028 | ) | (380 | ) | (2,712 | ) | (572 | ) | (2,742 | ) | ||||||||||
|
Provision
charged to expense
|
41,176 | 3,605 | 2,065 | 1,520 | 995 | |||||||||||||||
|
Balance
of ALLL at year-end
|
$ | 42,747 | $ | 26,599 | $ | 20,182 | $ | 20,829 | $ | 19,881 | ||||||||||
|
Net
charge-offs to average loans outstanding
|
1.11 | % | 0.02 | % | 0.17 | % | 0.04 | % | 0.23 | % | ||||||||||
|
Allowance
for loan and lease losses to year end loans (1)
|
1.91 | % | 1.17 | % | 1.18 | % | 1.33 | % | 1.46 | % | ||||||||||
|
(1)
|
Excludes
loans held for sale
|
The
increase in the loan and lease loss provision during 2008 and 2006 was due
primarily to increased charge-offs, and in 2008 to increased nonperforming
assets, while the increase in the provision for 2007 was primarily due to loan
growth.
We have
used the same methodology for ALLL calculations during 2008, 2007 and 2006.
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:
|
December
31,
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Balance
at End of Period
Applicable
to:
|
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
|
$ | 12,846 | 36.3 | % | $ | 7,068 | 33.4 | % | $ | 9,628 | 36.1 | % | $ | 12,060 | 36.5 | % | $ | 10,222 | 35.9 | % | ||||||||||||||||||||
|
Real
estate and construction:
|
||||||||||||||||||||||||||||||||||||||||
|
One-to-four
family residential
|
16,895 | 12.0 | % | 7,648 | 14.5 | % | 1,134 | 8.4 | % | 809 | 7.4 | % | 678 | 5.7 | % | |||||||||||||||||||||||||
|
Commercial
and five or more family residential properties
|
12,064 | 42.1 | % | 11,170 | 44.3 | % | 8,841 | 46.9 | % | 6,663 | 47.1 | % | 7,995 | 48.7 | % | |||||||||||||||||||||||||
|
Consumer
|
942 | 9.6 | % | 713 | 7.8 | % | 281 | 8.6 | % | 677 | 9.0 | % | 985 | 9.7 | % | |||||||||||||||||||||||||
|
Unallocated
|
- - | 0.0 | % | - - | 0.0 | % | 298 | 0.0 | % | 620 | 0.0 | % | 1 | 0.0 | % | |||||||||||||||||||||||||
|
Total
|
$ | 42,747 | 100.0 | % | $ | 26,599 | 100.0 | % | $ | 20,182 | 100.0 | % | $ | 20,829 | 100.0 | % | $ | 19,881 | 100.0 | % | ||||||||||||||||||||
|
*
|
Represents
the total of all outstanding loans in each category as a percent of total
loans outstanding.
|
Deposits
The
following table sets forth the average amount of and the average rate paid on
each significant deposit category:
|
Years
ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Average
Deposits
|
Rate
|
Average
Deposits
|
Rate
|
Average
Deposits
|
Rate
|
|||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Interest
bearing demand
|
$ | 445,449 | 1.35 | % | $ | 435,807 | 2.53 | % | $ | 361,618 | 2.08 | % | ||||||||||||
|
Money
market
|
578,123 | 1.86 | % | 558,510 | 3.07 | % | 518,156 | 2.30 | % | |||||||||||||||
|
Savings
|
118,073 | 0.37 | % | 111,265 | 0.42 | % | 115,802 | 0.38 | % | |||||||||||||||
|
Certificates
of deposit
|
780,092 | 3.60 | % | 698,078 | 4.48 | % | 543,053 | 3.86 | % | |||||||||||||||
|
Total
interest-bearing deposits
|
1,921,737 | 2.36 | % | 1,803,660 | 3.32 | % | 1,538,629 | 2.65 | % | |||||||||||||||
|
Demand
and other non-interest bearing
|
460,747 | 438,474 | 437,819 | |||||||||||||||||||||
|
Total
average deposits
|
$ | 2,382,484 | $ | 2,242,134 | $ | 1,976,448 | ||||||||||||||||||
|
(1)
|
Interest-bearing
demand deposits include interest-bearing checking accounts and money
market accounts.
|
During
2008 our total average deposits increased $140.4 million, or 6% as compared to
$265.7 million or 13% during 2007. Our focus in increasing our deposit base is
centered on core deposit growth, which includes interest and non-interest
bearing demand, money market, savings accounts and certificates of deposit less
than $100,000. Average core deposits increased $24.5 million during 2008 and
$223.1 million during 2007.
Competitive
pressure from banks in our market areas with strained liquidity positions
coupled with generally lower balances held in existing accounts has slowed the
growth of our deposit base but, in the long-term, we anticipate continued growth
in our core deposits through both the addition of new customers and our current
client base. However, with low short-term rates our cost of funds may
not decline significantly due to changes in our mix of interest bearing and
non-interest bearing accounts, growth in higher yielding deposits, and
competitive pressures.
We have
established a branch system to serve our customers and business
depositors. In addition, management’s strategy for funding asset
growth is to make use of brokered and other wholesale deposits on an as-needed
basis. At December 31, 2008 brokered and other wholesale deposits
(excluding public deposits) totaled $102.1 million or 4% of total deposits
compared to $72.8 million or 3% of total deposits, at year-end
2007. At December 31, 2008 public deposits held by the Company
totaled $118.4 million or 5% of total deposits. To assist in
guaranteeing our public depositors against loss we pledge collateral, consisting
of securities from our investment portfolio, in an amount equal to a minimum of
10% of public funds on deposit. However, each bank in the state does
not guarantee each public depositor against loss. Rather, in the
event of default of one bank, all participating banks in the state of Washington
collectively assure that no loss of funds will be suffered by the public
depositor. While this arrangement has been in place in the state of
Washington since 1969, an assessment had never been made upon participating
banks until February of 2009. The failure of the Bank of Clark County
resulted in an assessment of approximately $200,000 for Columbia out of a total
statewide assessment of just over $15 million. As a result of this
assessment and the potential for additional assessments in the future, we are
reassessing the costs and benefits of holding public deposits.
The
following table sets forth the amount outstanding of time certificates of
deposit and other time deposits in amounts of $100,000 or more by time remaining
until maturity and percentage of total deposits:
|
December
31, 2008
|
||||||||||||||||
|
Time
Certificates of Deposit of $100,000 or More
|
Other
Time Deposits of $100,000 or More
|
|||||||||||||||
|
Amounts
maturing in:
|
Amount
|
Percent
of Total Deposits
|
Amount
|
Percent
of Total Deposits
|
||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Three
months or less
|
$ | 192,544 | 8 | % | $ | 17,252 | 1 | % | ||||||||
|
Over
3 through 6 months
|
74,032 | 3 | % | 243 | 0 | % | ||||||||||
|
Over
6 through 12 months
|
49,030 | 2 | % | - - | 0 | % | ||||||||||
|
Over
12 months
|
23,365 | 1 | % | - - | 0 | % | ||||||||||
|
Total
|
$ | 338,971 | 14 | % | $ | 17,495 | 1 | % | ||||||||
Other
time deposits of $100,000 or more set forth in the table above represent
brokered and wholesale deposits. We use brokered and other wholesale deposits as
part of our strategy for funding growth. In the future, we anticipate continuing
the use of such deposits to fund loan demand or treasury functions.
Borrowings
Our
borrowings consist primarily of advances from the Federal Home Loan (“FHLB”) and
Federal Reserve Bank (“FRB”) as well as securities repurchase agreements. We
utilize these borrowings as a supplement to our funding sources. FHLB advances
are secured by one-to-four family real estate mortgages, investment securities,
and certain other assets. Federal Reserve Bank advances and securities
repurchase agreements are secured by investments. We anticipate we will continue
to rely on the same funding sources in the future, and will use those funds
primarily to make loans and purchase securities.
The
following tables set forth the details of FHLB advances and FRB
borrowings:
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
FHLB
Advances
|
||||||||||||
|
Balance
at end of year
|
$ | 150,000 | $ | 257,670 | $ | 205,800 | ||||||
|
Average
balance during the year
|
$ | 282,624 | $ | 207,521 | $ | 208,594 | ||||||
|
Maximum
month-end balance during the year
|
$ | 384,000 | $ | 264,250 | $ | 303,000 | ||||||
|
Weighted
average rate during the year
|
2.53 | % | 5.27 | % | 5.25 | % | ||||||
|
Weighted
average rate at December 31
|
1.89 | % | 4.59 | % | 5.56 | % | ||||||
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Federal
Reserve Bank Borrowings
|
||||||||||||
|
Balance
at end of year
|
$ | 50,000 | $ | - - | $ | - - | ||||||
|
Average
balance during the year
|
$ | 14,569 | $ | 54 | $ | 27 | ||||||
|
Maximum
month-end balance during the year
|
$ | 120,000 | $ | - - | $ | - - | ||||||
|
Weighted
average rate during the year
|
0.62 | % | 5.36 | % | 5.50 | % | ||||||
|
Weighted
average rate at December 31
|
0.60 | % | 0.00 | % | 0.00 | % | ||||||
Additionally,
we have a $20.0 million line of credit with a large commercial bank with an
interest rate indexed to LIBOR. At December 31, 2008 and 2007,
the outstanding balance was $100,000 and $5.0 million, respectively with an
interest rate of 2.43% at December 31, 2008. For additional information on our
borrowings, see Notes 11 and 12 to the Consolidated Financial Statements in
“Item 8. Financial Statements and Supplementary Data” of this
report.
For
additional information on our borrowings, including amounts pledged as
collateral, see Notes 11 and 12 to the Consolidated Financial Statements in
“Item 8. Financial Statements and Supplementary Data” of this
report.
Long-term
Subordinated Debt
During
2001, we, participated in a pooled trust preferred offering through our
subsidiary trust (the “Trust”), whereby the trust issued $22.0 million of 30
year floating rate capital securities. The capital securities constitute
guaranteed preferred beneficial interests in debentures issued by the trust. The
debentures had an initial rate of 7.29% and a rate of 7.00% at December 31,
2008. The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted
quarterly. Through the Trust we may call the debt at ten years at par, allowing
us to retire the debt early if conditions are favorable. Effective
December 31, 2003, we adopted Financial Accounting Standards Board
Interpretation No. 46 “Consolidation of Variable Interest Entities” whereby
the Trust was deconsolidated with the result being that the trust preferred
obligations were reclassified as long-term subordinated debt on our
December 31, 2003 Consolidated Balance Sheets and our related investment in
the Trust was recorded in “other assets” on the Consolidated Balance
Sheets. Through the 2007 Town Center Bancorp acquisition, the Company
assumed an additional $3.0 million in floating rate trust preferred obligations;
these debentures had a rate of 8.57% at December 31, 2008. The
floating rate is based on the 3-month LIBOR plus 3.75% and is adjusted
quarterly.
Contractual
Obligations & Commitments
We are
party to many contractual financial obligations, including repayment of
borrowings, operating and equipment lease payments, and commitments to extend
credit. The table below presents certain future financial obligations of the
Company:
|
Payments
due within time period at December 31, 2008
|
||||||||||||||||||||
|
0-12
Months
|
1-3
Years
|
4-5
Years
|
Due
after Five Years
|
Total
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Operating
& equipment leases
|
$ | 3,371 | $ | 6,233 | $ | 5,614 | $ | 8,839 | $ | 24,057 | ||||||||||
| Total deposits |
2,264,287
|
100,376 | 17,488 | - - | 2,382,151 | |||||||||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
100,000 | - - | - - | 100,000 | 200,000 | |||||||||||||||
|
Other
borrowings
|
201 | - - | - - | 25,000 | 25,201 | |||||||||||||||
|
Long-term
subordinated debt
|
- - | - - | - - | 25,603 | 25,603 | |||||||||||||||
|
Total
|
$ | 2,367,859 | $ | 106,609 | $ | 23,102 | $ | 159,442 | $ | 2,657,012 | ||||||||||
At
December 31, 2008, we had commitments to extend credit of $703.3 million
compared to $857.6 million at December 31, 2007. For additional information
regarding future financial commitments, see Note 18 to our Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data” of
this report.
Liquidity
and Sources of Funds
Our
primary sources of funds are net income, loan repayments, maturities and
principal payments on investment securities, customer deposits, advances from
the FHLB and FRB, securities repurchase agreements and other borrowings. These
funds are used to make loans, purchase investments, meet deposit withdrawals and
maturing liabilities and cover operational expenses. Scheduled loan repayments
and core deposits have proved to be a relatively stable source of funds while
other deposit inflows and unscheduled loan prepayments are influenced by
interest rate levels, competition and general economic conditions. We manage
liquidity through monitoring sources and uses of funds on a daily basis and had
unused credit lines with the FHLB, the Federal Reserve Bank and a large
commercial bank of $486 million, $95 million and $20 million, respectively, at
December 31, 2008, that are available to us as a supplemental funding
source. The holding company’s sources of funds are dividends from its banking
subsidiaries which are used to fund dividends to common and preferred
shareholders and cover operating expenses.
Capital
Expenditures
Capital
expenditures, primarily consisting of one additional branch location as well as
various information technology-related expenditures, are anticipated to be
approximately $2.9 million during 2009.
See the
Statement of Cash Flows of the Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” of this report for additional
information regarding our sources and uses of funds during 2008, 2007 and
2006.
Capital
Our
shareholders’ equity increased to $415.4 million at December 31, 2008, from
$341.7 million at December 31, 2007. Shareholders’ equity was
13.41% and 10.75% of total assets at December 31, 2008 and 2007.The
increase is due primarily to the issuance of preferred stock of $76.9 million as
a result of participation in the U.S. Treasury’s Capital Purchase Program
(“CPP”).
On
November 21, 2008, the Company issued 76,898 shares of Series A Cumulative
Perpetual Preferred Stock (the “Preferred Stock”) and a warrant to purchase
common stock to the U.S. Department of Treasury (the “Treasury”) as part of the
Treasury’s previously announced Capital Purchase Program. The
Preferred Stock is non-voting, has an aggregate liquidation preference of $76.9
million and an annual dividend rate of 5% for the first five years, and 9%
thereafter. Dividends are cumulative and payable
quarterly. The Preferred Stock may not be redeemed for a period of
three years from the date of issue, except with the proceeds from the issuance
of Tier 1-qualifying perpetual preferred or common stock from which the
aggregate gross proceeds to the Company are not less than 25% of the issue price
of the Preferred Stock. The warrant has an exercise price of $14.49
and is exercisable for 796,046 shares of common stock, which would be reduced by
one-half if the Company raises an additional $76.9 million through the issuance
of Tier 1-qualifying perpetual preferred or common stock by December 31,
2009.
Banking
regulations require bank holding companies to maintain a minimum “leverage”
ratio of core capital to adjusted quarterly average total assets of at least 3%.
In addition, banking regulators have adopted risk-based capital guidelines,
under which risk percentages are assigned to various categories of assets and
off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I
capital generally consists of preferred stock, common shareholders’ equity and
trust preferred obligations, less goodwill and certain identifiable intangible
assets, while Tier II capital includes the allowance for loan losses and
subordinated debt, both subject to certain limitations. Regulatory minimum
risk-based capital guidelines require Tier I capital of 4% of risk-adjusted
assets and total capital (combined Tier I and Tier II) of 8% to be considered
“adequately capitalized”.
Federal
Deposit Insurance Corporation regulations set forth the qualifications necessary
for a bank to be classified as “well capitalized”, primarily for assignment of
FDIC insurance premium rates. To qualify as “well capitalized,” banks must have
a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted
capital ratio of at least 10%, and a leverage ratio of at least 5%. Failure to
qualify as “well capitalized” can negatively impact a bank’s ability to expand
and to engage in certain activities. The Company and its banking subsidiary
qualify as “well-capitalized” at December 31, 2008 and 2007.
The
following table sets forth the Company’s and it’s banking subsidiary’s capital
ratios at December 31, 2008 and 2007:
|
Company
|
Columbia
Bank
|
Requirements
|
||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
Adequately
capitalized
|
Well-Capitalized
|
|||||||||||||||||||
|
Total
risk-based capital ratio
|
14.25 | % | 10.90 | % | 11.21 | % | 10.49 | % | 8 | % | 10 | % | ||||||||||||
|
Tier
1 risk-based capital ratio
|
12.99 | % | 9.87 | % | 9.96 | % | 9.47 | % | 4 | % | 6 | % | ||||||||||||
|
Leverage
ratio
|
11.27 | % | 8.54 | % | 8.64 | % | 8.23 | % | 4 | % | 5 | % | ||||||||||||
Dividends
The
following table sets forth the dividends paid per common share and the dividend
payout ratio (dividends paid per common share divided by basic earnings per
share):
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Dividends
paid per common share
|
$ | 0.58 | $ | 0.66 | $ | 0.57 | ||||||
|
Dividend
payout ratio
|
187 | % | 34 | % | 28 | % | ||||||
For
quarterly detail of dividends declared during 2008 and 2007 see “Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities” of this report.
Applicable
federal, Washington state and Oregon regulations restrict capital distributions,
including dividends, by the Company’s banking subsidiaries. Such restrictions
are tied to the institution’s capital levels after giving effect to
distributions. Our ability to pay cash dividends is substantially dependent upon
receipt of dividends from our banking subsidiaries. Additionally, due to our
participation in the Treasury’s CPP our quarterly dividend rate is limited to a
range of $0.00 to $0.07 per common share. For the duration of our
participation in the CPP, we would first have to obtain the approval of the
Treasury prior to paying a quarterly dividend greater than $0.07 per common
share.
Reference
“Item 6. Selected Financial Data” of this report for our return on average
assets, return on average equity and average equity to average assets ratios for
all reported periods.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Sensitivity
We are
exposed to interest rate risk, which is the risk that changes in prevailing
interest rates will adversely affect assets, liabilities, capital, income and
expenses at different times or in different amounts. Generally, there are four
sources of interest rate risk as described below:
Repricing risk—Repricing risk
is the risk of adverse consequences from a change in interest rates that arises
because of differences in the timing of when those interest rate changes affect
an institution’s assets and liabilities.
Basis risk—Basis risk is the
risk of adverse consequence resulting from unequal changes in the spread between
two or more rates for different instruments with the same maturity.
Yield curve risk—Yield curve
risk is the risk of adverse consequence resulting from unequal changes in the
spread between two or more rates for different maturities for the same
instrument.
Option risk—In banking, option
risks are known as borrower options to prepay loans and depositor options to
make deposits, withdrawals, and early redemptions. Option risk arises whenever
bank products give customers the right, but not the obligation, to alter the
quantity or the timing of cash flows.
We
maintain an asset/liability management policy that provides guidelines for
controlling exposure to interest rate risk. The guidelines direct management to
assess the impact of changes in interest rates upon both earnings and capital.
The guidelines further provide that in the event of an increase in interest rate
risk beyond pre-established limits, management will consider steps to reduce
interest rate risk to acceptable levels.
The
analysis of an institution’s interest rate gap (the difference between the
repricing of interest-earning assets and interest-bearing liabilities during a
given period of time) is one standard tool for the measurement of the exposure
to interest rate risk. We believe that because interest rate gap analysis does
not address all factors that can affect earnings performance, it should be used
in conjunction with other methods of evaluating interest rate risk.
The table
on the following page sets forth the estimated maturity or repricing, and the
resulting interest rate gap of our interest-earning assets and interest-bearing
liabilities at December 31, 2008. The amounts in the table are derived from
our internal data and are based upon regulatory reporting formats. Therefore,
they may not be consistent with financial information appearing elsewhere herein
that has been prepared in accordance with accounting principles generally
accepted in the United States. The amounts could be significantly affected by
external factors such as changes in prepayment assumptions, early withdrawal of
deposits and competition. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while other types may lag changes in market interest
rates.
Additionally,
certain assets, such as adjustable-rate mortgages, have features that restrict
changes in the interest rates of such assets both on a short-term basis and over
the lives of such assets. Further, in the event of a change in market interest
rates, prepayment and early withdrawal levels could deviate significantly from
those assumed in calculating the tables. Finally, the ability of many borrowers
to service their adjustable-rate debt may decrease in the event of a substantial
increase in market interest rates.
|
Estimated
Maturity or Repricing
|
||||||||||||||||||||
|
December
31. 2008
|
0-3
months
|
4-12
months
|
Over
1 year through
5
years
|
Due
after
5
years
|
Total
|
|||||||||||||||
|
Interest-Earning
Assets
|
||||||||||||||||||||
|
Interest-earning
deposits
|
$ | 3,943 | $ | - - | $ | - - | $ | - - | $ | 3,943 | ||||||||||
|
Loans,
net of deferred fees
|
1,095,819 | 207,055 | 727,531 | 201,927 | 2,232,332 | |||||||||||||||
|
Loans
held for sale
|
1,964 | - - | - - | - - | 1,964 | |||||||||||||||
|
Investments
|
34,876 | 101,531 | 223,638 | 180,480 | 540,525 | |||||||||||||||
|
Total
interest-earning assets
|
$ | 1,136,602 | $ | 308,586 | $ | 951,169 | $ | 382,407 | $ | 2,778,764 | ||||||||||
|
Allowance
for loan and lease losses
|
(42,747 | ) | ||||||||||||||||||
|
Cash
and due from banks
|
84,787 | |||||||||||||||||||
|
Premises
|
61,139 | |||||||||||||||||||
|
Other
assets
|
215,136 | |||||||||||||||||||
|
Noninterest-earning
assets
|
318,315 | |||||||||||||||||||
|
Total
Assets
|
$ | 3,097,079 | ||||||||||||||||||
|
Interest-Bearing
Liabilities
|
||||||||||||||||||||
|
Interest
bearing non-maturity deposits
|
$ | 530,065 | $ | - - | $ | - - | $ | 641,200 | $ | 1,171,265 | ||||||||||
|
Time
deposits
|
361,345 | 265,935 | 117,528 | - - | 744,808 | |||||||||||||||
|
Borrowings
|
124,000 | 1,000 | 100,000 | - - | 225,000 | |||||||||||||||
|
Long-term
subordinated debt
|
25,804 | - - | - - | - - | 25,804 | |||||||||||||||
|
Total
interest-bearing liabilities
|
$ | 1,041,214 | $ | 266,935 | $ | 217,528 | $ | 641,200 | 2,166,877 | |||||||||||
|
Other
liabilities
|
514,817 | |||||||||||||||||||
|
Total
liabilities
|
2,681,694 | |||||||||||||||||||
|
Shareholders'
equity
|
415,385 | |||||||||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 3,097,079 | ||||||||||||||||||
|
Interest-bearing
liabilities as a percent of total interest-earning assets
|
37.47 | % | 9.61 | % | 7.83 | % | 23.08 | % | ||||||||||||
|
Rate
sensitivity gap
|
$ | 95,388 | $ | 41,651 | $ | 733,641 | $ | (258,793 | ) | |||||||||||
|
Cumulative
rate sensitivity gap
|
$ | 95,388 | $ | 137,039 | $ | 870,680 | $ | 611,887 | ||||||||||||
|
Rate
sensitivity gap as a percentage of interest-earning assets
|
3.43 | % | 1.50 | % | 26.40 | % | (9.31) | % | ||||||||||||
|
Cumulative
rate sensitivity gap as a percentage of interest-earning
assets
|
3.43 | % | 4.93 | % | 31.33 | % | 22.02 | % | ||||||||||||
Impact
of Inflation and Changing Prices
The
impact of inflation on our operations is increased operating costs. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution’s performance than the effect
of general levels of inflation. Although interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest
rates.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Columbia Banking System,
Inc.
Tacoma,
Washington
We have
audited the accompanying consolidated balance sheets of Columbia Banking System,
Inc. and its subsidiaries (the “Company”) as of December 31, 2008 and 2007,
and the related consolidated statements of income, changes in shareholders’
equity, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such financial statements present fairly, in all material respects, the
financial position of Columbia Banking Systems, Inc. and its subsidiaries as of
December 31, 2008 and 2007, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 27, 2009
expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Seattle,
Washington
February
27, 2009
COLUMBIA
BANKING SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in thousands except per
share)
|
||||||||||||
|
Interest
Income
|
||||||||||||
|
Loans
|
$ | 147,830 | $ | 156,253 | $ | 123,998 | ||||||
|
Taxable
securities
|
18,852 | 18,614 | 20,018 | |||||||||
|
Tax-exempt
securities
|
7,976 | 7,923 | 7,042 | |||||||||
|
Federal
funds sold and deposits in banks
|
402 | 1,427 | 617 | |||||||||
|
Total
interest income
|
175,060 | 184,217 | 151,675 | |||||||||
|
Interest
Expense
|
||||||||||||
|
Deposits
|
45,307 | 59,930 | 40,838 | |||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
7,573 | 11,065 | 10,944 | |||||||||
|
Long-term
obligations
|
1,800 | 2,177 | 1,992 | |||||||||
|
Other
borrowings
|
867 | 2,225 | 138 | |||||||||
|
Total
interest expense
|
55,547 | 75,397 | 53,912 | |||||||||
|
Net
Interest Income
|
119,513 | 108,820 | 97,763 | |||||||||
|
Provision
for loan and lease losses
|
41,176 | 3,605 | 2,065 | |||||||||
|
Net
interest income after provision for loan and lease losses
|
78,337 | 105,215 | 95,698 | |||||||||
|
Noninterest
Income
|
||||||||||||
|
Service
charges and other fees
|
14,813 | 13,498 | 11,651 | |||||||||
|
Merchant
services fees
|
8,040 | 8,373 | 8,314 | |||||||||
|
Redemption
of Visa and Mastercard shares
|
3,028 | - - | - - | |||||||||
|
Gain
on sale of investment securities, net
|
846 | - - | 36 | |||||||||
|
Impairment
charge on investment securities
|
(19,541 | ) | - - | - - | ||||||||
|
Bank
owned life insurance ("BOLI")
|
2,075 | 1,886 | 1,687 | |||||||||
|
Other
|
5,589 | 3,991 | 2,984 | |||||||||
|
Total
noninterest income
|
14,850 | 27,748 | 24,672 | |||||||||
|
Noninterest
Expense
|
||||||||||||
|
Compensation
and employee benefits
|
49,315 | 46,703 | 38,769 | |||||||||
|
Occupancy
|
12,838 | 12,322 | 10,760 | |||||||||
|
Merchant
processing
|
3,558 | 3,470 | 3,361 | |||||||||
|
Advertising
and promotion
|
2,324 | 2,391 | 2,582 | |||||||||
|
Data
processing
|
3,486 | 2,564 | 2,314 | |||||||||
|
Legal
and professional fees
|
1,969 | 4,912 | 2,099 | |||||||||
|
Taxes,
licenses and fees
|
2,917 | 2,882 | 2,499 | |||||||||
|
Regulatory
premiums
|
2,141 | 507 | 269 | |||||||||
|
Net
(gain) loss on sale of other real estate owned
|
(49 | ) | 5 | (11 | ) | |||||||
|
Other
|
13,626 | 13,073 | 13,492 | |||||||||
|
Total
noninterest expense
|
92,125 | 88,829 | 76,134 | |||||||||
|
Income
before income taxes
|
1,062 | 44,134 | 44,236 | |||||||||
|
Provision
(benefit) for income taxes
|
(4,906 | ) | 11,753 | 12,133 | ||||||||
|
Net
Income
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | ||||||
|
Net
Income Applicable to Common Shareholders
|
$ | 5,498 | $ | 32,381 | $ | 32,103 | ||||||
|
Earnings
per Common Share
|
||||||||||||
|
Basic
|
$ | 0.31 | $ | 1.93 | $ | 2.01 | ||||||
|
Diluted
|
$ | 0.31 | $ | 1.91 | $ | 1.99 | ||||||
|
Dividends
paid per common share
|
$ | 0.58 | $ | 0.66 | $ | 0.57 | ||||||
|
Weighted
average number of common shares outstanding
|
17,914 | 16,802 | 15,946 | |||||||||
|
Weighted
average number of diluted common shares outstanding
|
18,010 | 16,972 | 16,148 | |||||||||
See accompanying notes to the
Consolidated Financial Statements.
COLUMBIA
BANKING SYSTEM, INC.
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
(in thousands)
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||
|
Cash
and due from banks
|
$ | 84,787 | $ | 82,735 | ||||||||||||
|
Interest-earning
deposits with banks
|
3,943 | 11,240 | ||||||||||||||
|
Total
cash and cash equivalents
|
88,730 | 93,975 | ||||||||||||||
|
Securities
available for sale at fair value (amortized cost of $525,110 and $558,685,
respectively)
|
528,918 | 561,366 | ||||||||||||||
|
Federal
Home Loan Bank stock at cost
|
11,607 | 11,607 | ||||||||||||||
|
Loans
held for sale
|
1,964 | 4,482 | ||||||||||||||
|
Loans,
net of deferred loan fees of ($4,033) and ($3,931),
respectively
|
2,232,332 | 2,282,728 | ||||||||||||||
|
Less:
allowance for loan and lease losses
|
42,747 | 26,599 | ||||||||||||||
|
Loans,
net
|
2,189,585 | 2,256,129 | ||||||||||||||
|
Interest
receivable
|
11,646 | 14,622 | ||||||||||||||
|
Premises
and equipment, net
|
61,139 | 56,122 | ||||||||||||||
|
Other
real estate owned
|
2,874 | 181 | ||||||||||||||
|
Goodwill
|
95,519 | 96,011 | ||||||||||||||
|
Core
deposit intangible, net
|
5,908 | 7,050 | ||||||||||||||
|
Other
assets
|
99,189 | 77,168 | ||||||||||||||
|
Total
Assets
|
$ | 3,097,079 | $ | 3,178,713 | ||||||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||
|
Deposits:
|
||||||||||||||||
|
Non-interest
bearing
|
$ | 466,078 | $ | 468,237 | ||||||||||||
|
Interest-bearing
|
1,916,073 | 2,029,824 | ||||||||||||||
|
Total
deposits
|
2,382,151 | 2,498,061 | ||||||||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
200,000 | 257,670 | ||||||||||||||
|
Securities
sold under agreements to repurchase
|
25,000 | - - | ||||||||||||||
|
Other
borrowings
|
201 | 5,061 | ||||||||||||||
|
Long-term
subordinated debt
|
25,603 | 25,519 | ||||||||||||||
|
Other
liabilities
|
48,739 | 50,671 | ||||||||||||||
|
Total
liabilities
|
2,681,694 | 2,836,982 | ||||||||||||||
|
Commitments
and contingent liabilities (note 18)
|
||||||||||||||||
|
Shareholders'
equity:
|
||||||||||||||||
|
December
31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Preferred
stock (76,898 aggregate liquidation preference)
|
||||||||||||||||
|
Authorized
shares
|
2,000 | 2,000 | ||||||||||||||
|
Issued
and outstanding
|
77 | - - | 73,743 | - - | ||||||||||||
|
Common
Stock (no par value)
|
||||||||||||||||
|
Authorized
shares
|
63,033 | 63,033 | ||||||||||||||
|
Issued
and outstanding
|
18,151 | 17,953 | 233,192 | 226,550 | ||||||||||||
|
Retained
earnings
|
103,061 | 110,169 | ||||||||||||||
|
Accumulated
other comprehensive income
|
5,389 | 5,012 | ||||||||||||||
|
Total
shareholders' equity
|
415,385 | 341,731 | ||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 3,097,079 | $ | 3,178,713 | ||||||||||||
See
accompanying notes to Consolidated Financial Statements.
COLUMBIA
BANKING SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Other
|
Total
|
|||||||||||||||||||||||||||||
|
Number
of
|
Number
of
|
Retained
|
Deferred
|
Comprehensive
|
Shareholders'
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Earnings
|
Compensation
|
Income
(Loss)
|
Equity
|
|||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||||||
|
Balance
at January 1, 2006
|
- - | $ | - - | 15,831 | $ | 163,065 | $ | 66,051 | $ | (92 | ) | $ | (2,782 | ) | $ | 226,242 | ||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- - | - - | - - | - - | 32,103 | - - | - - | 32,103 | ||||||||||||||||||||||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||||||||
|
Net unrealized loss from securities, net of
reclassification adjustments
|
- - | - - | - - | - - | - - | - - | (1,032 | ) | (1,032 | ) | ||||||||||||||||||||||
|
Net
unrealized gain from cash flow hedging
instruments
|
- - | - - | - - | - - | - - | - - | 361 | 361 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
31,432 | |||||||||||||||||||||||||||||||
|
Transition
adjustment related to adoption of SFAS 123(R)
|
- - | - - | - - | (92 | ) | - - | 92 | - - | - - | |||||||||||||||||||||||
|
Common
stock issued - stock option and other plans
|
- - | - - | 148 | 2,090 | - - | - - | - - | 2,090 | ||||||||||||||||||||||||
|
Common
stock issued - restricted stock awards, net of cancelled
awards
|
- - | - - | 81 | - - | - - | - - | - - | - - | ||||||||||||||||||||||||
|
Share-based
payment
|
- - | - - | 793 | - - | - - | - - | 793 | |||||||||||||||||||||||||
|
Tax
benefit associated with share-based payment
|
- - | - - | - - | 907 | - - | - - | -- | 907 | ||||||||||||||||||||||||
|
Cash
dividends paid on common stock
|
- - | - - | - - | - - | (9,117 | ) | - - | - - | (9,117 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2006
|
- - | - - | 16,060 | 166,763 | 89,037 | - - | (3,453 | ) | 252,347 | |||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- - | - - | - - | - - | 32,381 | - - | - - | 32,381 | ||||||||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||
|
Net
unrealized gain from securities, net of
reclassification
adjustments
|
- - | - - | - - | - - | - - | - - | 5,540 | 5,540 | ||||||||||||||||||||||||
|
Net
unrealized gain from cash flow hedging
instruments
|
- - | - - | - - | - - | - - | - - | 2,925 | 2,925 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
40,846 | |||||||||||||||||||||||||||||||
|
Acquisitions:
|
||||||||||||||||||||||||||||||||
|
Shares
issued to the shareholders of Mountain Bank
Holding
Company
|
- - | - - | 993 | 31,652 | - - | - - | - - | 31,652 | ||||||||||||||||||||||||
|
Shares
issued to the shareholders of Town Center
Bancorp
|
- - | - - | 705 | 25,467 | - - | - - | - - | 25,467 | ||||||||||||||||||||||||
|
Common
stock issued - stock option and other plans
|
- - | - - | 193 | 2,836 | - - | - - | - - | 2,836 | ||||||||||||||||||||||||
|
Common
stock issued - restricted stock awards, net of cancelled
awards
|
- - | - - | 67 | - - | - - | - - | - - | - - | ||||||||||||||||||||||||
|
Purchase
and retirement of common stock
|
- - | - - | (65 | ) | (2,121 | ) | - - | - - | - - | (2,121 | ) | |||||||||||||||||||||
|
Share-based
payment
|
- - | - - | - - | 974 | - - | - - | - - | 974 | ||||||||||||||||||||||||
|
Tax
benefit associated with share-based payment
|
- - | - - | - - | 979 | - - | - - | - - | 979 | ||||||||||||||||||||||||
|
Cash
dividends paid on common stock
|
- - | - - | - - | - - | (11,249 | ) | - - | - - | (11,249 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2007
|
- - | - - | 17,953 | 226,550 | 110,169 | - - | 5,012 | 341,731 | ||||||||||||||||||||||||
|
Cumulative
effect of applying EITF 06-4 consensus
|
- - | - - | - - | -- | (2,137 | ) | - - | - - | (2,137 | ) | ||||||||||||||||||||||
|
Adjusted
balance
|
- - | - - | 17,953 | 226,550 | 108,032 | - - | 5,012 | 339,594 | ||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- - | - - | - - | - - | 5,968 | - - | - - | 5,968 | ||||||||||||||||||||||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||||||||
|
Net
unrealized gain from securities, net of
reclassification
adjustments
|
- - | - - | - - | - - | - - | - - | 729 | 729 | ||||||||||||||||||||||||
|
Net
unrealized loss from cash flow hedging
instruments
|
- - | - - | - - | - - | - - | - - | (352 | ) | (352 | ) | ||||||||||||||||||||||
|
Total
comprehensive income
|
6,345 | |||||||||||||||||||||||||||||||
|
Issuance
of preferred stock and common stock warrant, net
|
77 | 73,743 | - - | 3,168 | (43 | ) | - - | - - | 76,868 | |||||||||||||||||||||||
|
Common
stock issued - stock option and other plans
|
- - | - - | 137 | 1,906 | - - | - - | - - | 1,906 | ||||||||||||||||||||||||
|
Common
stock issued - restricted stock awards, net of cancelled
awards
|
- - | - - | 61 | - - | - - | - - | - - | - - | ||||||||||||||||||||||||
|
Share-based
payment
|
- - | - - | - - | 1,327 | 22 | - - | - - | 1,349 | ||||||||||||||||||||||||
|
Tax
benefit associated with share-based payment
|
- - | - - | - - | 241 | - - | - - | - - | 241 | ||||||||||||||||||||||||
|
Accumulated
preferred dividends
|
- - | - - | - - | - - | (427 | ) | - - | - - | (427 | ) | ||||||||||||||||||||||
|
Cash
dividends paid on common stock
|
- - | - - | - - | - - | (10,491 | ) | - - | - - | (10,491 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2008
|
77 | $ | 73,743 | 18,151 | $ | 233,192 | $ | 103,061 | $ | - - | $ | 5,389 | $ | 415,385 | ||||||||||||||||||
See
accompanying notes to Consolidated Financial Statements.
COLUMBIA
BANKING SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
Income
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
|
Provision
for loan and lease losses
|
41,176 | 3,605 | 2,065 | |||||||||
|
Deferred
income tax benefit
|
(14,409 | ) | (2,607 | ) | (1,988 | ) | ||||||
|
Stock-based
compensation expense
|
1,349 | 974 | 793 | |||||||||
|
Depreciation,
amortization and accretion
|
7,046 | 6,685 | 7,713 | |||||||||
|
Net
realized gain on sale of securities
|
(846 | ) | - - | (36 | ) | |||||||
|
Net
realized gain on sale of other real estate and fixed
assets
|
(589 | ) | (216 | ) | (317 | ) | ||||||
|
Gain
on terminated cash flow hedging instruments
|
(1,693 | ) | - - | - - | ||||||||
|
Impairment
charge on investment securities
|
19,541 | - - | - - | |||||||||
|
Net
change in:
|
||||||||||||
|
Loans
held for sale
|
2,518 | (3,084 | ) | 917 | ||||||||
|
Interest
receivable
|
2,969 | (404 | ) | (878 | ) | |||||||
|
Interest
payable
|
(4,536 | ) | 6,014 | 744 | ||||||||
|
Other
assets
|
(12,698 | ) | 2,945 | (4,766 | ) | |||||||
|
Other
liabilities
|
(1,431 | ) | 4,306 | 2,011 | ||||||||
|
Net
cash provided by operating activities
|
44,365 | 50,599 | 38,361 | |||||||||
|
Cash
Flows From Investing Activities
|
||||||||||||
|
Purchases
of securities available for sale
|
(89,055 | ) | (3,742 | ) | (177,797 | ) | ||||||
|
Proceeds
from sales of securities available for sale
|
53,512 | 29,867 | 43,099 | |||||||||
|
Proceeds
from principal repayments and maturities of securities available for
sale
|
49,652 | 48,646 | 110,144 | |||||||||
|
Proceeds
from maturities of securities held to maturity
|
- - | 578 | 703 | |||||||||
|
Loans
originated and acquired, net of principal collected
|
21,702 | (288,099 | ) | (147,040 | ) | |||||||
|
Purchases
of premises and equipment
|
(10,479 | ) | (5,591 | ) | (4,455 | ) | ||||||
|
Proceeds
from disposal of premises and equipment
|
925 | 216 | 126 | |||||||||
|
Acquisition
of Mt. Rainier and Town Center, net of cash acquired
|
- - | (32,356 | ) | - - | ||||||||
|
Proceeds
from sales of Federal Reserve Bank stock
|
- - | 310 | - - | |||||||||
|
Proceeds
from termination of cash flow hedging instruments
|
8,100 | - - | - - | |||||||||
|
Proceeds
from sales of other real estate and other personal property
owned
|
949 | - - | 29 | |||||||||
|
Net
cash provided by(used in) investing activities
|
35,306 | (250,171 | ) | (175,191 | ) | |||||||
|
Cash
Flows From Financing Activities
|
||||||||||||
|
Net
increase(decrease) in deposits
|
(115,910 | ) | 170,025 | 17,862 | ||||||||
|
Proceeds
from Federal Home Loan Bank and Federal Reserve Bank
borrowings
|
3,287,268 | 2,992,548 | 2,873,249 | |||||||||
|
Repayments
of Federal Home Loan Bank and Federal Reserve Bank
borrowings
|
(3,344,938 | ) | (2,948,678 | ) | (2,761,849 | ) | ||||||
|
Proceeds
from repurchase agreement borrowings
|
25,000 | - - | - - | |||||||||
|
Repayment
of repurchase agreement borrowings
|
- - | (20,000 | ) | - - | ||||||||
|
Net
increase(decrease) in other borrowings
|
(4,860 | ) | 4,863 | 17,626 | ||||||||
|
Proceeds
from issuance of preferred stock, net
|
76,868 | - - | - - | |||||||||
|
Cash
dividends paid on common stock
|
(10,491 | ) | (11,249 | ) | (9,117 | ) | ||||||
|
Proceeds
from issuance of common stock
|
1,906 | 2,836 | 2,090 | |||||||||
|
Repurchase
of common stock
|
- - | (2,121 | ) | - - | ||||||||
|
Excess
tax benefit from stock-based compensation
|
241 | 979 | 907 | |||||||||
|
Net
cash provided by(used in) financing activities
|
(84,916 | ) | 189,203 | 140,768 | ||||||||
|
Increase(decrease)
in cash and cash equivalents
|
(5,245 | ) | (10,369 | ) | 3,938 | |||||||
|
Cash
and cash equivalents at beginning of year
|
93,975 | 104,344 | 100,406 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 88,730 | $ | 93,975 | $ | 104,344 | ||||||
|
Supplemental
Information:
|
||||||||||||
|
Cash
paid for interest
|
$ | 60,083 | $ | 69,383 | $ | 53,168 | ||||||
|
Cash
paid for income tax
|
$ | 9,937 | $ | 13,930 | $ | 14,575 | ||||||
|
Loans
foreclosed and transferred to other real estate owned or other personal
property owned
|
$ | 3,564 | $ | - - | $ | - - | ||||||
|
Transfer
of securities from held to maturity to available for sale
|
$ | - - | $ | 1,258 | $ | - - | ||||||
|
Share-based
consideration issued for acquisitions
|
- - | $ | 57,119 | $ | - - | |||||||
See
accompanying notes to Consolidated Financial Statements.
COLUMBIA
BANKING SYSTEM, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2008, 2007 and 2006
Columbia
Banking System, Inc. (the “Company”), through its wholly owned banking
subsidiaries, provides a full range of banking services to small and
medium-sized businesses, professionals and other individuals generally based in
western Washington state and the northern coastal and Portland metropolitan
areas of Oregon. At December 31, 2008, the Company conducted its banking
services in 53 office locations with the majority of its loans, loan commitments
and core deposits geographically concentrated in the Puget Sound region of
Washington state.
In
Washington state, the Portland metropolitan and northern coastal areas of
Oregon, the Company conducts a full-service commercial banking business through
its wholly owned banking subsidiary, Columbia State Bank (“Columbia
Bank”).
|
1.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The
Consolidated Financial Statements of the Company include the accounts of the
Company and its wholly owned banking subsidiary, Columbia Bank. Intercompany
balances and transactions have been eliminated in consolidation.
Business
Combinations
Statement
of Financial Accounting Standards No. 141, Business Combinations (“SFAS
141”), requires that all business combinations be accounted for using the
purchase method. The purchase method of accounting requires that the cost of an
acquired entity be allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The difference
between the fair values and the purchase price is recorded to Goodwill. Also,
under SFAS 141, identified intangible assets acquired in a purchase business
combination must be separately valued and recognized on the balance sheet if
they meet certain requirements.
Securities
Debt
securities that management has the positive intent and ability to hold to
maturity are classified as “held to maturity” and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as “available for sale” and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported net of tax as a component of “other comprehensive income (loss)” in
the Consolidated Statements of Changes in Shareholders’ Equity.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of held to
maturity and available for sale securities below their cost that are deemed to
be other-than-temporary are reflected in earnings as realized losses. Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. In estimating other-than-temporary impairment losses, management
considers (1) the reasons for the decline, (2) the length of time and
the extent to which the fair value has been less than cost and not as a result
of changes in interest rates, (3) the financial condition and near-term
prospects of the issuer, and (4) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. Gains and losses on the sale of
securities are determined using the specific identification method.
Loans
Held for Sale
Loans
originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value, as determined by aggregate outstanding
commitments from investors or current investor yield requirements. The amount by
which cost exceeds market for loans held for sale is accounted for as a
valuation allowance, and changes in the allowance are included in the
determination of net income in the period in which the change occurs. Gains and
losses on sales of mortgage loans are recognized based on the difference between
the selling price and the carrying value of the related mortgage loans sold; the
servicing rights on such loans are not retained.
Loans
Loans are
stated at their outstanding unpaid principal balance adjusted for charge-offs,
the allowance for loan losses, and any deferred loan fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees and direct loan origination costs are deferred and the net
amount is recognized as an adjustment to yield over the contractual life of the
related loans. Fees related to lending activities other than the origination or
purchase of loans are recognized as noninterest income during the period the
related services are performed.
The
policy of the Company is to discontinue the accrual of interest on all loans
past due 90 days or more and place them on nonaccrual status. In all cases,
loans are placed on non-accrual or charged-off at an earlier date if collection
of principal or interest is considered doubtful. All interest accrued but not
collected for loans that are placed on non-accrual or charged off is reversed
against interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance
for Loan and Lease Losses
The
allowance for loan and lease losses is established as losses are estimated to
have occurred through a provision for loan and lease losses charged to earnings.
Loan and lease losses are charged against the allowance when management believes
the collectibility of a loan balance is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
The
allowance for loan and lease losses is evaluated on a regular basis by
management and is based upon management’s periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
The
allowance consists of general, specific, and unallocated components. The general
component covers non-classified loans and is based on historical loss experience
adjusted for qualitative factors. The specific component relates to loans that
are impaired. For impaired loans an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The unallocated
allowance provides for other credit losses inherent in the Company’s 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.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrowers, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.
Allowance
for Unfunded Loan Commitments and Letters of Credit
The
allowance for unfunded loan commitments is maintained at a level believed by
management to be sufficient to absorb estimated probable losses related to these
unfunded credit facilities. The determination of the adequacy of the allowance
is based on periodic evaluations of the unfunded credit facilities including an
assessment of the probability of commitment usage, credit risk factors for loans
outstanding to these same customers, and the terms and expiration dates of the
unfunded credit facilities. The allowance for unfunded loan commitments is
included in other liabilities on the Consolidated Balance Sheets, with changes
to the balance charged against noninterest expense.
Derivatives
and Hedging Activities
Statement
of Financial Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments. Generally, derivatives are financial instruments with little or no
initial net investment in comparison to their notional amount and whose value is
based upon an underlying asset, index, reference rate or other variable. As
required by SFAS 133, all derivatives are reported at their fair value on the
Consolidated Balance Sheets
The
Company enters into derivative contracts to add stability to interest income and
to manage its exposure to changes in interest rates. On the date the Company
enters into a derivative contract, the derivative instrument is designated as:
(1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (a “fair value” hedge); (2) a hedge of the
variability in expected future cash flows associated with an existing recognized
asset or liability or a probable forecasted transaction (a “cash flow” hedge);
or (3) held for other economic purposes (an “economic” hedge) and not
formally designated as part of qualifying hedging relationships under SFAS
133.
In a fair
value hedge, changes in the fair value of the hedging derivative are recognized
in earnings and offset by recognizing changes in the fair value of the hedged
item attributable to the risk being hedged. To the extent that the hedge is
ineffective, the changes in fair value will not offset and the difference is
reflected in earnings.
In a cash
flow hedge, the effective portion of the change in the fair value of the hedging
derivative is recorded in accumulated other comprehensive income and is
subsequently reclassified into earnings during the same period in which the
hedged item affects earnings. The change in fair value of any ineffective
portion of the hedging derivative is recognized immediately in
earnings. When a cash flow hedge is discontinued, the net derivative
gain or loss continues to be reported in accumulated other comprehensive income
unless it is probable that the forecasted transactions will not occur by the end
of the originally specified time period. The net derivative gain or
loss from a discontinued cash flow hedge is reclassified into earnings during
the originally specified time period in which the forecasted transactions were
to occur.
Derivatives
used for other economic purposes are used as economic hedges in which the
Company has not attempted to achieve the highly effective hedge accounting
standard under SFAS 133. The changes in fair value of these instruments are
recognized immediately in earnings.
The
Company formally documents the relationship between the hedging instruments and
hedged items, as well as its risk management objective and strategy before
initiating a hedge. To qualify for hedge accounting, the derivatives and related
hedged items must be designated as a hedge. For hedging relationships in which
effectiveness is measured, the correlations between the hedging instruments and
hedged items are assessed at inception of the hedge and on an ongoing basis,
which includes determining whether the hedge relationship is expected to be
highly effective in offsetting changes in fair value or cash flows of hedged
items.
Premises
and Equipment
Land,
buildings, leasehold improvements and equipment are carried at amortized cost.
Buildings and equipment are depreciated over their estimated useful lives using
the straight-line method. Leasehold improvements are amortized over the shorter
of their useful lives or lease terms. Gains or losses on dispositions are
reflected in operations. Expenditures for improvements and major renewals are
capitalized, and ordinary maintenance, repairs and small purchases are charged
to operations as incurred.
Other
Real Estate Owned and Other Personal Property Owned
All other
real estate and other personal property acquired in satisfaction of a loan are
considered held for disposal and reported as “other real estate owned” and
“other personal property owned.” Other personal property owned is included in
“other assets” in the Consolidated Balance Sheets. Other real estate owned and
other personal property owned is carried at the lower of cost or fair value less
estimated cost of disposal.
Federal
Home Loan Bank Stock
The
Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at par
value. The Company is required to maintain a minimum level of investment in FHLB
stock based on specific percentages of its outstanding mortgages, total assets
or FHLB advances. Stock redemptions are at the discretion of the
FHLB.
Goodwill
and Other Intangibles
Net
assets of companies acquired in purchase transactions are recorded at fair value
at the date of acquisition. Identified intangibles are amortized on an
accelerated basis over the period benefited. Goodwill is not amortized but is
reviewed for potential impairment during the third quarter on an annual basis
or, more frequently, if events or circumstances indicate a potential impairment,
at the reporting unit level. The impairment test is performed in two phases. The
first step of the goodwill impairment test compares the fair value of the
reporting unit with its carrying amount, including goodwill. If the fair value
of the reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired; however, if the carrying amount of the
reporting unit exceeds its fair value, an additional procedure must be
performed. That additional procedure compares the implied fair value of the
reporting unit’s goodwill (as defined in SFAS No. 142, “Goodwill and Other
Intangible Assets”) with the carrying amount of that goodwill. An impairment
loss is recorded to the extent that the carrying amount of goodwill exceeds its
implied fair value.
Intangible
assets are evaluated for impairment if events and circumstances indicate a
possible impairment. Such evaluation of other intangible assets is based on
undiscounted cash flow projections. At December 31, 2008, intangible assets
included on the Consolidated Balance Sheets consist of a core deposit intangible
that is amortized using an accelerated method with an original estimated life of
approximately 10 years.
Securities
Sold Under Agreements to Repurchase
The
Company pledges certain financial instruments it owns to collateralize the sales
of securities that are subject to an obligation to repurchase the same or
similar securities (“repurchase agreements”). Under these arrangements, the
Company transfers the assets but still retains effective control through an
agreement that both entitles and obligates the Company to repurchase the assets.
As a result, repurchase agreements are accounted for as collateralized financing
arrangements and not as a sale and subsequent repurchase of securities. The
obligation to repurchase the securities is reflected as a liability in the
Consolidated Balance Sheets while the securities underlying the agreements
remain in the respective asset accounts.
Share-Based
Payment
The
Company maintains a share-based compensation plan (the “Plan”) as described in
Note 15 that provides for the granting of share options and shares to eligible
employees and directors. The Company accounts for share options and
shares granted under this plan in accordance with the requirements
of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS
123R”). SFAS 123R requires that all share-based compensation be recognized as an
expense in the financial statement and that such cost be measured at the fair
value of the award on the grant date.
Income
Tax
The
provision for income tax is based on income and expense reported for financial
statement purposes, using the “asset and liability method” for accounting for
deferred income tax. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
recorded against any deferred tax assets for which it is more likely than not
that the deferred tax asset will not be realized.
Earnings
per Common Share
Earnings
per common share (“EPS”) are computed using the weighted average number of
common and diluted common shares outstanding during the period. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates are used in determining the level of the allowance for loan and lease
losses and the evaluation of goodwill for impairment.
Statements
of Cash Flows
For
purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents
include cash and due from banks, interest-earning deposits with banks and
federal funds sold with maturities of 90 days or less.
Accounting
Pronouncements Recently Issued or Adopted
Recently
Issued Accounting Pronouncements
In June
2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Base Payment Transactions Are Participating Securities
(“FSP EITF 03-6-1”). Under this FSP, unvested share-based
payment awards that contain nonforfeitable rights to dividends will be
considered to be a separate class of common stock and will be included in the
basic EPS calculation using the two-class method that is described in FASB
Statement No. 128, Earnings
per Share. This FSP will be effective for the Company on
January 1, 2009, and will require retrospective adjustment of all prior periods
presented.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS 161”). This Statement amends and requires enhanced
qualitative, quantitative and credit risk disclosures about an entity’s
derivative and hedging activities, but does not change the scope or accounting
principles of Statement No. 133. SFAS 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. Because
SFAS 161 impacts the Company’s disclosure and not its accounting treatment for
derivative financial instruments and related hedged items, adoption of SFAS 161
will not impact the Company’s financial condition or results of
operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141R, Business
Combinations (“SFAS 141R”). This statement establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.
Recently
Adopted Accounting Pronouncements
In
December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN
46(R)-8, Disclosure by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities (“FSP FAS 140-4 and FIN
46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends FASB Statement No.
140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, to
require public entities to provide additional disclosures about transfers of
financial assets and amends FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable
Interest Entities, to require public enterprises provide additional
disclosures about their involvement in variable interest entities and certain
special purpose entities. This FSP was effective for the
first reporting period ending after December 15, 2008. Because FSP
FAS 140-4 and FIN 46(R)-8 impact disclosures and not the accounting
treatment for transfer of financial assets and interest in variable interest
entities, adoption of FSP FAS 140-4 and FIN 46(R)-8 did not impact the Company’s
financial condition or results of operations.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (“SFAS 157”). This statement defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This
Statement applies whenever assets or liabilities are required or permitted to be
measured at fair value under currently existing standards. No additional fair
value measurements are required under this Statement. The Company adopted SFAS
157 on January 1, 2008 and there was no effect on our financial condition or
results of operations.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
Under Statement 13 (“FSP FAS 157-1”). FSP FAS 157-1 amends
FASB Statement No. 157, Fair
Value Measurements, to exclude FASB
Statement No. 13, Accounting
for Leases, and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under Statement
13. However, the scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required to be measured
at fair value under FASB Statement No. 141, Business Combinations, or No.
141 (revised 2007), Business
Combinations, regardless of whether those assets and liabilities are
related to leases. FSP FAS 157-1 was effective upon the initial
adoption of FASB Statement No. 157. As the Company applied Statement
No. 157 in a manner consistent with this FSP, adoption of this FSP had no effect
on our financial condition or results of operations.
In
October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP FAS
157-3”). This FSP clarifies the application of FASB Statement No.
157, Fair Value Measurements,
in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP was effective
when issued; adoption of this FSP had no effect on our financial condition or
results of operations.
In
September 2006, the Financial Accounting Standards Board ratified the consensus
reached by the Emerging Issues Task Force in Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (“EITF 06-4”). EITF 06-4 provides recognition
guidance regarding liabilities and related compensation costs for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. On January 1, 2008 the
Company recognized the effects of applying the consensus through a change in
accounting principle with a cumulative-effect adjustment to retained earnings of
approximately $2.1 million and an increase in postretirement benefit liability
of the same amount.
|
2.
|
Earnings
per Common Share
|
|
|
Information
used to calculate earnings per common share was as
follows:
|
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands except per share)
|
||||||||||||
|
Net
income
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | ||||||
|
Accumulated
preferred dividends
|
(427 | ) | - - | - - | ||||||||
|
Amortization
of preferred stock discount
|
(43 | ) | - - | - - | ||||||||
|
Net
income applicable to common shareholders
|
$ | 5,498 | $ | 32,381 | $ | 32,103 | ||||||
|
Basic
weighted average common shares outstanding
|
17,914 | 16,802 | 15,946 | |||||||||
|
Dilutive
effect of potential common shares from:
|
||||||||||||
|
Awards
granted under equity incentive program
|
75 | 170 | 202 | |||||||||
|
Common
stock warrants
|
21 | - - | - - | |||||||||
|
Diluted
weighted average common shares outstanding
|
18,010 | 16,972 | 16,148 | |||||||||
|
Earnings
per common share
|
||||||||||||
|
Basic
|
$ | 0.31 | $ | 1.93 | $ | 2.01 | ||||||
|
Diluted
|
$ | 0.31 | $ | 1.91 | $ | 1.99 | ||||||
Potential
dilutive shares are excluded from the computation of earnings per share if their
effect is anti-dilutive. Anti-dilutive shares outstanding related to
options to acquire common stock for the year ended December 31, 2008 totaled
54,912. There were no anti-dilutive shares outstanding related to
options to acquire common stock for the years 2007 and 2006.
|
3.
|
Cash
and Cash Equivalents
|
The
Company is required to maintain an average reserve balance with the Federal
Reserve Bank or maintain such reserve balance in the form of cash. The average
required reserve balance for the years ended December 31, 2008 and 2007 was
approximately $225 thousand and $1.0 million, respectively, and was met by
holding cash and maintaining an average balance with the Federal Reserve
Bank.
|
4.
|
Securities
|
At
December 31, 2008, the Company’s securities portfolio primarily consisted
of securities issued by U.S. government agencies, U.S. government-sponsored
enterprises and state and municipalities. All of the Company’s
mortgage-backed securities and collateralized mortgage obligations are issued by
U.S. government agencies and U.S. government-sponsored enterprises and are
implicitly guaranteed by the U.S. government. The Company did not have any other
issuances in its portfolio which exceeded ten percent of shareholders’
equity.
The
following table summarizes the amortized cost, gross unrealized gains and
losses, and the resulting fair value of securities available for
sale:
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31, 2008:
|
||||||||||||||||
|
U.S.
Government sponsored enterprise
|
$ | 488 | $ | - - | $ | - - | $ | 488 | ||||||||
|
U.S.
Government agency and government-sponsored enterprise mortgage-backed
securities & collateralized mortgage obligations
|
335,207 | 6,889 | (258 | ) | 341,838 | |||||||||||
|
State
and municipal securities
|
188,415 | 2,547 | (5,309 | ) | 185,653 | |||||||||||
|
Other
securities
|
1,000 | - - | (61 | ) | 939 | |||||||||||
|
Total
|
$ | 525,110 | $ | 9,436 | $ | (5,628 | ) | $ | 528,918 | |||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31, 2007:
|
||||||||||||||||
|
U.S.
Government sponsored enterprise
|
$ | 61,137 | $ | 216 | $ | (53 | ) | $ | 61,300 | |||||||
|
U.S.
Government agency and government-sponsored enterprise mortgage-backed
securities & collateralized mortgage obligations
|
304,475 | 1,132 | (1,865 | ) | 303,742 | |||||||||||
|
State
and municipal securities
|
190,673 | 3,782 | (490 | ) | 193,965 | |||||||||||
|
Other
securities
|
2,400 | - - | (41 | ) | 2,359 | |||||||||||
|
Total
|
$ | 558,685 | $ | 5,130 | $ | (2,449 | ) | $ | 561,366 | |||||||
Gross realized losses
amounted to $36 thousand, $0 and $504 thousand for the years ended December 31,
2008, 2007 and 2006, respectively. Gross realized gains amounted to $882
thousand, $0 and $540 thousand for the years ended December 31, 2008, 2007 and
2006, respectively.
The
following table summarizes the amortized cost and fair value of securities
available for sale by contractual maturity groups:
|
December
31, 2008
|
||||||||
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
(in
thousands)
|
||||||||
|
U.S.
Government agency and government-sponsored enterprise mortgage-backed
securities & collateralized mortgage obligations (1)
|
||||||||
|
Due
through 1 year
|
$ | 58 | $ | 59 | ||||
|
Over
1 through 5 years
|
2,057 | 2,078 | ||||||
|
Over
5 through 10 years
|
139,046 | 140,318 | ||||||
|
Over
10 years
|
194,046 | 199,383 | ||||||
|
Total
|
$ | 335,207 | $ | 341,838 | ||||
|
State
and municipal securities
|
||||||||
|
Due
through 1 year
|
$ | 1,801 | $ | 1,804 | ||||
|
Over
1 through 5 years
|
16,091 | 16,839 | ||||||
|
Over
5 through 10 years
|
36,028 | 36,444 | ||||||
|
Over
10 years
|
134,495 | 130,566 | ||||||
|
Total
|
$ | 188,415 | $ | 185,653 | ||||
|
(1)
|
The
maturities reported for mortgage-backed securities and collateralized
mortgage obligations are based on contractual maturities and principal
amortization.
|
At
December 31, 2008 and 2007, available for sale securities with a fair value
of $370.0 million and $326.6 million, respectively, were pledged to secure
public deposits, Federal Home Loan Bank borrowings, and for other purposes as
required or permitted by law.
The
following tables summarizes information pertaining to securities with gross
unrealized losses at December 31, 2008 and 2007, aggregated by investment
category and length of time that individual securities have been in a continuous
loss position:
|
Less
than 12 months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
December
31, 2008
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
U.S.
Government sponsored enterprise
|
$ | - - | $ | - - | $ | - - | $ | - - | $ | - - | $ | - - | ||||||||||||
|
U.S.
Government agency and government-sponsored enterprise mortgage-backed
securities & collateralized mortgage obligations
|
562 | (3 | ) | 17,414 | (255 | ) | 17,976 | (258 | ) | |||||||||||||||
|
State
and municipal securities
|
95,560 | (4,744 | ) | 6,863 | (565 | ) | 102,423 | (5,309 | ) | |||||||||||||||
|
Other
securities
|
- - | - - | 939 | (61 | ) | 939 | (61 | ) | ||||||||||||||||
|
Total
|
$ | 96,122 | $ | (4,747 | ) | $ | 25,216 | $ | (881 | ) | $ | 121,338 | $ | (5,628 | ) | |||||||||
|
Less
than 12 months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
December
31, 2007
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
U.S.
Government sponsored enterprise
|
$ | - - | $ | - - | $ | 17,678 | $ | (53 | ) | $ | 17,678 | $ | (53 | ) | ||||||||||
|
U.S.
Government agency and government-sponsored enterprise mortgage-backed
securities & collateralized mortgage obligations
|
16,897 | (28 | ) | 170,932 | (1,837 | ) | 187,829 | (1,865 | ) | |||||||||||||||
|
State
and municipal securities
|
19,725 | (112 | ) | 24,549 | (378 | ) | 44,274 | (490 | ) | |||||||||||||||
|
Other
securities
|
- - | - - | 959 | (41 | ) | 959 | (41 | ) | ||||||||||||||||
|
Total
|
$ | 36,622 | $ | (140 | ) | $ | 214,118 | $ | (2,309 | ) | $ | 250,740 | $ | (2,449 | ) | |||||||||
At
December 31, 2008, there were 123 state and municipal government securities
in an unrealized loss position, of which 8 were in a continuous loss position
for 12 months or more. The unrealized losses on state and municipal securities
were caused by interest rate changes subsequent to the purchase of the
individual securities. Management monitors published credit ratings of these
securities for adverse changes. As of December 31, 2008 none of the
obligations of state and local government entities held by the Company had an
adverse credit rating. The decline in fair value is attributable to changes in
interest rates relative to where these investments fall within the yield curve
and their individual characteristics. Because the credit quality of these
securities remains above investment grade and the Company has the ability and
intent to hold these investments until a recovery of market value, which may be
maturity, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2008.
At
December 31, 2008, there were 12 U.S. Government agency and
government-sponsored enterprise mortgage-backed securities &
collateralized mortgage obligations securities in an unrealized loss position,
of which 9 were in a continuous loss position for 12 months or more. The
unrealized losses on U.S. Government agency and government-sponsored enterprise
mortgage-backed securities & collateralized mortgage obligations were
caused by interest rate changes subsequent to the purchase of the securities. It
is expected that the securities would not be settled at a price less than the
amortized cost of the investment. The decline in fair value is attributable to
changes in interest rates relative to where these investments fall within the
yield curve and their individual characteristics. Because the Company has the
ability and intent to hold these investments until a recovery of market value,
which may be maturity, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2008.
At
December 31, 2008, there was one other security, a mortgage-backed
securities fund, which was in a continuous loss position for 12 months or more.
The unrealized loss on this security was caused by interest rate changes
subsequent to the purchase of the security. It is expected that this security
would not be settled at a price less than the amortized cost of the investment.
The decline in fair value is attributable to changes in interest rates and the
additional risk premium investors are demanding for investment securities with
these characteristics. Because the Company has the ability and intent to hold
these investments until a recovery of market value, the Company does not
consider this investment to be other-than-temporarily impaired at
December 31, 2008.
|
5.
|
Comprehensive
Income
|
|
|
The
components of comprehensive income are as
follows:
|
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Net
income as reported
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | ||||||
|
Unrealized
gain(loss) from securities:
|
||||||||||||
|
Net
unrealized holding gain(loss) from available for sale securities arising
during the year, net of tax of $(699), $(2,985) and $572
|
1,275 | 5,540 | (1,009 | ) | ||||||||
|
Reclassification
adjustment of net gain from sale of available for sale securities included
in income, net of tax of $300, $0 and $13
|
(546 | ) | - - | (23 | ) | |||||||
|
Net
unrealized gain(loss) from securities, net of reclassification
adjustment
|
729 | 5,540 | (1,032 | ) | ||||||||
|
Unrealized
gain(loss) from cash flow hedging instruments:
|
||||||||||||
|
Net
unrealized gain from cash flow hedging instruments arising during the
year, net of tax of $410, $1,552 and $197
|
754 | 2,847 | 361 | |||||||||
|
Reclassification
adjustment of net (gain)loss included in income, net of tax of $587, $43
and $0
|
(1,106 | ) | 78 | - - | ||||||||
|
Net
unrealized gain(loss) from cash flow hedging instruments
|
(352 | ) | 2,925 | 361 | ||||||||
|
Total
comprehensive income
|
$ | 6,345 | $ | 40,846 | $ | 31,432 | ||||||
6. Loans
The
following is an analysis of the loan portfolio by major types of loans (net of
deferred loan fees):
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Commercial
business
|
$ | 810,922 | $ | 762,365 | ||||
|
Real
estate:
|
||||||||
|
One-to-four
family residential
|
57,237 | 60,991 | ||||||
|
Commercial
and five or more family residential properties
|
862,595 | 852,139 | ||||||
|
Total
real estate
|
919,832 | 913,130 | ||||||
|
Real
estate construction:
|
||||||||
|
One-to-four
family residential
|
209,682 | 269,115 | ||||||
|
Commercial
and five or more family residential properties
|
81,176 | 165,490 | ||||||
|
Total
real estate construction
|
290,858 | 434,605 | ||||||
|
Consumer
|
214,753 | 176,559 | ||||||
|
Subtotal
|
2,236,365 | 2,286,659 | ||||||
|
Less
deferred loan fees and other
|
(4,033 | ) | (3,931 | ) | ||||
|
Total
loans, net of deferred loan fees
|
$ | 2,232,332 | $ | 2,282,728 | ||||
|
Loans
held for sale
|
$ | 1,964 | $ | 4,482 | ||||
Non-accrual
loans totaled $106.2 million and $14.0 million at December 31, 2008 and
2007, respectively. The amount of interest income foregone as a result of these
loans being placed on non-accrual status totaled $4.1 million for 2008, $814,000
for 2007 and $497,000 for 2006. At December 31, 2008 and 2007, there were
no commitments of additional funds for loans accounted for on a non-accrual
basis.
At
December 31, 2008 and 2007, the total recorded investment in impaired loans
was $106.8 million and $12.4 million, respectively. At December 31,
2008, $8.3 million of impaired loans had a specific valuation allowance of $1.2
million. At December 31, 2007, $5.2 million of impaired loans had a
specific valuation allowance of $820,000. The average recorded investment in
impaired loans for the years ended December 31, 2008, 2007, and 2006, was
$134.1 million, $11.4 million, and $5.2 million, respectively. Interest income
recognized on impaired loans was $40 thousand in 2008, $13,000 in 2007, and
$51,000 in 2006.
At
December 31, 2008 and 2007, the Company had no loans to foreign domiciled
businesses or foreign countries, or loans related to highly leveraged
transactions. Substantially all of the Company’s loans and loan commitments are
geographically concentrated in its service areas within Washington and
Oregon.
The
Company and its banking subsidiary have granted loans to officers and directors
of the Company and related interests. These loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve more
than the normal risk of collectability. The aggregate dollar amount of these
loans was $8.8 million and $13.6 million at December 31, 2008 and 2007,
respectively. During 2008, $4.2 million of related party loans were made and
repayments totaled $9.0 million. During 2007, $7.7 million related party loans
were made and repayments totaled $6.1 million.
At
December 31, 2008 and 2007 $467.7 million and $106.3 million of commercial
and residential real estate loans were pledged as collateral on FHLB
borrowings.
|
7.
|
Allowances
for Loan and Lease Losses and Unfunded Loan Commitments and Letters of
Credit
|
Changes
in the allowance for loan and lease losses are summarized as
follows:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 26,599 | $ | 20,182 | $ | 20,829 | ||||||
|
Loans
charged off
|
(25,987 | ) | (1,213 | ) | (3,195 | ) | ||||||
|
Recoveries
|
959 | 833 | 483 | |||||||||
|
Net
chargeoffs
|
(25,028 | ) | (380 | ) | (2,712 | ) | ||||||
|
Balance
established in acquisition
|
- - | 3,192 | - - | |||||||||
|
Provision
charged to expense
|
41,176 | 3,605 | 2,065 | |||||||||
|
Balance
at end of year
|
$ | 42,747 | $ | 26,599 | $ | 20,182 | ||||||
Changes in the
allowance for unfunded loan commitments and letters of credit are summarized as
follows:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 349 | $ | 339 | $ | 339 | ||||||
|
Net
changes in the allowance for unfunded loan commitments and letters of
credit
|
151 | 10 | - | |||||||||
|
Balance
at end of year
|
$ | 500 | $ | 349 | $ | 339 | ||||||
8. Premises
and Equipment
Land,
buildings, and furniture and equipment, less accumulated depreciation and
amortization, were as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Land
|
$ | 17,507 | $ | 15,026 | ||||
|
Buildings
|
44,374 | 40,321 | ||||||
|
Leasehold
improvements
|
2,833 | 2,208 | ||||||
|
Equipment
under capital lease
|
510 | 537 | ||||||
|
Furniture
and equipment
|
22,671 | 22,685 | ||||||
|
Vehicles
|
339 | 358 | ||||||
|
Computer
software
|
8,716 | 7,655 | ||||||
|
Total
cost
|
96,950 | 88,790 | ||||||
|
Less
accumulated depreciation and amortization
|
(35,811 | ) | (32,668 | ) | ||||
|
Total
|
$ | 61,139 | $ | 56,122 | ||||
Total
depreciation and amortization expense on buildings and furniture and equipment
was $5.0 million, $4.5 million, and $4.4 million, for the years ended
December 31, 2008, 2007, and 2006, respectively.
|
9.
|
Goodwill
and Other Intangibles
|
The
following table summarizes the changes in the Company’s goodwill and core
deposit intangible asset for the years ended December 31, 2008 and
2007:
|
Goodwill
|
CDI
|
|||||||
|
(in
thousands)
|
||||||||
|
Balance
at December 31, 2006
|
$ | 29,723 | $ | 2,944 | ||||
|
Additions
|
66,288 | 4,825 | ||||||
|
Amortization
|
- - | (719 | ) | |||||
|
Balance
at December 31, 2007
|
96,011 | 7,050 | ||||||
|
Additions
|
- - | - - | ||||||
|
Amortization
|
- - | (1,142 | ) | |||||
|
Other
|
(492 | ) | - - | |||||
|
Balance
at December 31, 2008
|
$ | 95,519 | $ | 5,908 | ||||
The
change in goodwill from year-end 2007 is due to income tax adjustments related
to the 2007 acquisitions resulting from the preparation in 2008 of final income
tax returns. Amortization expense on the CDI was $1.1 million in
2008, $719 thousand in 2007 and $452 thousand in 2006. The Company estimates
that aggregate amortization expense on the CDI will be $1.0 million for 2009,
$963 thousand for 2010, $893 thousand for 2011, $832 thousand for 2012 and $780
thousand for 2013.
The products
and services of companies previously acquired are comparable to the Company's
retail banking operations. Accordingly, goodwill has been assigned to the
retail banking reporting unit for purposes of impairment testing. We
review our goodwill for impairment annually during the third
quarter. Goodwill of a reporting unit shall be 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.
A
significant amount of judgment is involved in determining 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: declines in the value of our stock price, a significant
adverse change in legal factors or in the business climate; 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.
The
goodwill impairment test involves a two-step process. The first step
is a comparison of the reporting unit’s fair value to its carrying
value. We estimate fair value using three approaches: allocation of
corporate value, discounted cash flow and comparable market
statistics. The allocation of corporate value approach applies the
aggregate market value of the Company and divides it among the reporting units
based on a common financial measure such as assets or earnings. This
type of allocation methodology is most effective when the reporting units of the
Company are highly similar. A key assumption in this approach is the
control premium applied to the aggregate market value. A control
premium is utilized as the value of a company from the perspective of a
controlling interest is generally higher than the widely quoted market price per
share. The discounted cash flow approach uses a reporting unit’s
projection of future cash flows that is discounted using a weighted-average cost
of capital that reflects current market conditions. Finally, the
comparable market statistics approach estimates the value of the Company by
comparing it to trading multiples involving similar companies. Key
assumptions include the control premium as described above.
If the
carrying value of the reporting unit is higher than its fair value, there is an
indication that impairment may exist and the second step must be performed to
measure the amount of impairment loss, if any. The amount of
impairment is determined by comparing the implied fair value of the reporting
unit goodwill to the carrying value of the goodwill in the same manner as if the
reporting unit was being acquired in a business
combination. Specifically, we would allocate the fair value to all of
the assets and liabilities of the reporting unit in a hypothetical analysis that
would calculate 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.
During
the third quarter of 2008, we conducted our annual goodwill impairment test and
concluded the fair value of the retail banking reporting unit exceeded its
carrying value and, accordingly, did not perform the second step of the goodwill
impairment test. During the fourth quarter of 2008, due to the poor
overall economic conditions, declines in the value of our stock price as well as
our competitors and a challenging environment for the financial services
industry, we concluded a triggering event had occurred indicating potential
impairment. Accordingly we conducted an interim impairment test of
our goodwill as of November 30, 2008.
At
November 30, 2008 we had three reporting units, retail banking, commercial
banking and private banking. Based upon the acquisition history of
the Company, all of the Company’s goodwill is assigned to the retail banking
reporting unit. As part of our process for performing the step one
impairment test of goodwill, we estimated the fair value of the retail banking
reporting unit utilizing the three approaches described above. Based
on the results of the step one impairment test, a potential impairment loss was
indicated. Accordingly, we performed the second step of the
impairment test to measure the amount of any impairment loss.
Groups of
assets and liabilities of the retail banking reporting unit subject to the most
material valuation adjustments in the second step include loans, certificates of
deposit and core deposits. The loan portfolio was valued utilizing
the comparable market statistics approach. This approach estimates
the value of an asset by comparing it to transactions involving similar
assets. The key assumption in this approach is the discount
percentage applied to the value of the asset. The discounted cash
flow approach was also considered in valuing the loan portfolio but was not
utilized due to the difficulty in obtaining both accurate estimates of future
cash flow amounts and reliable discount rates. The value of the core
deposits is the present value of the cost savings generated by core
deposits. Key variables in this valuation include the life of the
accounts, the interest rates on the deposit accounts, the operating costs of the
deposit accounts, the cost of an alternate source of funds and any other income
associated with the deposit accounts.
Based
upon the pro forma purchase price allocation, we determined that there was no
goodwill impairment for the year ended December 31, 2008. Continued
declines in the value of our stock price or significant adverse changes in legal
factors or in the business climate for the financial services industry may
result in a future impairment charge. It is possible that changes in
circumstances, existing at the measurement date or at other times in the future,
or in management’s judgments, assumptions and estimates made in assessing the
fair value of goodwill, could result in an impairment charge of a portion or all
of our goodwill. If we recorded an impairment charge, our financial
position and results of operations would be adversely affected.
10. Deposits
Year-end
deposits are summarized in the following table:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deposit
Composition
|
(in thousands)
|
|||||||
|
Core
deposits:
|
||||||||
|
Demand
and other non-interest bearing
|
$ | 466,078 | $ | 468,237 | ||||
|
Interest
bearing demand
|
519,124 | 478,596 | ||||||
|
Money
market
|
530,065 | 609,502 | ||||||
|
Savings
|
122,076 | 115,324 | ||||||
|
Certificates
of deposit less than $100,000
|
303,704 | 324,734 | ||||||
|
Total
core deposits
|
1,941,047 | 1,996,393 | ||||||
|
Certificates
of deposit greater than $100,000
|
338,971 | 428,885 | ||||||
|
Wholesale
certificates of deposit (CDARS®)
|
39,903 | 762 | ||||||
|
Wholesale
certificates of deposit
|
62,230 | 72,021 | ||||||
|
Total
deposits
|
$ | 2,382,151 | $ | 2,498,061 | ||||
The
following table shows the amount and maturity of time deposits that had balances
of $100,000 or greater:
|
Years
Ending December 31,
|
(in
thousands)
|
|||
|
2009
|
$ | 333,100 | ||
|
2010
|
11,499 | |||
|
2011
|
6,961 | |||
|
2012
|
2,796 | |||
|
2013
|
2,109 | |||
|
Thereafter
|
- - | |||
|
Total
|
$ | 356,465 | ||
|
11.
|
Federal
Home Loan Bank and Federal Reserve Bank
Borrowings
|
The
Company has entered into borrowing arrangements with the Federal Home Loan Bank
of Seattle (“FHLB”) to borrow funds under a short-term floating rate cash
management advance program and fixed-term loan agreements. All
borrowings are secured by stock of the FHLB, certain pledged available for sale
investment securities and a blanket pledge of qualifying loans receivable. At
December 31, 2008 FHLB advances were scheduled to mature as
follows:
|
Federal
Home Loan Bank Advances
|
||||||||||||||||||||||||
|
Adjustable
rate
|
Fixed
rate
|
Total
|
||||||||||||||||||||||
|
advances
|
advances
|
advances
|
||||||||||||||||||||||
|
Wtd
Avg Rate
|
Amount
|
Wtd
Avg Rate
|
Amount
|
Wtd
Avg Rate
|
Amount
|
|||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Due
through 1 year
|
0.63 | % | $ | 49,000 | 3.89 | % | $ | 1,000 | 0.64 | % | $ | 50,000 | ||||||||||||
|
Over
1 through 5 years
|
- - | - - | 2.49 | % | 100,000 | 2.49 | % | 100,000 | ||||||||||||||||
|
Total
FHLB advances
|
0.63 | % | $ | 49,000 | 2.50 | % | $ | 101,000 | 1.89 | % | $ | 150,000 | ||||||||||||
The
maximum, average outstanding and year-end balances and average interest rates on
advances from the FHLB were as follows for the years ended December 31, 2008,
2007 and 2006:
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Balance
at end of year
|
$ | 150,000 | $ | 257,670 | $ | 205,800 | ||||||
|
Average
balance during the year
|
$ | 282,624 | $ | 207,521 | $ | 208,594 | ||||||
|
Maximum
month-end balance during the year
|
$ | 349,000 | $ | 264,250 | $ | 303,000 | ||||||
|
Weighted
average rate during the year
|
2.53 | % | 5.27 | % | 5.25 | % | ||||||
|
Weighted
average rate at December 31
|
1.89 | % | 4.59 | % | 5.56 | % | ||||||
FHLB
advances are collateralized by the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Fair
value of investment securities
|
$ | 168,537 | $ | 274,354 | ||||
|
Recorded
value of blanket pledge on loans receivable
|
467,682 | 106,344 | ||||||
|
Total
|
$ | 636,219 | $ | 380,698 | ||||
|
FHLB
Borrowing Capacity
|
$ | 486,219 | $ | 50,998 | ||||
The
Company is also eligible to borrow under the Federal Reserve Bank’s primary
credit program, including the Term Auction Facility (“TAF”)
auctions. All borrowings are secured by certain pledged available for
sale investment securities. At December 31, 2008 Federal Reserve Bank borrowings
were scheduled to mature as follows:
|
Federal Reserve
Bank Borrowings
|
||||||||||||||||||||||||
|
Adjustable
rate
|
Fixed
rate
|
Total
|
||||||||||||||||||||||
|
advances
|
advances
|
advances
|
||||||||||||||||||||||
|
Wtd
Avg Rate
|
Amount
|
Wtd
Avg Rate
|
Amount
|
Wtd
Avg Rate
|
Amount
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Due
through 1 year
|
0.00 | % | $ | - - | 0.60 | % | $ | 50,000 | 0.60 | % | $ | 50,000 | ||||||||||||
The
maximum, average outstanding and year-end balances and average interest rates on
borrowings from the Federal Reserve Bank were as follows for the years ended
December 31, 2008, 2007 and 2006:
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Balance
at end of year
|
$ | 50,000 | $ | - - | $ | - - | ||||||
|
Average
balance during the year
|
$ | 14,569 | $ | 54 | $ | 27 | ||||||
|
Maximum
month-end balance during the year
|
$ | 120,000 | $ | - - | $ | - - | ||||||
|
Weighted
average rate during the year
|
0.62 | % | 5.36 | % | 5.50 | % | ||||||
|
Weighted
average rate at December 31
|
0.60 | % | 0.00 | % | 0.00 | % | ||||||
Federal
Reserve Bank borrowings are collateralized by the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Fair
value of investment securities
|
$ | 144,754 | $ | 22,672 | ||||
|
Federal
Reserve Bank borrowing capacity
|
$ | 94,754 | $ | 22,672 | ||||
12. Other
Borrowings
Securities
Sold Under Agreements to Repurchase
The
Company has entered into wholesale repurchase agreements with certain
brokers. At December 31, 2008, the Company held $25.0 million in
whole sale repurchase agreements with an interest rate of
1.88%. Securities available for sale with a carrying amount of $28.5
million were pledged as collateral for the repurchase agreement
borrowings. The broker holds the securities while the Company
continues to receive the principal and interest payments from the
securities. Upon maturity of the agreement, the pledged securities
will be returned to the Company.
Credit
Line
The
Company has a $20.0 million unsecured line of credit with a large commercial
bank with an interest rate indexed to LIBOR. At December 31, 2008 and
2007, the outstanding balance was $100 thousand and $5.0 million, respectively
with an interest rate of 2.43% at December 31, 2008.
|
13.
|
Long-term
Subordinated Debt
|
During
2001, the Company, through its subsidiary trust (the “Trust”) participated in a
pooled trust preferred offering, whereby the trust issued $22.0 million of 30
year floating rate capital securities. The capital securities constitute
guaranteed preferred beneficial interests in debentures issued by the trust. The
debentures had an initial rate of 7.29% and a rate of 7.00% at December 31,
2008. The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted
quarterly. The Company through the Trust may call the debt after ten years at
par, allowing the Company to retire the debt early if conditions are favorable.
In accordance with FASB Interpretation No. 46 (as revised), “Consolidation of Variable Interest
Entities”, the Trust is deconsolidated with the result being that the
trust preferred obligations are classified as long-term subordinated debt on the
Company’s Consolidated Balance Sheet and the Company’s related investment in the
Trust of $681,000 is recorded in other assets. At December 31, 2008 and
2007, the balance of the Company’s investment in the Trust remained at $681,000.
The subordinated debt payable to the Trust is on the same interest and payment
terms as the trust preferred obligations issued by the
Trust. Through a 2007 acquisition, the Company assumed an additional
$3.0 million in floating rate trust preferred obligations from the Town Center
Bancorp Statutory Trust; these debentures had a rate of 8.57% at December 31,
2008. The floating rate is based on the 3-month LIBOR plus 3.75% and
is adjusted quarterly. At December 31, 2008 and 2007, the balance of
the Company’s investment in this Town Center Bancorp Statutory Trust was $93,000
which is recorded in other assets on the Consolidated Balance
Sheets.
|
14.
|
Income
Tax
|
The components of income
tax expense (benefit) are as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
tax expense
|
$ | 9,503 | $ | 14,360 | $ | 14,121 | ||||||
|
Deferred
benefit
|
(14,409 | ) | (2,607 | ) | (1,988 | ) | ||||||
|
Total
|
$ | (4,906 | ) | $ | 11,753 | $ | 12,133 | |||||
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan and lease losses
|
$ | 15,139 | $ | 9,284 | ||||
|
Supplemental
executive retirement plan
|
4,684 | 4,379 | ||||||
|
Stock
option and restricted stock
|
873 | 536 | ||||||
|
Litigation
reserve
|
199 | 627 | ||||||
|
Preferred
stock
|
6,920 | - - | ||||||
|
Other
|
1,847 | 483 | ||||||
|
Total
deferred tax assets
|
29,662 | 15,309 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
FHLB
stock dividends
|
(1,985 | ) | (2,028 | ) | ||||
|
Purchase
accounting
|
(2,093 | ) | (2,534 | ) | ||||
|
Section
481 adjustment-deferred fees
|
(105 | ) | (150 | ) | ||||
|
Deferred
loan fees
|
(885 | ) | - - | |||||
|
Unrealized
gain on investment securities
|
(1,353 | ) | (954 | ) | ||||
|
Unrealized
gain on cash flow hedging instruments
|
- - | (1,750 | ) | |||||
|
Depreciation
|
(753 | ) | (1,165 | ) | ||||
|
Total
deferred tax liabilities
|
(7,174 | ) | (8,581 | ) | ||||
|
Net
deferred tax assets
|
$ | 22,488 | $ | 6,728 | ||||
A
reconciliation of the Company’s effective income tax rate with the federal
statutory tax rate is as follows:
|
Years
Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Income
tax based on statutory rate
|
$ | 372 | 35 | % | $ | 15,447 | 35 | % | $ | 15,483 | 35 | % | ||||||||||||
|
Reduction
resulting from:
|
||||||||||||||||||||||||
|
Tax
credits
|
(725 | ) | (68) | % | (711 | ) | (1) | % | (566 | ) | (1) | % | ||||||||||||
|
Tax
exempt instruments
|
(2,810 | ) | (265) | % | (2,631 | ) | (6) | % | (2,484 | ) | (6) | % | ||||||||||||
|
Life
insurance proceeds
|
(940 | ) | (89) | % | - - | 0 | % | - - | 0 | % | ||||||||||||||
|
Other
nondeductible items
|
(803 | ) | (76) | % | (352 | ) | (1) | % | (300 | ) | (1) | % | ||||||||||||
|
Income
tax provision (benefit)
|
$ | (4,906 | ) | (463) | % | $ | 11,753 | 27 | % | $ | 12,133 | 27 | % | |||||||||||
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (“FIN 48”) on January 1, 2007. As of December 31, 2008,
we had no unrecognized tax benefits. Our policy is to recognize interest and
penalties on unrecognized tax benefits in “Provision for income taxes” in the
Consolidated Statements of Income. There were no amounts related to interest and
penalties recognized for the years ended December 31, 2008 and 2007. The
tax years subject to examination by federal and state taxing authorities are the
years ending December 31, 2007, 2006, and 2005.
|
15.
|
Share-Based
Payments
|
At
December 31, 2008, the Company had one equity compensation plan (the
“Plan”), which is shareholder approved, that provides for the granting of share
options and shares to eligible employees and directors up to 2,191,482
shares.
Share
Awards: Restricted share awards provide for the immediate
issuance of shares of Company common stock to the recipient, with such shares
held in escrow until certain service conditions are met, generally five years of
continual service. Recipients of restricted shares do not pay any
cash consideration to the Company for the shares, have the right to vote all
shares subject to such grant, and receive all dividends with respect to such
shares, whether or not the shares have vested. The fair value of
share awards is equal to the fair market value of the Company’s common stock on
the date of grant.
A summary
of the status of the Company’s nonvested shares as of December 31, 2008, 2007
and 2006 is presented below:
|
Nonvested
Shares
|
Shares
|
Weighted
Average Grant-Date Fair Value
|
||||||
|
Nonvested
at January 1, 2006
|
8,000 | $ | 24.34 | |||||
|
Granted
|
87,025 | 33.04 | ||||||
|
Vested
|
(6,000 | ) | 27.74 | |||||
|
Forfeited
|
(5,850 | ) | 33.10 | |||||
|
Nonvested
at December 31, 2006
|
83,175 | 32.58 | ||||||
|
Granted
|
76,250 | 31.63 | ||||||
|
Vested
|
(6,500 | ) | 28.27 | |||||
|
Forfeited
|
(9,600 | ) | 31.32 | |||||
|
Nonvested
at December 31, 2007
|
143,325 | 32.36 | ||||||
|
Granted
|
69,360 | 23.65 | ||||||
|
Vested
|
(13,065 | ) | 30.89 | |||||
|
Forfeited
|
(8,300 | ) | 29.72 | |||||
|
Nonvested
at December 31, 2008
|
191,320 | $ | 29.41 | |||||
As of
December 31, 2008, there was $3.3 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Plan. That cost is expected to be recognized over a weighted
average period of 2.8 years. The total fair value of shares vested during the
years ended December 31, 2008, 2007, and 2006 was $404 thousand, $184
thousand, and $166 thousand, respectively.
Share
Options: Option awards are
generally granted with an exercise price equal to the market price of the
Company’s stock at the date of grant; those option awards generally vest based
on three years of continual service and are exercisable for a five-year period
after vesting. Option awards granted have a 10-year maximum
term.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. The fair value of all options is amortized
on a straight-line basis over the requisite service periods, which are generally
the vesting periods. The expected life of options granted represents the period
of time that they are expected to be outstanding. The expected life is
determined based on historical experience with similar awards, giving
consideration to the contractual terms and vesting schedules. Expected
volatilities of our common stock are estimated at the date of grant based on the
historical volatility of the stock. The volatility factor is based on historical
stock prices over the most recent period commensurate with the estimated
expected life of the award. The risk-free interest rate is based on the U.S.
Treasury curve in effect at the time of the award. The expected dividend yield
is based on dividend trends and the market value of the Company’s stock price at
the time of the award.
Assumptions
utilized in the Black-Scholes option valuation model and the resulting fair
value for options granted during the years ended December 31, 2008, 2007
and 2006 are summarized as follows:
|
For
The Twelve Months Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
Life (in years)
|
- - | 4.14 | - - | |||||||||
|
Expected
Volatility
|
- - | 29.47 | % | - - | ||||||||
|
Weighted
Average Risk-free Interest Rate
|
- - | 4.53 | % | - - | ||||||||
|
Expected
Annual Dividend Yield
|
- - | 2.01 | % | - - | ||||||||
|
Weighted
Average Fair Value
|
- - | $ | 15.61 | - - | ||||||||
A
summary of option activity under the Plan as of December 31, 2008, and
changes during the year then ended is presented below:
|
Options
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
|
Aggregate
Intrinsic Value ($000)
|
||||||||||||
|
Balance
at December 31, 2007
|
331,868 | $ | 14.77 | |||||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Forfeited
|
(7,861 | ) | 20.87 | |||||||||||||
|
Expired
|
(13,341 | ) | 10.82 | |||||||||||||
|
Exercised
|
(108,685 | ) | 11.60 | |||||||||||||
|
Balance
at December 31, 2008
|
201,981 | $ | 16.49 | 3.3 | $ | 110 | ||||||||||
|
Total
Exercisable at December 31, 2008
|
201,981 | $ | 16.49 | 3.3 | $ | 110 | ||||||||||
The
weighted average grant-date fair value of options granted during the years 2007
$15.61. No options were granted in 2008 and 2006. The total intrinsic
value of options exercised during the years ended December 31, 2008, 2007,
and 2006 was $1.2 million, $3.3 million, and $2.7 million,
respectively.
As of
December 31, 2008, outstanding stock options consist of the
following:
|
Ranges
of
Exercise
Prices
|
Number
of
Option
Shares
|
Weighted
Average Remaining
Contractual
Life
|
Weighted
Average Exercise Price of
Option
Shares
|
Number
of
Exercisable
Option
Shares
|
Weighted
Average Exercise Price of Exercisable Option
Shares
|
|||||||||||||||||
| $ | 3.09 - 6.17 | 10,177 | 2.8 | $ | 4.91 | 10,177 | $ | 4.91 | ||||||||||||||
| 6.18 - 9.25 | 2,326 | 3.9 | 6.31 | 2,326 | 6.31 | |||||||||||||||||
| 9.26 - 12.34 | 59,364 | 1.1 | 11.62 | 59,364 | 11.62 | |||||||||||||||||
| 12.35 - 15.43 | 42,236 | 4.0 | 13.98 | 42,236 | 13.98 | |||||||||||||||||
| 15.44 - 18.51 | 13,749 | 3.6 | 17.29 | 13,749 | 17.29 | |||||||||||||||||
| 18.52 - 21.60 | 21,648 | 5.5 | 18.95 | 21,648 | 18.95 | |||||||||||||||||
| 21.61 - 24.68 | 15,500 | 3.9 | 22.95 | 15,500 | 22.95 | |||||||||||||||||
| 24.69 - 27.77 | 31,310 | 3.9 | 25.77 | 31,310 | 25.77 | |||||||||||||||||
| 27.78 - 30.86 | 5,671 | 8.1 | 30.86 | 5,671 | 30.86 | |||||||||||||||||
| 201,981 | 3.3 | $ | 16.49 | 201,981 | $ | 16.49 | ||||||||||||||||
It is the
Company’s policy to issue new shares for share option exercises and share
awards. The Company expenses awards of share options and shares on a
straight-line basis over the related vesting term of the award. For the 12
months ended December 31, 2008 and 2007, the Company recognized pre-tax
share-based compensation expense of $1.3 million and $974 thousand,
respectively.
|
16.
|
Regulatory
Capital Requirements
|
The
Company (on a consolidated basis) and its banking subsidy are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company and its subsidiaries’
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and its banking subsidiaries
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and
classification
are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and its banking subsidiaries to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital to risk-weighted
assets (as defined in the regulations) and of Tier 1 capital to average assets
(as defined in the regulations). Management believes, as of December 31,
2008 and 2007, that the Company and Columbia Bank met all capital adequacy
requirements to which they are subject.
As of
December 31, 2008, the most recent notification from the Federal Deposit
Insurance Corporation categorized Columbia Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the following tables. There
are no conditions or events since the notification that management believes have
changed Columbia Bank’s category. The Company and its banking subsidiary’s
actual capital amounts and ratios as of December 31, 2008 and 2007, are
also presented in the following table.
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provision
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Total
Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
The
Company
|
$ | 365,797 | 14.25 | % | $ | 205,388 | 8.0 | % | N/A | N/A | ||||||||||||||
|
Columbia
Bank
|
$ | 287,665 | 11.21 | % | $ | 205,202 | 8.0 | % | $ | 256,503 | 10.0 | % | ||||||||||||
|
Tier
1 Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
The
Company
|
$ | 333,568 | 12.99 | % | $ | 102,694 | 4.0 | % | N/A | N/A | ||||||||||||||
|
Columbia
Bank
|
$ | 255,464 | 9.96 | % | $ | 102,601 | 4.0 | % | $ | 153,902 | 6.0 | % | ||||||||||||
|
Tier
1 Capital (to average assets):
|
||||||||||||||||||||||||
|
The
Company
|
$ | 333,568 | 11.27 | % | $ | 118,418 | 4.0 | % | N/A | N/A | ||||||||||||||
|
Columbia
Bank
|
$ | 255,464 | 8.64 | % | $ | 118,288 | 4.0 | % | $ | 147,860 | 5.0 | % | ||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||
|
Total
Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
The
Company
|
$ | 285,606 | 10.90 | % | $ | 209,618 | 8.0 | % | N/A | N/A | ||||||||||||||
|
Columbia
Bank
|
$ | 257,753 | 10.49 | % | $ | 196,532 | 8.0 | % | $ | 245,665 | 10.0 | % | ||||||||||||
|
Tier
1 Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
The
Company
|
$ | 258,658 | 9.87 | % | $ | 104,809 | 4.0 | % | N/A | N/A | ||||||||||||||
|
Columbia
Bank
|
$ | 232,707 | 9.47 | % | $ | 98,266 | 4.0 | % | $ | 147,399 | 6.0 | % | ||||||||||||
|
Tier
1 Capital (to average assets):
|
||||||||||||||||||||||||
|
The
Company
|
$ | 258,658 | 8.54 | % | $ | 121,122 | 4.0 | % | N/A | N/A | ||||||||||||||
|
Columbia
Bank
|
$ | 232,707 | 8.23 | % | $ | 113,056 | 4.0 | % | $ | 141,320 | 5.0 | % | ||||||||||||
|
17.
|
Employee
Benefit Plans
|
401(k)
Plan
The
Company maintains defined contribution and profit sharing plans in conformity
with the provisions of section 401(k) of the Internal Revenue Code at Columbia
Bank. The Columbia Bank 401(k) and Profit Sharing Plan (the “401(k) Plan”),
permits eligible Columbia Bank employees, those who are at least 18 years of age
and have completed six months of service, to contribute up to 75% of their
eligible compensation to the 401(k) Plan. On a per pay period basis the Company
is required to match 50% of employee contributions up to 3% of each employee’s
eligible compensation. Additionally, as determined annually by the Board of
Directors of the Company, the 401(k) Plan provides for a non-matching
discretionary profit sharing contribution. The Company contributed $818 thousand
during 2008, $811 thousand during 2007, and $867 thousand during 2006, in
matching funds to the 401(k) Plan. The Company’s discretionary profit sharing
contributions were $1.0 million during 2008, $1.6 million during 2007 and $1.2
million during 2006.
Employee
Stock Purchase Plan
The
Company maintains an “Employee Stock Purchase Plan” (the “ESP Plan”) in which
substantially all employees of the Company are eligible to participate. The ESP
Plan provides participants the opportunity to purchase common stock of the
Company at a discounted price. Under the ESP Plan, participants can purchase
common stock of the Company for 90% of the lowest price on either the first or
last day in each of two six month look-back periods. The look-back periods are
January 1st through
June 30th and
July 1st through
December 31st of each
calendar year. The 10% discount is recognized by the Company as compensation
expense and does not have a material impact on net income or earnings per common
share. Participants of the ESP Plan purchased 37,179 shares for $568 thousand in
2008, 21,633 shares for $634 thousand in 2007 and 18,952 shares for $542
thousand in 2006. At December 31, 2008 there were 29,141 shares
available for purchase under the ESP plan.
Supplemental
Executive Retirement Plan
The
Company maintains a supplemental executive retirement plan (the “SERP”), a
nonqualified deferred compensation plan that provides retirement benefits to
certain highly compensated executives. The SERP is unsecured and unfunded and
there are no program assets. Associated with the SERP benefit is a death benefit
for each participant’s beneficiary. Beneficiaries are entitled to a split dollar
share of proceeds from life insurance policies purchased by the Company. The
SERP projected benefit obligation, which represents the vested net present value
of future payments to individuals under the plan is accrued over the estimated
remaining term of employment of the participants and has been determined by
actuarial valuation using Income Tax Regulation 1.72-9, “Table 1 Ordinary Life
Annuities,” for the mortality assumptions and a discount rate of 5.75% in 2008
and 2007. Additional assumptions and features of the plan are a normal
retirement age of 65 and a 2% annual cost of living benefit adjustment. The
projected benefit obligation is included in other liabilities on the
Consolidated Balance Sheets.
The
following table reconciles the accumulated liability for the projected benefit
obligation:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Balance
at beginning of year
|
$ | 7,912 | $ | 4,182 | ||||
|
Benefit
expense
|
917 | 828 | ||||||
|
Established
through acquisitions
|
- - | 3,203 | ||||||
|
Benefit
payments
|
(288 | ) | (301 | ) | ||||
|
Balance
at end of year
|
$ | 8,541 | $ | 7,912 | ||||
The
benefits expected to be paid in conjunction with the SERP are presented in the
following table:
|
Years
Ending December 31,
|
(in
thousands)
|
|||
|
2009
|
$ | 294 | ||
|
2010
|
380 | |||
|
2011
|
386 | |||
|
2012
|
392 | |||
|
2013
|
398 | |||
|
2014
through 2018
|
2,911 | |||
|
Total
|
$ | 4,761 | ||
2008
Life Insurance Replacement Policy Program
On
January 1, 2008 we recognized the effects of applying the consensus in EITF 06-4
through a change in accounting principle with a cumulative-effect adjustment to
retained earnings, net of tax, of approximately $2.1 million and an increase in
postretirement benefit liability of $3.3 million. During 2008, the
Company completed a life insurance replacement policy program in which the
individuals participating in the split dollar life insurance arrangements agreed
to terminate their postretirement split dollar life insurance
benefits. In exchange, the Company purchased replacement life
insurance policies for the covered individuals which offered comparable life
insurance benefits but for which the Company ultimately receives 100% of the
death benefit. The benefit of reversing the postretirement liability
accrued under EITF 06-4 coupled with the expense associated with purchasing the
replacement policies resulted in the Company recognizing in 2008 a one-time net
increase in income before income taxes of approximately $100
thousand.
|
18.
|
Commitments
and Contingent Liabilities
|
Lease Commitments: The
Company leases locations as well as equipment under various non-cancelable
operating leases that expire between 2009 and 2045. The majority of the leases
contain renewal options and provisions for increases in rental rates based on an
agreed upon index or predetermined escalation schedule. As of December 31,
2008, minimum future rental payments, exclusive of taxes and other charges, of
these leases were:
|
Years
Ending December 31,
|
(in
thousands)
|
|||
|
2009
|
$ | 3,371 | ||
|
2010
|
3,192 | |||
|
2011
|
3,041 | |||
|
2012
|
2,851 | |||
|
2013
|
2,764 | |||
|
Thereafter
|
8,839 | |||
|
Total
minimum payments
|
$ | 24,058 | ||
Total
rental expense on buildings and equipment, net of rental income of $674
thousand, $669 thousand, and $768 thousand, was $3.2 million, $3.1 million, and
$2.8 million, for the years ended December 31, 2008, 2007, and 2006,
respectively.
On
September 30, 2004, the Company sold its Broadway and Longview locations.
The Company maintains a substantial continuing involvement in the locations
through various noncancellable operating leases that do not contain renewal
options. The resulting gain on sale of $1.3 million was deferred using the
financing method in accordance with SFAS No. 13, “Accounting for Leases”
and is being amortized over the life of the respective leases. At
December 31, 2008 and 2007, the deferred gain was $483 thousand and $565
thousand, respectively, and is included in “other liabilities” on the
Consolidated Balance Sheets.
Financial Instruments with
Off-Balance Sheet Risk: In the normal course of business, the
Company makes loan commitments (unfunded loans and unused lines of credit) and
issues standby letters of credit to accommodate the financial needs of its
customers.
Standby
letters of credit commit the Company to make payments on behalf of customers
under specified conditions. Historically, no significant losses have been
incurred by the Company under standby letters of credit. Both arrangements have
credit risk essentially the same as that involved in extending loans to
customers and are subject to the Company’s normal credit policies, including
collateral requirements, where appropriate. At December 31, 2008 and 2007,
the Company’s loan commitments amounted to $703.3 million and $857.6 million,
respectively. Standby letters of credit were $41.9 million and $33.6 million at
December 31, 2008 and 2007, respectively. In addition, commitments under
commercial letters of credit used to facilitate customers’ trade transactions
amounted to $362 thousand and $1.1 million at December 31, 2008 and 2007,
respectively.
Public Funds: The
Company’s subsidiary bank is a public depositary and, accordingly, accepts
deposit funds belonging to, or held for the benefit of, Washington and Oregon
states, political subdivisions thereof, municipal corporations, and other public
funds. In accordance with applicable state law, in the event of
default of one bank, all participating banks in the state collectively assure
that no loss of funds is suffered by any public depositor. Generally,
in the event of default by a public depositary, the assessment attributable to
all public depositaries is allocated on a pro rata basis in proportion to the
maximum liability of each public depositary as it existed on the date of
loss.
Legal Proceedings: The
Company and its subsidiaries are from time to time defendants in and are
threatened with various legal proceedings arising from their regular business
activities. Management, after consulting with legal counsel, is of the opinion
that the ultimate liability, if any, resulting from these pending or threatened
actions and proceedings will not have a material effect on the financial
statements of the Company.
In 2007
Visa, Inc. (“Visa”) completed a restructuring and issued shares of Visa Inc.
Class B common stock to its financial institution members in contemplation of
its initial public offering (“IPO”). After the restructuring, member
financial institutions became guarantors of certain of Visa’s litigation
liabilities (“covered litigation”) based upon their proportionate share of the
membership base. Also in 2007, Visa announced that it had reached a
settlement in the amount of $2.07 billion to resolve certain restraint of trade
litigation brought by American Express. Accordingly, in 2007, the Company
recognized a pre-tax charge of approximately $1.8 million related to the
American Express settlement and the remaining covered
litigation. This charge was included in the legal and professional
services line item of the 2007 consolidated statement of income.
In March
2008 Visa completed its initial public offering and subsequently funded a
litigation escrow account with $3.0 billion from its IPO proceeds. In
November 2008, Visa announced that it had reached a settlement in the amount of
$1.89 billion, $1.74 billion to be funded from the escrow account, to settle
covered litigation with Discover Financial Services. In December
2008, Visa deposited an additional $1.1 billion into the litigation escrow
account. As a result of the settlements with Discover Financial
Services and American Express and based on the Company’s Visa USA membership
percentage, the Company recognized a reversal of previously accrued legal
expense of $1.3 million. This reversal is included in the legal and
professional services line item of the consolidate statements of
income. At December 31, 2008 the Company’s remaining reserve for
covered litigation was $485 thousand and we held approximately 73 thousand Class
B shares. When Visa funds the litigation escrow account, the Company,
and other Visa financial institution members, bears the expense via a reduction
of the as converted Class B share count. The Company anticipates the
value of its remaining unredeemed Class B Visa common shares will more than
offset its liabilities related to the remaining covered litigation.
|
19.
|
Fair
Value Accounting and Measurement
|
SFAS 157
defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure requirements about fair value. We hold fixed
and variable rate interest bearing securities, investments in marketable equity
securities and certain other financial instruments, which are carried at fair
value. Fair value is determined based upon quoted prices when
available or through the use of alternative approaches, such as matrix or model
pricing, when market quotes are not readily accessible or
available.
The
valuation techniques are based upon observable and unobservable
inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our own market
assumptions. These two types of inputs create the following fair
value hierarchy:
Level 1 –
Quoted prices for identical instruments in active markets that are accessible at
the measurement date.
Level 2 –
Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model
derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level 3 –
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable.
Fair
values are determined as follows:
Certain
preferred stock securities at fair value are priced using quoted prices for
identical instruments in active markets and are classified within level 1 of the
valuation hierarchy.
Other
securities at fair value are priced using matrix pricing based on the
securities’ relationship to other benchmark quoted prices, and under the
provisions of SFAS 157 are considered a Level 2 input method.
Interest
rate swap positions are valued in models, which use as their basis, readily
observable market parameters and are classified within level 2 of the valuation
hierarchy.
The following
table sets forth the Company’s financial assets and liabilities that were
accounted for at fair value on a recurring basis at December 31, 2008 by level
within the fair value hierarchy. As required by SFAS 157, financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement:
|
Fair
value at
|
Fair
Value Measurements at Reporting Date Using
|
|||||||||||||||
|
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Securities
available for sale
|
$ | 528,918 | $ | 488 | $ | 528,430 | $ | - - | ||||||||
|
Interest
rate swap agreements
|
$ | 14,933 | $ | - - | $ | 14,933 | $ | - - | ||||||||
|
Liabilities
|
||||||||||||||||
|
Interest
rate swap agreements
|
$ | 14,933 | $ | - - | $ | 14,933 | $ | - - | ||||||||
Certain
assets and liabilities are measured at fair value on a nonrecurring basis after
initial recognition such as loans measured for impairment and OREO. The
following methods were used to estimate the fair value of each such class of
financial instrument:
Impaired loans - A
loan is considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of the loan
agreement. Impaired loans are measured by the fair market value of the
collateral if the loan is collateral dependent.
Other real estate owned -
OREO is real property that the Bank has taken ownership of in partial or full
satisfaction of a loan or loans. OREO is recorded at the lower of the carrying
amount of the loan or fair value less estimated costs to sell. This amount
becomes the property’s new basis. Any write-downs based on the property fair
value less estimated cost to sell at the date of acquisition are charged to the
allowance for loan and lease losses. Management periodically reviews OREO in an
effort to ensure the property is carried at the lower of its new basis or fair
value, net of estimated costs to sell.
The
following table presents the carrying value of certain financial and
nonfinancial assets by level within the fair value hierarchy as of December 31,
2008, for which a nonrecurring change in fair value has been recorded during the
year ended December 31, 2008:
|
Fair
value at
|
Fair
Value Measurements at Reporting Date Using
|
|||||||||||||||
|
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Impaired
loans
|
$ | 7,121 | $ | - - | - | $ | - - | $ | 7,121 | |||||||
|
Other
real estate owned
|
2,426 | - - | - - | 2,426 | ||||||||||||
| $ | 9,547 | $ | - - | $ | - - | $ | 9,547 | |||||||||
In
accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan, impaired loans, with carrying amounts of $8.3
million had specific valuation allowances totaling $1.2 million, which were
included in the allowance for loan and lease losses.
Other
real estate owned with a carrying amount of $2.6 million was acquired during the
year ended December 31, 2008. In accordance with Statement of
Financial Accounting Standards No.144, Accounting for the Impairment or
Disposal of Long-Lived Assets, these long-lived assets held for sale were
written down to their fair value of $2.4 million, less cost to sell of $270
thousand (or $2.2 million), resulting in a loss of $434 thousand, which was
charged to the allowance for loan and lease losses during the
period.
|
20.
|
Fair
Value of Financial Instruments
|
The
following table summarizes carrying amounts and estimated fair values of
selected financial instruments as well as assumptions used by the Company in
estimating fair value:
|
December
31,
|
|||||||||||||||||
|
2008
|
2007
|
||||||||||||||||
|
Assumptions
Used in Estimating Fair Value
|
Carrying
Amount
|
Fair Value
|
Carrying
Amount
|
Fair Value
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||||||
|
Assets
|
|||||||||||||||||
|
Cash
and due from banks
|
Approximately
equal to carrying value
|
$ | 84,787 | $ | 84,787 | $ | 82,735 | $ | 82,735 | ||||||||
|
Interest-earning
deposits with banks
|
Approximately
equal to carrying value
|
3,943 | 3,943 | 11,240 | 11,240 | ||||||||||||
|
Securities
available for sale
|
Quoted
market prices, discounted expected future cash flows
|
528,918 | 528,918 | 561,366 | 561,366 | ||||||||||||
|
Loans
held for sale
|
Approximately
equal to carrying value
|
1,964 | 1,964 | 4,482 | 4,482 | ||||||||||||
|
Loans
|
2008:
Comparable market statistics
2007:Discounted
expected future cash flows, net of ALLL
|
2,189,585 | 2,023,405 | 2,256,129 | 2,275,949 | ||||||||||||
|
Liabilities
|
|||||||||||||||||
|
Deposits
|
Fixed-rate
certificates of deposit: Discounted expected future cash
flows
All
other deposits: Approximately equal to carrying value
|
$ | 2,382,151 | $ | 2,390,024 | $ | 2,498,061 | $ | 2,499,331 | ||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank borrowings
|
Discounted
expected future cash flows
|
200,000 | 203,898 | 257,670 | 257,535 | ||||||||||||
|
Repurchase
agreements
|
Discounted
expected future cash flows
|
25,000 | 25,055 | - - | - - | ||||||||||||
|
Other
borrowings
|
Approximately
equal to carrying value
|
201 | 201 | 5,061 | 5,061 | ||||||||||||
|
Long-term
obligations
|
2008:
Discounted expected future cash flows
2007:
Approximately equal to carrying value
|
25,603 | 14,813 | 25,519 | 25,519 | ||||||||||||
Off-Balance-Sheet Financial
Instruments: The fair value of commitments, guarantees, and letters
of credit at December 31, 2008 and 2007, approximates the recorded amounts
of the related fees, which are not material. The fair value is estimated based
upon fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed rate commitments, the fair value estimation
takes into consideration an interest rate risk factor. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements.
|
21.
|
Derivatives
and Hedging Activities
|
Termination of Hedging
Activities: On January 7, 2008, the Company discontinued its three prime
rate floor derivative instruments that were previously utilized to hedge the
variable cash flows associated with existing variable-rate loan assets based on
the prime rate. The Company received $8.1 million as a result of the
termination transaction resulting in a net derivative gain of $6.2
million. The interest rate floors had an original
maturity
date of April 4, 2011. In accordance with Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), as
amended and interpreted, the net derivative gain related to a discontinued cash
flow hedge continues to be reported in accumulated other comprehensive income
and is reclassified into earnings in the same periods during which the
originally hedged forecasted transactions affect earnings. For the year ended
December 31, 2008, $1.7 million of the net derivative gain was reclassified into
earnings. For the year ended December 31, 2009, the Company estimates
that $2.4 million of the net derivative gain will be reclassified from
accumulated other comprehensive income into interest income.
Customer Derivatives: The
Company periodically enters into certain commercial loan interest rate swap
agreements in order to provide commercial loan customers the ability to convert
from variable to fixed interest rates. Under these agreements, the
Company enters into a variable-rate loan agreement with a customer in addition
to a swap agreement. This swap agreement effectively converts the
customer’s variable rate loan into a fixed rate. The Company then
enters into a corresponding swap agreement with a third party in order to offset
its exposure on the variable and fixed components of the customer
agreement. At December 31, 2008, the notional amount of such
arrangements was $114.9 million and investment securities with a fair value of
$16.4 million were pledged as collateral to the third parties. As the
interest rate swap agreements with the customers and third parties are not
designated as hedges under SFAS 133, the instruments are marked to market in
earnings.
|
22.
|
Business
Segment Information
|
The
Company is managed along two major lines of business within the Columbia Bank
banking subsidiary: commercial banking and retail banking. The treasury function
of the Company, included in the “Other” category, although not considered a line
of business, is responsible for the management of investments and interest rate
risk. In addition, the provision for loan and lease losses is
included in the “Other” category. On April 1, 2008, the Bank of
Astoria banking subsidiary was merged into the Columbia Bank banking
subsidiary. This change in internal organizational structure also
changes the composition of the Company’s reportable
segments. Accordingly, segment results for the Bank of Astoria are
now included in the Retail Banking segment. Prior period segment
reporting has been restated to reflect this change.
The
Company generates segment results that include balances directly attributable to
business line activities. The principal activities conducted by commercial
banking are the origination of commercial business relationships, private
banking services and real estate lending. Retail banking includes all deposit
products, with their related fee income, and all consumer loan products as well
as commercial loan products offered in the Company’s branch
offices.
Overhead,
including sales and back office support functions and other indirect expenses
are not allocated to the major lines of business. Goodwill resulting from
business combinations is included in the Retail Banking segment. Since the
Company is not specifically organized around lines of business, most reportable
segments comprise more than one operating activity.
Effective
January 1, 2008 the Company implemented a more robust internal funds transfer
pricing methodology. Internal funds transfer pricing refers to the
process we utilize to give an earnings credit to a branch or revenue center for
the deposit funds they generate while providing an earnings charge to the
centers that use deposit funds to make loans. The implementation of
this methodology changed the basis of measurement for segment net interest
income as presented in the tables below. Generally, this methodology
had the effect of increasing net interest income for the commercial banking
segment with a corresponding decrease in net interest income for the retail
banking segment. The increase in net interest income for the
commercial banking segment is driven primarily by the earnings credit for
deposit funds generated within that segment. In prior years, the
retail banking segment benefited from the earnings credit for deposit funds
generated by the commercial banking segment. Segment net interest
income after provision for loan and lease losses for the current year is not
directly comparable to the same line item for the prior years as those prior
years cannot practicably be restated.
The
organizational structure of the Company and its business line financial results
are not necessarily comparable with information from other financial
institutions. Financial highlights by lines of business are as
follows:
Condensed
Statement of Operations
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
Commercial
Banking
|
Retail
Banking
|
Other
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Net
interest income
|
$ | 47,461 | $ | 55,411 | $ | 16,641 | $ | 119,513 | ||||||||
|
Provision
for loan and lease losses
|
- - | - - | (41,176 | ) | (41,176 | ) | ||||||||||
|
Net
interest income after provision for loan and lease losses
|
47,461 | 55,411 | (24,535 | ) | 78,337 | |||||||||||
|
Noninterest
income
|
3,624 | 9,089 | 2,137 | 14,850 | ||||||||||||
|
Noninterest
expense
|
(22,587 | ) | (41,679 | ) | (27,859 | ) | (92,125 | ) | ||||||||
|
Income
(loss) before income taxes
|
28,498 | 22,821 | (50,257 | ) | 1,062 | |||||||||||
|
Income
tax benefit
|
4,906 | |||||||||||||||
|
Net
income
|
$ | 5,968 | ||||||||||||||
|
Total
assets
|
$ | 1,443,029 | $ | 1,000,209 | $ | 653,841 | $ | 3,097,079 | ||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
Commercial
Banking
|
Retail
Banking
|
Other
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Net
interest income
|
$ | 30,062 | $ | 82,306 | $ | (3,548 | ) | $ | 108,820 | |||||||
|
Provision
for loan and lease losses
|
(3,605 | ) | (3,605 | ) | ||||||||||||
|
Net
interest income after provision for loan and lease losses
|
30,062 | 82,306 | (7,153 | ) | 105,215 | |||||||||||
|
Noninterest
income
|
3,192 | 8,571 | 15,985 | 27,748 | ||||||||||||
|
Noninterest
expense
|
(11,582 | ) | (28,181 | ) | (49,066 | ) | (88,829 | ) | ||||||||
|
Income
(loss) before income taxes
|
21,672 | 62,696 | (40,234 | ) | 44,134 | |||||||||||
|
Income
tax provision
|
(11,753 | ) | ||||||||||||||
|
Net
income
|
$ | 32,381 | ||||||||||||||
|
Total
assets
|
$ | 1,474,678 | $ | 1,068,282 | $ | 635,753 | $ | 3,178,713 | ||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||
|
Commercial
Banking
|
Retail
Banking
|
Other
|
Total
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Net
interest income
|
$ | 22,870 | $ | 79,366 | $ | (4,473 | ) | $ | 97,763 | |||||||
|
Provision
for loan and lease losses
|
(2,065 | ) | (2,065 | ) | ||||||||||||
|
Net
interest income after provision for loan and lease losses
|
22,870 | 79,366 | (6,538 | ) | 95,698 | |||||||||||
|
Noninterest
income
|
2,076 | 7,700 | 14,896 | 24,672 | ||||||||||||
|
Noninterest
expense
|
(10,197 | ) | (25,642 | ) | (40,295 | ) | (76,134 | ) | ||||||||
|
Income
(loss) before income taxes
|
14,749 | 61,424 | (31,937 | ) | 44,236 | |||||||||||
|
Income
tax provision
|
(12,133 | ) | ||||||||||||||
|
Net
income
|
$ | 32,103 | ||||||||||||||
|
Total
assets
|
$ | 1,204,269 | $ | 682,029 | $ | 666,833 | $ | 2,553,131 | ||||||||
|
23.
|
Preferred Stock and
Warrant
|
On
November 21, 2008, the Company entered into a Securities Purchase
Agreement-Standard Terms with the U.S. Department of Treasury (the “Treasury”)
pursuant to which the Company sold to the Treasury for an aggregate purchase
price of $76.9 million, 76,898 shares of Fixed Rate Cumulative Perpetual
Preferred Stock Series A (the “Preferred Stock”) and a warrant to purchase
796,046 shares of common stock (the “Warrant”) as part of the Treasury’s
previously announced Troubled Asset Relief Program Capital Purchase
Program.
The
Preferred Stock is non-voting, has an aggregate liquidation preference of $76.9
million and an annual dividend rate of 5% for the first five years, and 9%
thereafter. Dividends are cumulative and payable
quarterly. The Preferred Stock may not be redeemed for a period of
three years from the date of issue, except with the proceeds from the issuance
of Tier 1-qualifying perpetual preferred or common stock from which the
aggregate gross proceeds to the Company are not less than 25% of the issue price
of the Preferred Stock. The Preferred Stock ranks senior to common shares both
as to dividend and liquidation preferences. In addition, the Company
is subject to the following restrictions:
Restrictions
on Dividends
For as
long as the Preferred Stock is outstanding, the Company may not declare or pay
dividends on, or redeem, repurchase, or otherwise acquire shares of its common
stock unless all accrued and unpaid dividends on the Preferred Stock are fully
paid.
Increase
in Common Dividends
The
Treasury’s consent is required for any increase in common dividends per share
until the third anniversary of the issue date unless the Preferred Stock is
redeemed in whole prior to the third anniversary or the Treasury has transferred
all of the Preferred Stock to third parties.
Repurchases
The
Treasury’s consent is required for any share repurchases, with certain limited
exceptions, until the third anniversary of the date of issue unless the
Preferred Stock is redeemed in whole prior to the third anniversary or the
Treasury has transferred all of the Preferred Stock to third
parties.
The
Warrant has a term of 10 years and is exercisable at any time, in whole or in
part, at an exercise price of $14.49 per share. The Treasury may not
exercise the Warrant for, or transfer the Warrant with respect to, more than
half of the initial shares of common stock underlying the Warrant prior to the
earlier of (i) the date on which the Company receives aggregate gross proceeds
of not less then $76.9 million from one or more Qualified Equity Offerings and
(ii) December 31, 2009. The number of shares to be delivered upon
settlement of the Warrant will be reduced by 50% if the Company receives
aggregate gross proceeds of at least 100% of the aggregate Liquidation
Preference of the Preferred Stock from ore or more Qualified Equity Offerings
prior to December 31, 2009.
The $76.9
million in proceeds was allocated to the Preferred Stock and the Warrant based
on their relative fair values at issuance (approximately $73.7 million was
allocated to the Preferred Stock and approximately $3.2 million to the
Warrant). The difference between the initial value allocated to the
Preferred Stock of approximately $73.7 million and the liquidation value of
$76.9 million will be charged to retained earnings over the first five years of
the contract as an adjustment to the dividend yield using the effective yield
method. The amount charged to retained earnings will be deducted from
the numerator in calculating basic and diluted earnings per share during the
related reporting period (see note 2).
|
24.
|
Parent
Company Financial Information
|
Condensed
Statements of Income—Parent Company Only
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Income
|
||||||||||||
|
Dividend
from banking subsidiaries
|
$ | 3,380 | $ | 4,475 | $ | 17,200 | ||||||
|
Interest
on securities available for sale
|
- - | - - | 53 | |||||||||
|
Interest-earning
deposits
|
369 | 590 | 435 | |||||||||
|
Other
income
|
54 | 64 | 79 | |||||||||
|
Total
Income
|
3,803 | 5,129 | 17,767 | |||||||||
|
Expense
|
||||||||||||
|
Compensation
and employee benefits
|
754 | 451 | 436 | |||||||||
|
Long-term
obligations
|
1,800 | 2,177 | 1,992 | |||||||||
|
Other
expense
|
1,435 | 948 | 889 | |||||||||
|
Total
Expenses
|
3,989 | 3,576 | 3,317 | |||||||||
|
Income
(loss) before income tax benefit and equity in undistributed net income of
subsidiaries
|
(186 | ) | 1,553 | 14,450 | ||||||||
|
Income
tax benefit
|
(1,205 | ) | (1,031 | ) | (1,070 | ) | ||||||
|
Income
before equity in undistributed net income of subsidiaries
|
1,019 | 2,584 | 15,520 | |||||||||
|
Equity
in undistributed net income of subsidiaries
|
4,949 | 29,797 | 16,583 | |||||||||
|
Net
Income
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | ||||||
Condensed
Balance Sheets—Parent Company Only
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
and due from banking subsidiaries
|
$ | 797 | $ | 1,663 | ||||
|
Interest-earning
deposits
|
76,068 | 9,286 | ||||||
|
Total
cash and cash equivalents
|
76,865 | 10,949 | ||||||
|
Investment
in banking subsidiaries
|
362,274 | 359,084 | ||||||
|
Investment
in other subsidiaries
|
774 | 774 | ||||||
|
Other
assets
|
2,273 | 2,337 | ||||||
|
Total
Assets
|
$ | 442,186 | $ | 373,144 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Long-term
subordinated debt
|
$ | 25,603 | $ | 25,519 | ||||
|
Other
borrowings
|
100 | 5,000 | ||||||
|
Other
liabilities
|
1,098 | 894 | ||||||
|
Total
liabilities
|
26,801 | 31,413 | ||||||
|
Shareholders'
equity
|
415,385 | 341,731 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 442,186 | $ | 373,144 | ||||
Condensed
Statements of Cash Flows—Parent Company Only
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Operating
Activities
|
||||||||||||
|
Net
Income
|
$ | 5,968 | $ | 32,381 | $ | 32,103 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Equity
in undistributed earnings of subsidiaries
|
(4,949 | ) | (29,797 | ) | (16,583 | ) | ||||||
|
Stock-based
compensation expense
|
399 | 94 | 185 | |||||||||
|
Net
changes in other assets and liabilities
|
874 | (27 | ) | 523 | ||||||||
|
Net
cash provided by operating activities
|
2,292 | 2,651 | 16,228 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Proceeds
from maturities of securities available for sale
|
- - | - - | 5,000 | |||||||||
|
Acquisition
of subsidiaries
|
- - | (2,497 | ) | - - | ||||||||
|
Net
cash provided by (used in) investing activities
|
- - | (2,497 | ) | 5,000 | ||||||||
|
Financing
Activities
|
||||||||||||
|
Net
increase (decrease) in short-term borrowings
|
(4,900 | ) | 5,000 | (2,500 | ) | |||||||
|
Cash
dividends paid
|
(10,491 | ) | (11,249 | ) | (9,117 | ) | ||||||
|
Proceeds
from issuance of preferred stock, net
|
76,868 | |||||||||||
|
Proceeds
from issuance of common stock, net
|
1,906 | 2,836 | 2,090 | |||||||||
|
Excess
tax benefit from stock-based compensation
|
241 | 979 | 907 | |||||||||
|
Purchase
and retirement of common stock
|
- - | (2,121 | ) | - | ||||||||
|
Net
cash provided by (used in) financing activities
|
63,624 | (4,555 | ) | (8,620 | ) | |||||||
|
Increase
(decrease) in cash and cash equivalents
|
65,916 | (4,401 | ) | 12,608 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
10,949 | 15,350 | 2,742 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 76,865 | $ | 10,949 | $ | 15,350 | ||||||
|
Supplemental
Non-Cash Investing and Financing Activities
|
||||||||||||
|
Issuance
of stock in acquisitions
|
$ | - - | $ | 57,119 | $ | - - | ||||||
Summary
Of Quarterly Financial Information (Unaudited)
Quarterly
financial information for the years ended December 31, 2008 and 2007 is
summarized as follows:
|
First
|
Second
|
Third
|
Fourth
|
Year
Ended
|
||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
December
31,
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
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 | |||||||||
|
Net
Income (Loss) Per Common Share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.61 | $ | 0.11 | $ | (0.49 | ) | $ | 0.07 | $ | 0.31 | |||||||||
|
Diluted
|
$ | 0.61 | $ | 0.11 | $ | (0.49 | ) | $ | 0.07 | $ | 0.31 | |||||||||
|
2007
|
||||||||||||||||||||
|
Total
interest income
|
$ | 41,146 | $ | 43,255 | $ | 49,378 | $ | 50,438 | $ | 184,217 | ||||||||||
|
Total
interest expense
|
16,443 | 17,560 | 20,518 | 20,876 | 75,397 | |||||||||||||||
|
Net
interest income
|
24,703 | 25,695 | 28,860 | 29,562 | 108,820 | |||||||||||||||
|
Provision
for loan and lease losses
|
638 | 329 | 1,231 | 1,407 | 3,605 | |||||||||||||||
|
Noninterest
income
|
6,177 | 6,741 | 7,631 | 7,199 | 27,748 | |||||||||||||||
|
Noninterest
expense
|
20,402 | 20,266 | 22,425 | 25,736 | 88,829 | |||||||||||||||
|
Income
before income taxes
|
9,840 | 11,841 | 12,835 | 9,618 | 44,134 | |||||||||||||||
|
Provision
for income taxes
|
2,557 | 3,297 | 3,579 | 2,320 | 11,753 | |||||||||||||||
|
Net
Income
|
$ | 7,283 | $ | 8,544 | $ | 9,256 | $ | 7,298 | $ | 32,381 | ||||||||||
|
Net
Income Per Common Share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.45 | $ | 0.53 | $ | 0.53 | $ | 0.41 | $ | 1.93 | ||||||||||
|
Diluted
|
$ | 0.45 | $ | 0.53 | $ | 0.53 | $ | 0.41 | $ | 1.91 | ||||||||||
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
An
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded
that as of the end of the period covered by this report, our disclosure controls
and procedures are effective in ensuring that the information required to be
disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934 is (i) accumulated and communicated to our management (including the
CEO and CFO) to allow timely decisions regarding required disclosure, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
Internal
Control Over Financial Reporting
Management’s
Annual Report On Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, the internal control system has been
designed to provide reasonable assurance to the Company’s management and Board
of Directors regarding the preparation and fair presentation of the Company’s
published financial statements.
Reasonable
assurance includes the understanding that there is a remote likelihood that
material misstatements will not be prevented or detected on a timely
basis.
Management
has evaluated the effectiveness of its internal control over financial reporting
as of December 31, 2008 based on the control criteria established in a
report entitled Internal
Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on such evaluation, management
has concluded that the Company’s internal control over financial reporting is
effective as of December 31, 2008.
Our
independent registered public accounting firm has issued an attestation report
our internal control over financial reporting, which appears in this annual
report on Form 10K.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Columbia Banking System,
Inc.
Tacoma,
Washington
We have
audited the internal control over financial reporting of Columbia Banking
System, Inc. and its subsidiaries (the "Company") as of December 31, 2008, based
on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Because management's assessment and our audit
were conducted to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment
and our audit of the Company's internal control over financial reporting
included controls over the preparation of the schedules equivalent to the basic
financial statements in accordance with the instructions for the Consolidated
Reports of Condition and Income for Schedules RC, RI, and RI-A. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Annual Report On Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America
(“generally accepted accounting principles”). A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
not examined and, accordingly, we do not express an opinion or any other form of
assurance on management's statement referring to compliance with laws and
regulations.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2008 of the Company and our report dated
February 27, 2009 expressed an unqualified opinion on those financial
statements.
Seattle,
Washington
February,
27 2009
ITEM 9B. OTHER
INFORMATION
None.
PART
III
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
regarding “Directors, Executive Officers and Corporate Governance” is set forth
under the headings “Proposal: Election of Directors”, “Management—Executive
Officers Who are Not Directors” and “Corporate Governance” in the Company’s 2009
Annual Proxy Statement (“Proxy Statement”) and is incorporated herein by
reference.
Information
regarding “Compliance with Section 16(a) of the Exchange Act” is set forth
under the section “Section 16(a) Beneficial Ownership Reporting Compliance” of
the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding the Company’s audit committee financial expert is set
forth under the heading “Board Structure and Compensation—What Committees has
the Board Established” in our Proxy Statement and is incorporated by
reference.
On
February 25, 2004, consistent with the requirements of the Sarbanes-Oxley
Act of 2002, the Company adopted a Code of Ethics applicable to senior financial
officers including the principal executive officer. The Code of Ethics was filed
as Exhibit 14 to our 2003 Form 10-K Annual Report and can be accessed
electronically by visiting the Company’s website at www.columbiabank.com.
|
EXECUTIVE
COMPENSATION
|
Information
regarding “Executive Compensation” is set forth under the headings “Board
Structure and Compensation” and “Executive Compensation” of the Company’s Proxy
Statement and is incorporated herein by reference.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
regarding “Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters” is set forth under the heading “Stock Ownership” of
the Company’s Proxy Statement and is incorporated herein by
reference.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
regarding “Certain Relationships and Related Transactions, and Director
Independence” is set forth under the headings “Interest of Management in Certain
Transactions” and “Corporate Governance—Director Independence” of the Company’s
Proxy Statement and is incorporated herein by reference.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information
regarding “Principal Accounting Fees and Services” is set forth under the
heading “Independent Public Accountants” of the Company’s Proxy Statement and is
incorporated herein by reference.
PART
IV
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
(a)(1)
|
Financial
Statements:
|
The
Consolidated Financial Statements and related documents set forth in “Item 8.
Financial Statements and Supplementary Data” of this report are filed as part of
this report.
|
(2)
|
Financial Statements
Schedules:
|
All other
schedules to the Consolidated Financial Statements required by Regulation S-X
are omitted because they are not applicable, not material or because the
information is included in the Consolidated Financial Statements and related
notes in “Item 8. Financial Statements and Supplementary Data” of this
report.
|
(3)
|
Exhibits:
|
The
response to this portion of Item 15 is submitted as a separate section of
this report appearing immediately following the signature page and entitled
“Index to Exhibits.”
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 27th day of February
2009.
|
COLUMBIA
BANKING SYSTEM, INC.
|
|
|
(Registrant)
|
|
|
By:
|
/s/ MELANIE J. DRESSEL
|
|
Melanie
J. Dressel
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President
and Chief Executive Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated, on the 27th day of February 2009.
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Principal
Executive Officer:
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By:
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/s/ MELANIE J. DRESSEL
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Melanie
J. Dressel
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President
and Chief Executive Officer
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Principal
Financial Officer:
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By:
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/s/ GARY R. SCHMINKEY
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Gary
R. Schminkey
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Executive
Vice President and Chief Financial Officer
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Principal
Accounting Officer:
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By:
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/s/ CLINT E. STEIN
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Clint
E. Stein
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Senior
Vice President and Chief Accounting
Officer
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Melanie
J. Dressel, pursuant to a power of attorney that is being filed with the Annual
Report on Form 10-K, has signed this report on February 27, 2009 as
attorney in fact for the following directors who constitute a majority of the
Board.
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[John
P. Folsom]
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[Donald
Rodman]
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[Frederick
M. Goldberg]
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[William
T. Weyerhaeuser]
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[Thomas
M. Hulbert]
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[James
M. Will]
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[Thomas
L. Matson]
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[Daniel
C. Regis]
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/s/ MELANIE J. DRESSEL
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Melanie
J. Dressel
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Attorney-in-fact
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February
27, 2009
INDEX TO EXHIBITS
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Exhibit No.
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3.1
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Amended
and Restated Articles of Incorporation
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3.2
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Amended
and Restated Bylaws
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4.1
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Specimen
of common stock certificate (1)
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4.2
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Form
of Series A Preferred Stock Certificate, together with Certificate of
Designations (1)
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4.3
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Pursuant
to Item 601(b) (4) (iii) (A) of Regulation S-K, copies of instruments
defining the rights of holders of long-term debt and preferred securities
are not filed. The Company agrees to furnish a copy thereof to the
Securities and Exchange Commission upon request
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4.4
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Warrant
to Purchase Common Stock of Columbia (2)
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10.1
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Amended
and Restated Stock Option and Equity Compensation Plan (3)
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10.2
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Form
of Stock Option Agreement (4)
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10.3
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Form
of Restricted Stock Agreement (4)
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10.4
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Form
of Stock Appreciation Right Agreement (4)
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10.5
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Form
of Restricted Stock Unit Agreement (4)
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10.6
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Amended
and Restated Employee Stock Purchase Plan
(5)
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10.7
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Office
Lease, dated as of December 15, 1999, between the Company and Haub
Brothers Enterprises Trust
(6)
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10.8
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Employment
Agreement between the Bank, the Company and Melanie J. Dressel effective
August 1, 2004
(7)
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10.9
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Severance
Agreement between the Company and Mr. Gary R. Schminkey effective November
15, 2005 (8)
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10.10
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Form
of Change in Control Agreement between the Bank , and Mr. Mark W. Nelson
and Mr. Andrew McDonald (4)
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10.11
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Form
of Long-Term Care Agreement between the Bank, the Company, and each of the
following directors: Mr. Folsom, Mr. Hulbert, Mr. Matson, Mr. Rodman, Mr.
Weyerhaeuser and Mr. Will (9)
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10.12
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Form
of Supplemental Executive Retirement Plan between Columbia Banking System,
Inc., Columbia State Bank, its wholly owned banking subsidiary, and each
of the following executive officers effective August 1, 2001: Melanie J.
Dressel and Gary R. Schminkey, and for Mark W. Nelson, whose agreement is
effective July 1, 2003 (9)
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10.13
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Deferred
Compensation Plan (401 Plus Plan) dated December 17, 2003 for directors
and key employees (10)
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10.14
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Change
in Control Agreement between the Bank and Mr. Kent L. Roberts dated
December 4, 2006 (11)
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10.15
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Form
of Supplemental Compensation Agreement between the Bank and Mr. Andrew
McDonald (4)
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10.16
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Town
Center Bancorp 2004 Stock Incentive Plan (12)
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10.17
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Town
Center Bancorp Form of Restricted Stock Award Agreement (12)
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10.18
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Mountain
Bank Holding Company Director Stock Option Plan (13)
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10.19
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Mountain
Bank Holding Company Form of Non-employee Director Stock Option Agreement
(13)
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Exhibit No.
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10.20
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Mountain
Bank Holding Company 1999 Employee Stock Option Plan (13)
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10.21
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Mountain
Bank Holding Company Form of Employee Stock Option Agreement (13)
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10.22
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Mt.
Rainier National Bank 1990 Stock Option Plan (13)
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10.23
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Letter
Agreement with Treasury, including Securities Purchase Agreement (2)
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10.24
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Form
of Supplemental Compensation Agreement (4)
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10.25
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Amendment
to Employment Agreement between the Bank, the Company and Melanie J.
Dressel effective February 1, 2009 (14)
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14
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Code
of Ethics (12)
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21
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Subsidiaries
of the Company
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23
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Consent
of Deloitte & Touche LLP
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24
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Power
of Attorney
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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32
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Certification
Filed Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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(1)
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Incorporated
by reference to Exhibit 4.3 and 4.4 of the Company’s S-3 Registration
Statement (File No. 333-156350) filed December 19,
2008
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(2)
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Incorporated
by reference to Exhibits 4.1 and 10.2 of the Company’s Current Report on
Form 8-K filed November 21, 2008
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(3)
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Incorporated
by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement
(File No. 333-125298) filed May 27,
2005
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(4)
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Incorporated
by reference to Exhibits 10.2 - 10.5 of the Company’s Annual Report on
Form 10-K for the year ended December 31,
2007
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(5)
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Incorporated
by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement
(File No. 333-135439) filed June 29,
2006
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(6)
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Incorporated
by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K
for the year ended December 31,
2000
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(7)
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Incorporated
by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30,
2004
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(8)
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Incorporate
by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K
for the year ended December 31,
2005
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(9)
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Incorporated
by reference to Exhibits 10.1—10.3 of the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30,
2001
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(10)
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Incorporated
by reference to Exhibits 10.18 and 14 of the Company’s Annual Report on
Form 10-K for the year ended December 31,
2003
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(11)
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Incorporated
by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31,
2007
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(12)
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Incorporated
by reference to Exhibits 10.1 and 10.2 of the Company’s S-8 Registration
Statement (File No. 333-145207) filed August 7,
2007
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(13)
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Incorporated
by reference to Exhibits 99.1—99.5 of the Company’s S-8 Registration
Statement (File No. 333-144811) filed July 24,
2007
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(14)
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Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed February 16, 2009
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93