UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of issuer as specified in its charter)
Washington | 91-1422237 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
1301 A Street Tacoma, Washington | 98402-2156 | |
(Address of principal executive offices) | (Zip Code) |
(253) 305-1900
(Issuers telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | 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 number of shares of common stock outstanding at April 30, 2011 was 39,482,955.
i
PART I - FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
Three Months Ended March 31, |
||||||||
(in thousands except per share) |
2011 | 2010 | ||||||
Interest Income |
||||||||
Loans |
$ | 47,429 | $ | 36,947 | ||||
Taxable securities |
4,417 | 4,745 | ||||||
Tax-exempt securities |
2,467 | 2,446 | ||||||
Federal funds sold and deposits in banks |
298 | 149 | ||||||
Total interest income |
54,611 | 44,287 | ||||||
Interest Expense |
||||||||
Deposits |
3,079 | 4,941 | ||||||
Federal Home Loan Bank advances |
694 | 705 | ||||||
Long-term obligations |
251 | 249 | ||||||
Other borrowings |
138 | 118 | ||||||
Total interest expense |
4,162 | 6,013 | ||||||
Net Interest Income |
50,449 | 38,274 | ||||||
Provision for loan and lease losses |
0 | 15,000 | ||||||
Provision for losses on covered loans |
(422 | ) | 0 | |||||
Net interest income after provision for loan and lease losses |
50,871 | 23,274 | ||||||
Noninterest Income (Loss) |
||||||||
Service charges and other fees |
6,288 | 5,424 | ||||||
Gain on bank acquisitions |
0 | 9,818 | ||||||
Merchant services fees |
1,633 | 1,739 | ||||||
Gain on sale of investment securities, net |
0 | 58 | ||||||
Bank owned life insurance |
505 | 504 | ||||||
Change in FDIC loss sharing asset |
(14,774 | ) | 0 | |||||
Other |
929 | 930 | ||||||
Total noninterest income (loss) |
(5,419 | ) | 18,473 | |||||
Noninterest Expense |
||||||||
Compensation and employee benefits |
18,921 | 16,986 | ||||||
Occupancy |
4,397 | 3,969 | ||||||
Merchant processing |
883 | 1,100 | ||||||
Advertising and promotion |
901 | 838 | ||||||
Data processing and communications |
1,924 | 1,879 | ||||||
Legal and professional fees |
1,413 | 1,498 | ||||||
Taxes, licenses and fees |
865 | 564 | ||||||
Regulatory premiums |
2,195 | 1,496 | ||||||
Net cost of operation of other real estate owned |
(442 | ) | 1,312 | |||||
Amortization of intangibles |
984 | 787 | ||||||
Other |
5,305 | 3,468 | ||||||
Total noninterest expense |
37,346 | 33,897 | ||||||
Income before income taxes |
8,106 | 7,850 | ||||||
Income tax provision (benefit) |
2,327 | (66 | ) | |||||
Net Income |
$ | 5,779 | $ | 7,916 | ||||
Net Income Applicable to Common Shareholders |
$ | 5,779 | $ | 6,809 | ||||
Earnings per common share |
||||||||
Basic |
$ | 0.15 | $ | 0.24 | ||||
Diluted |
$ | 0.15 | $ | 0.24 | ||||
Dividends paid per common share |
$ | 0.03 | $ | 0.01 | ||||
Weighted average number of common shares outstanding |
39,043 | 27,886 | ||||||
Weighted average number of diluted common shares outstanding |
39,156 | 28,098 |
See accompanying notes to unaudited consolidated condensed financial statements.
1
CONSOLIDATED CONDENSED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
(in thousands) |
March 31, 2011 |
December 31, 2010 |
||||||||||||||
ASSETS | ||||||||||||||||
Cash and due from banks |
$ | 74,973 | $ | 55,492 | ||||||||||||
Interest-earning deposits with banks |
401,355 | 458,638 | ||||||||||||||
Total cash and cash equivalents |
476,328 | 514,130 | ||||||||||||||
Securities available for sale at fair value (amortized cost of $864,653 and $743,928, respectively) |
888,188 | 763,866 | ||||||||||||||
Federal Home Loan Bank stock at cost |
17,908 | 17,908 | ||||||||||||||
Loans held for sale |
542 | 754 | ||||||||||||||
Loans, excluding covered loans, net of deferred loan fees of ($3,161) and ($3,490), respectively |
1,884,206 | 1,915,754 | ||||||||||||||
Less: allowance for loan and lease losses |
55,315 | 60,993 | ||||||||||||||
Loans, excluding covered loans, net |
1,828,891 | 1,854,761 | ||||||||||||||
Covered loans, net of allowance for loan losses of ($5,633) and ($6,055), respectively |
486,345 | 517,061 | ||||||||||||||
Total loans, net |
2,315,236 | 2,371,822 | ||||||||||||||
FDIC loss sharing asset |
193,053 | 205,991 | ||||||||||||||
Interest receivable |
12,889 | 11,164 | ||||||||||||||
Premises and equipment, net |
94,131 | 93,108 | ||||||||||||||
Other real estate owned ($13,527 and $14,443 covered by FDIC loss share, respectively) |
39,608 | 45,434 | ||||||||||||||
Goodwill |
109,639 | 109,639 | ||||||||||||||
Core deposit intangible, net |
17,712 | 18,696 | ||||||||||||||
Other assets |
99,085 | 103,851 | ||||||||||||||
Total Assets |
$ | 4,264,319 | $ | 4,256,363 | ||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||||||||||
Deposits: |
||||||||||||||||
Noninterest-bearing |
$ | 892,751 | $ | 895,671 | ||||||||||||
Interest-bearing |
2,443,462 | 2,431,598 | ||||||||||||||
Total deposits |
3,336,213 | 3,327,269 | ||||||||||||||
Federal Home Loan Bank advances |
115,265 | 119,405 | ||||||||||||||
Securities sold under agreements to repurchase |
25,000 | 25,000 | ||||||||||||||
Other borrowings |
84 | 642 | ||||||||||||||
Long-term subordinated debt |
25,752 | 25,735 | ||||||||||||||
Other liabilities |
47,922 | 51,434 | ||||||||||||||
Total liabilities |
3,550,236 | 3,549,485 | ||||||||||||||
Commitments and contingent liabilities |
||||||||||||||||
Shareholders equity: |
||||||||||||||||
March 31, 2011 |
December 31, 2010 |
|||||||||||||||
Common Stock (no par value) |
||||||||||||||||
Authorized shares |
63,033 | 63,033 | ||||||||||||||
Issued and outstanding |
39,481 | 39,338 | 577,588 | 576,905 | ||||||||||||
Retained earnings |
122,290 | 117,692 | ||||||||||||||
Accumulated other comprehensive income |
14,205 | 12,281 | ||||||||||||||
Total shareholders equity |
714,083 | 706,878 | ||||||||||||||
Total Liabilities and Shareholders Equity |
$ | 4,264,319 | $ | 4,256,363 | ||||||||||||
See accompanying notes to unaudited consolidated condensed financial statements.
2
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Columbia Banking System, Inc.
(Unaudited)
(in thousands) |
Preferred Stock | Common Stock | Retained Earnings |
Accumulated Other Comprehensive Income |
Total Shareholders Equity |
|||||||||||||||||||||||
Number of Shares |
Amount | Number of Shares |
Amount | |||||||||||||||||||||||||
Balance at January 1, 2010 |
77 | $ | 74,301 | 28,129 | $ | 348,706 | $ | 93,316 | $ | 11,816 | $ | 528,139 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
7,916 | 7,916 | ||||||||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||
Net unrealized gain from securities, net of reclassification adjustments |
3,518 | 3,518 | ||||||||||||||||||||||||||
Net change in cash flow hedging instruments |
(479 | ) | (479 | ) | ||||||||||||||||||||||||
Net pension plan liability adjustment |
30 | 30 | ||||||||||||||||||||||||||
Other comprehensive income |
3,069 | |||||||||||||||||||||||||||
Comprehensive income |
10,985 | |||||||||||||||||||||||||||
Accretion of preferred stock discount |
146 | (146 | ) | 0 | ||||||||||||||||||||||||
Issuance of common stock - stock option and other plans |
41 | 509 | 509 | |||||||||||||||||||||||||
Issuance of common stock - restricted stock awards, net of cancelled awards |
72 | 350 | 350 | |||||||||||||||||||||||||
Tax benefit deficiency associated with share-based compensation |
(19 | ) | (19 | ) | ||||||||||||||||||||||||
Preferred dividends |
(961 | ) | (961 | ) | ||||||||||||||||||||||||
Cash dividends paid on common stock |
(282 | ) | (282 | ) | ||||||||||||||||||||||||
Balance at March 31, 2010 |
77 | $ | 74,447 | 28,242 | $ | 349,546 | $ | 99,843 | $ | 14,885 | $ | 538,721 | ||||||||||||||||
Balance at January 1, 2011 |
0 | $ | 0 | 39,338 | $ | 576,905 | $ | 117,692 | $ | 12,281 | $ | 706,878 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
5,779 | 5,779 | ||||||||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||
Net unrealized gain from securities, net of reclassification adjustments |
2,313 | 2,313 | ||||||||||||||||||||||||||
Net change in cash flow hedging instruments |
(142 | ) | (142 | ) | ||||||||||||||||||||||||
Net pension plan liability adjustment |
(247 | ) | (247 | ) | ||||||||||||||||||||||||
Other comprehensive income |
1,924 | |||||||||||||||||||||||||||
Comprehensive income |
7,703 | |||||||||||||||||||||||||||
Issuance of common stock - stock option and other plans |
23 | 380 | 380 | |||||||||||||||||||||||||
Issuance of common stock - restricted stock awards, net of cancelled awards |
122 | 335 | 335 | |||||||||||||||||||||||||
Repurchase of shares |
(2 | ) | (32 | ) | (32 | ) | ||||||||||||||||||||||
Cash dividends paid on common stock |
(1,181 | ) | (1,181 | ) | ||||||||||||||||||||||||
Balance at March 31, 2011 |
0 | $ | 0 | 39,481 | $ | 577,588 | $ | 122,290 | $ | 14,205 | $ | 714,083 | ||||||||||||||||
See accompanying notes to unaudited consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
Three Months Ended March 31, |
||||||||
(in thousands) |
2011 | 2010 | ||||||
Cash Flows From Operating Activities |
||||||||
Net Income |
$ | 5,779 | $ | 7,916 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Provision for loan and lease losses |
(422 | ) | 15,000 | |||||
Stock-based compensation expense |
335 | 350 | ||||||
Depreciation, amortization and accretion |
3,774 | 2,903 | ||||||
Net realized gain on FDIC assisted bank acquisitions |
0 | (9,818 | ) | |||||
Net realized gain on sale of securities |
0 | (58 | ) | |||||
Net realized gain on sale of other assets |
(3 | ) | (14 | ) | ||||
Net realized (gain) loss on sale of other real estate owned |
(2,712 | ) | 145 | |||||
Gain on termination of cash flow hedging instruments |
(222 | ) | (743 | ) | ||||
Write-down on other real estate owned |
1,925 | 829 | ||||||
Deferred income tax benefit |
0 | (125 | ) | |||||
Net change in: |
||||||||
Loans held for sale |
212 | 0 | ||||||
Interest receivable |
(1,725 | ) | (600 | ) | ||||
Interest payable |
(251 | ) | (145 | ) | ||||
Other assets |
13,736 | 6,493 | ||||||
Other liabilities |
(766 | ) | 6,289 | |||||
Net cash provided by operating activities |
19,660 | 28,422 | ||||||
Cash Flows From Investing Activities |
||||||||
Loans originated and acquired, net of principal collected |
51,870 | 75,505 | ||||||
Purchases of: |
||||||||
Securities available for sale |
(149,799 | ) | (56,469 | ) | ||||
Premises and equipment |
(2,461 | ) | (10 | ) | ||||
Proceeds from: |
||||||||
Sales of securities available for sale |
0 | 69,328 | ||||||
Principal repayments and maturities of securities available for sale |
27,315 | 21,911 | ||||||
Disposal of premises and equipment |
20 | 54 | ||||||
Sales of covered other real estate owned |
6,959 | 5,950 | ||||||
Sales of other real estate and other personal property owned |
5,372 | 1,361 | ||||||
Capital improvements on other real estate properties |
(251 | ) | (329 | ) | ||||
Decrease in Small Business Administration secured borrowings |
(558 | ) | 0 | |||||
Net cash acquired in business combinations |
0 | 145,534 | ||||||
Net cash (used in) provided by investing activities |
(61,533 | ) | 262,835 | |||||
Cash Flows From Financing Activities |
||||||||
Net increase (decrease) in deposits |
8,944 | (258,862 | ) | |||||
Proceeds from: |
||||||||
Federal Home Loan Bank advances |
100 | 0 | ||||||
Federal Reserve Bank borrowings |
100 | 0 | ||||||
Exercise of stock options |
380 | 490 | ||||||
Payment for: |
||||||||
Repayment of Federal Home Loan Bank advances |
(4,140 | ) | (30,159 | ) | ||||
Repayment of Federal Reserve Bank borrowings |
(100 | ) | 0 | |||||
Preferred stock dividends |
0 | (961 | ) | |||||
Common stock dividends |
(1,181 | ) | (282 | ) | ||||
Repurchase of common stock |
(32 | ) | 0 | |||||
Net decrease in other borrowings |
0 | (86 | ) | |||||
Net cash provided by (used in) financing activities |
4,071 | (289,860 | ) | |||||
(Decrease) Increase in cash and cash equivalents |
(37,802 | ) | 1,397 | |||||
Cash and cash equivalents at beginning of period |
514,130 | 305,074 | ||||||
Cash and cash equivalents at end of period |
$ | 476,328 | $ | 306,471 | ||||
Supplemental Information: |
||||||||
Cash paid during the year for: |
||||||||
Cash paid for interest |
$ | 4,413 | $ | 6,158 | ||||
Non-cash investing activities |
||||||||
Assets acquired in FDIC assisted acquisitions (excluding cash and cash equivalents) |
$ | 0 | $ | 1,075,166 | ||||
Liabilities assumed in FDIC assisted acquisitions |
$ | 0 | $ | 1,210,882 | ||||
Loans transferred to other real estate owned |
$ | 5,467 | $ | 3,308 |
See accompanying notes to unaudited consolidated condensed financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1. Basis of Presentation and Significant Accounting Policies
(a) | Basis of Presentation |
The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiary Columbia Bank. All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results to be anticipated for the year ending December 31, 2011. The accompanying interim unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Companys 2010 Annual Report on Form 10-K.
(b) | Significant Accounting Policies |
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2010 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2010 10-K disclosure for the year ended December 31, 2010.
2. Accounting Pronouncements Recently Issued
In April 2011, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2011-02, A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310). ASU 2011-02 clarifies the criteria for a restructuring to be classified as a TDR. The effective date of ASU 2011-02 will be the first interim or annual period beginning after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The Company is evaluating the impact this ASU will have on its financial condition and results of operations.
5
3. Earnings per Common Share
Basic Earnings Per Share (EPS) is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Common shares outstanding include common stock and vested restricted stock awards where recipients have satisfied the vesting terms. Diluted EPS reflects the assumed conversion of all dilutive securities, applying the treasury stock method. The Company calculates earnings per share using the two-class method as described in the Earnings per Share topic of the FASB Accounting Standards Codification (ASC). The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2011 and 2010:
Three Months Ended March 31, |
||||||||
(in thousands except per share) |
2011 | 2010 | ||||||
Basic EPS: |
||||||||
Net income |
$ | 5,779 | $ | 7,916 | ||||
Less: Preferred dividends and accretion of issuance discount for preferred stock |
0 | (1,107 | ) | |||||
Net income applicable to common shareholders |
$ | 5,779 | $ | 6,809 | ||||
Less: Earnings allocated to participating securities |
(53 | ) | (73 | ) | ||||
Earnings allocated to common shareholders |
$ | 5,726 | $ | 6,736 | ||||
Weighted average common shares outstanding |
39,043 | 27,886 | ||||||
Basic earnings per common share |
$ | 0.15 | $ | 0.24 | ||||
Diluted EPS: |
||||||||
Earnings allocated to common shareholders |
$ | 5,726 | $ | 6,736 | ||||
Weighted average common shares outstanding |
39,043 | 27,886 | ||||||
Dilutive effect of equity awards and warrants |
113 | 212 | ||||||
Weighted average diluted common shares outstanding |
39,156 | 28,098 | ||||||
Diluted earnings per common share |
$ | 0.15 | $ | 0.24 | ||||
Potentially dilutive share options that were not included in the computation of diluted EPS because to do so would be anti-dilutive. |
54 | 54 |
4. Securities
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities available for sale:
(in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
March 31, 2011: |
||||||||||||||||
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations |
$ | 612,379 | $ | 15,739 | ($ | 1,198 | ) | $ | 626,920 | |||||||
State and municipal securities |
246,979 | 10,327 | (1,288 | ) | 256,018 | |||||||||||
U.S. government agency securities |
2,014 | 10 | 0 | 2,024 | ||||||||||||
Other securities |
3,281 | 0 | (55 | ) | 3,226 | |||||||||||
Total |
$ | 864,653 | $ | 26,076 | ($ | 2,541 | ) | $ | 888,188 | |||||||
December 31, 2010: |
||||||||||||||||
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations |
$ | 491,530 | $ | 16,139 | ($ | 1,027 | ) | $ | 506,642 | |||||||
State and municipal securities |
249,117 | 7,247 | (2,383 | ) | 253,981 | |||||||||||
Other securities |
3,281 | 0 | (38 | ) | 3,243 | |||||||||||
Total |
$ | 743,928 | $ | 23,386 | ($ | 3,448 | ) | $ | 763,866 | |||||||
6
The scheduled contractual maturities of investment securities available for sale at March 31, 2011 are presented as follows:
March 31, 2011 | ||||||||
Amortized Cost |
Fair Value | |||||||
(in thousands) | ||||||||
Due within one year |
$ | 6,565 | $ | 6,694 | ||||
Due after one year through five years |
59,801 | 62,138 | ||||||
Due after five years through ten years |
163,004 | 168,245 | ||||||
Due after ten years |
632,002 | 647,885 | ||||||
Total investment securities available-for-sale |
$ | 861,372 | $ | 884,962 | ||||
The following table summarizes the carrying value of securities pledged as collateral at March 31, 2011:
(in thousands) |
Carrying Amount |
|||
Washington and Oregon State public deposits |
$ | 178,718 | ||
Federal Reserve Bank borrowings |
144,881 | |||
Federal Home Loan Bank advances |
97,162 | |||
Repurchase agreement |
26,734 | |||
Interest rate contracts |
12,407 | |||
Other |
1,427 | |||
Total securities pledged as collateral |
$ | 461,329 | ||
The following tables show the gross unrealized losses and fair value of the Companys investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2011 and December 31, 2010:
March 31, 2011
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
(in thousands) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations |
$ | 201,951 | ($ | 1,196 | ) | $ | 493 | ($ | 2 | ) | $ | 202,444 | ($ | 1,198 | ) | |||||||||
State and municipal securities |
31,039 | (1,051 | ) | 2,840 | (237 | ) | 33,879 | (1,288 | ) | |||||||||||||||
Other securities |
2,267 | (14 | ) | 959 | (41 | ) | 3,226 | (55 | ) | |||||||||||||||
Total |
$ | 235,257 | ($ | 2,261 | ) | $ | 4,292 | ($ | 280 | ) | $ | 239,549 | ($ | 2,541 | ) | |||||||||
December 31, 2010 |
||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
(in thousands) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations |
$ | 86,529 | ($ | 1,025 | ) | $ | 588 | ($ | 2 | ) | $ | 87,117 | ($ | 1,027 | ) | |||||||||
State and municipal securities |
74,755 | (2,099 | ) | 2,792 | (284 | ) | 77,547 | (2,383 | ) | |||||||||||||||
Other securities |
2,275 | (6 | ) | 968 | (32 | ) | 3,243 | (38 | ) | |||||||||||||||
Total |
$ | 163,559 | ($ | 3,130 | ) | $ | 4,348 | ($ | 318 | ) | $ | 167,907 | ($ | 3,448 | ) | |||||||||
The unrealized losses on the above securities are primarily attributable to increases in market interest rates subsequent to their purchase by the Company. Management does not intend to sell any impaired securities nor does available evidence suggest it is more likely than not that management will be required to sell any impaired securities. The Companys securities portfolio does not include any private label mortgage backed securities or investments in trust preferred securities. Management believes the nature of securities in the Companys investment portfolio present a very high probability of collecting all contractual amounts due, as the majority of the securities held are backed by government agencies or government-sponsored enterprises. However, this recovery in value may not occur for some time, perhaps greater than the one-year time horizon or perhaps even at maturity.
7
5. Loans
The following is an analysis of the loan portfolio by major types of loans (net of deferred loan fees):
(in thousands) |
March 31, 2011 |
December 31, 2010 |
||||||
Noncovered loans: |
||||||||
Commercial business |
$ | 782,565 | $ | 795,369 | ||||
Real Estate: |
||||||||
One-to-four family residential |
50,545 | 49,383 | ||||||
Commercial and five or more family residential properties |
785,870 | 794,329 | ||||||
Total real estate |
836,415 | 843,712 | ||||||
Real estate construction: |
||||||||
One-to-four family residential |
61,097 | 67,961 | ||||||
Commercial and five or more family residential properties |
30,072 | 30,185 | ||||||
Total real estate construction |
91,169 | 98,146 | ||||||
Consumer |
177,218 | 182,017 | ||||||
Less: deferred loan fees |
(3,161 | ) | (3,490 | ) | ||||
Total noncovered loans, net of deferred fees |
1,884,206 | 1,915,754 | ||||||
Less: Allowance for loan and lease losses |
(55,315 | ) | (60,993 | ) | ||||
Noncovered loans, net |
1,828,891 | 1,854,761 | ||||||
Covered loans, net of allowance for loan losses of ($5,633) and ($6,055), respectively |
486,345 | 517,061 | ||||||
Total loans, net |
$ | 2,315,236 | $ | 2,371,822 | ||||
Loans held for sale |
$ | 542 | $ | 754 | ||||
Noncovered Loans
At March 31, 2011 and December 31, 2010, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Substantially all of the Companys loans and unfunded commitments are geographically concentrated in its service areas within the states of 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 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 $11.0 million and $12.9 million at March 31, 2011 and December 31, 2010, respectively. During the first three months of 2011, advances on related party loans were $1.8 million and repayments totaled $3.7 million.
At March 31, 2011 and December 31, 2010, $414.1 million and $426.6 million of commercial and residential real estate loans were pledged as collateral on FHLB borrowings. Additionally, at March 31, 2011, the Company had $84 thousand in Small Business Administration (SBA) loans pledged as collateral for SBA-secured borrowings.
8
The following is an analysis of nonaccrual loans as of March 31, 2011 and December 31, 2010:
March 31, 2011 | December 31, 2010 | |||||||||||||||
(in thousands) |
Recorded Investment (1) Nonaccrual Loans |
Unpaid Principal Balance Nonaccrual Loans |
Recorded Investment (1) Nonaccrual Loans |
Unpaid Principal Balance Nonaccrual Loans |
||||||||||||
Commercial Business |
||||||||||||||||
Secured |
$ | 23,689 | $ | 32,171 | $ | 32,368 | $ | 44,316 | ||||||||
Unsecured |
230 | 231 | 0 | 327 | ||||||||||||
Real Estate 1-4 Family |
||||||||||||||||
Residential RE Perm |
3,187 | 3,558 | 2,999 | 3,353 | ||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||
Commercial RE Land |
6,160 | 8,945 | 4,093 | 6,279 | ||||||||||||
Income Property Multifamily Perm |
9,384 | 11,188 | 11,716 | 12,737 | ||||||||||||
Owner Occupied RE Perm |
10,318 | 10,574 | 7,407 | 8,990 | ||||||||||||
Construction 1-4 Family |
||||||||||||||||
Land & Acquisition |
9,369 | 19,275 | 11,608 | 21,344 | ||||||||||||
Residential Construction |
3,663 | 9,238 | 6,503 | 11,547 | ||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||
Income Property Multifamily Construction |
7,074 | 12,892 | 7,585 | 12,916 | ||||||||||||
Owner Occupied RE Construction |
0 | 0 | 0 | 0 | ||||||||||||
Consumer |
5,713 | 6,147 | 5,022 | 5,192 | ||||||||||||
Total |
$ | 78,787 | $ | 114,219 | $ | 89,301 | $ | 127,001 | ||||||||
(1) | Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest. |
9
The following is an analysis of the aged loan portfolio as of March 31, 2011 and December 31, 2010:
(in thousands) |
Current Loans |
30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Nonaccrual Loans |
Total Loans | |||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||||||
Commercial Business |
||||||||||||||||||||||||||||
Secured |
$ | 716,030 | $ | 2,839 | $ | 113 | $ | 0 | $ | 2,952 | $ | 23,671 | $ | 742,653 | ||||||||||||||
Unsecured |
39,499 | 136 | 50 | 0 | 186 | 228 | 39,913 | |||||||||||||||||||||
Real Estate 1-4 Family |
||||||||||||||||||||||||||||
Residential RE Perm |
47,311 | 50 | 0 | 0 | 50 | 3,184 | 50,545 | |||||||||||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||||||||||||||
Commercial RE Land |
18,052 | 210 | 0 | 0 | 210 | 6,155 | 24,417 | |||||||||||||||||||||
Income Property Multifamily Perm |
420,772 | 1,026 | 452 | 0 | 1,478 | 9,370 | 431,620 | |||||||||||||||||||||
Owner Occupied RE Perm |
317,008 | 2,513 | 0 | 0 | 2,513 | 10,312 | 329,833 | |||||||||||||||||||||
Construction 1-4 Family |
||||||||||||||||||||||||||||
Land & Acquisition |
23,574 | 0 | 0 | 0 | 0 | 9,365 | 32,939 | |||||||||||||||||||||
Residential Construction |
22,870 | 1,665 | 0 | 0 | 1,665 | 3,622 | 28,157 | |||||||||||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||||||||||||||
Income Property Multifamily Construction |
11,166 | 0 | 0 | 0 | 0 | 7,073 | 18,239 | |||||||||||||||||||||
Owner Occupied RE Construction |
11,832 | 0 | 0 | 0 | 0 | 0 | 11,832 | |||||||||||||||||||||
Consumer |
170,692 | 609 | 206 | 0 | 815 | 5,712 | 177,219 | |||||||||||||||||||||
Total |
$ | 1,798,806 | $ | 9,048 | $ | 821 | $ | 0 | $ | 9,869 | $ | 78,692 | $ | 1,887,367 | ||||||||||||||
(in thousands) |
Current Loans |
30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Nonaccrual Loans |
Total Loans | |||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||||||
Commercial Business |
||||||||||||||||||||||||||||
Secured |
$ | 720,926 | $ | 919 | $ | 692 | $ | 1 | $ | 1,612 | $ | 31,919 | $ | 754,457 | ||||||||||||||
Unsecured |
40,455 | 9 | 0 | 0 | 9 | 448 | 40,912 | |||||||||||||||||||||
Real Estate 1-4 Family |
||||||||||||||||||||||||||||
Residential RE Perm |
46,167 | 220 | 0 | 0 | 220 | 2,996 | 49,383 | |||||||||||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||||||||||||||
Commercial RE Land |
18,979 | 0 | 1,752 | 0 | 1,752 | 4,091 | 24,822 | |||||||||||||||||||||
Income Property Multifamily Perm |
426,320 | 1,208 | 121 | 0 | 1,329 | 10,745 | 438,394 | |||||||||||||||||||||
Owner Occupied RE Perm |
318,508 | 497 | 3,752 | 0 | 4,249 | 8,356 | 331,113 | |||||||||||||||||||||
Construction 1-4 Family |
||||||||||||||||||||||||||||
Land & Acquisition |
24,883 | 214 | 205 | 0 | 419 | 11,604 | 36,906 | |||||||||||||||||||||
Residential Construction |
24,655 | 0 | 0 | 0 | 0 | 6,400 | 31,055 | |||||||||||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||||||||||||||
Income Property Multifamily Construction |
10,666 | 0 | 0 | 0 | 0 | 7,584 | 18,250 | |||||||||||||||||||||
Owner Occupied RE Construction |
11,935 | 0 | 0 | 0 | 0 | 0 | 11,935 | |||||||||||||||||||||
Consumer |
176,005 | 397 | 595 | 0 | 992 | 5,020 | 182,017 | |||||||||||||||||||||
Total |
$ | 1,819,499 | $ | 3,464 | $ | 7,117 | $ | 1 | $ | 10,582 | $ | 89,163 | $ | 1,919,244 | ||||||||||||||
10
The following is an analysis of noncovered impaired loans as of March 31, 2011 and December 31, 2010:
(in thousands) |
Balance
of Loans Collectively Measured for Contingency Provision |
Balance of Loans Individually Measured for Specific Impairment |
Impaired Loans With Recorded Allowance |
Impaired Loans Without Recorded Allowance |
Average Recorded Investment Impaired Loans (1) |
Interest Recognized on Impaired Loans |
||||||||||||||||||||||||||||||
Recorded Investment (1) |
Unpaid Principal Balance |
Related Allowance |
Recorded Investment (1) |
Unpaid Principal Balance |
||||||||||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||||||||||||||
Commercial Business |
||||||||||||||||||||||||||||||||||||
Secured |
$ | 720,865 | $ | 21,787 | $ | 12,059 | $ | 13,247 | $ | 247 | $ | 10,345 | $ | 16,782 | $ | 26,101 | $ | 145 | ||||||||||||||||||
Unsecured |
39,812 | 102 | 73 | 75 | 73 | 29 | 30 | 103 | 2 | |||||||||||||||||||||||||||
Real Estate 1-4 Family |
||||||||||||||||||||||||||||||||||||
Residential RE Perm |
47,687 | 2,858 | 70 | 74 | 1 | 2,790 | 3,083 | 2,759 | 4 | |||||||||||||||||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||||||||||||||||||||||
Commercial RE Land |
18,350 | 6,067 | 4,713 | 6,908 | 58 | 1,360 | 1,444 | 4,970 | 648 | |||||||||||||||||||||||||||
Income Property Multifamily Perm |
422,156 | 9,465 | 311 | 321 | 51 | 9,170 | 10,866 | 11,434 | 10 | |||||||||||||||||||||||||||
Owner Occupied RE Perm |
313,917 | 15,915 | 0 | 0 | 0 | 15,959 | 18,539 | 15,056 | 0 | |||||||||||||||||||||||||||
Construction 1-4 Family |
||||||||||||||||||||||||||||||||||||
Land & Acquisition |
23,421 | 9,518 | 5,141 | 7,915 | 355 | 4,380 | 9,063 | 10,534 | 945 | |||||||||||||||||||||||||||
Residential Construction |
24,536 | 3,622 | 329 | 327 | 34 | 3,334 | 8,911 | 5,082 | 14 | |||||||||||||||||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||||||||||||||||||||||
Income Property Multifamily Construction |
11,166 | 7,073 | 0 | 0 | 0 | 7,074 | 12,892 | 7,329 | 0 | |||||||||||||||||||||||||||
Owner Occupied RE Construction |
11,832 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Consumer |
172,295 | 4,923 | 0 | 0 | 0 | 4,924 | 5,228 | 4,729 | 0 | |||||||||||||||||||||||||||
Total |
$ | 1,806,037 | $ | 81,330 | $ | 22,696 | $ | 28,867 | $ | 819 | $ | 59,365 | $ | 86,838 | $ | 88,094 | $ | 1,768 | ||||||||||||||||||
(in thousands) |
Balance
of Loans Collectively Measured for Contingency Provision |
Balance of Loans Individually Measured for Specific Impairment |
Impaired Loans With Recorded Allowance |
Impaired Loans Without Recorded Allowance |
||||||||||||||||||||||||
Recorded Investment (1) |
Unpaid Principal Balance |
Related Allowance |
Recorded Investment (1) |
Unpaid Principal Balance |
||||||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||||||
Commercial Business |
||||||||||||||||||||||||||||
Secured |
$ | 724,665 | $ | 29,793 | $ | 2,717 | $ | 2,758 | $ | 600 | $ | 27,081 | $ | 26,913 | ||||||||||||||
Unsecured |
40,808 | 104 | 75 | 75 | 75 | 29 | 30 | |||||||||||||||||||||
Real Estate 1-4 Family |
||||||||||||||||||||||||||||
Residential RE Perm |
46,728 | 2,655 | 0 | 0 | 0 | 2,658 | 2,949 | |||||||||||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||||||||||||||
Commercial RE Land |
20,959 | 3,863 | 3,062 | 5,225 | 0 | 804 | 826 | |||||||||||||||||||||
Income Property Multifamily Perm |
427,799 | 10,595 | 3,094 | 3,139 | 59 | 10,292 | 12,253 | |||||||||||||||||||||
Owner Occupied RE Perm |
317,010 | 14,103 | 0 | 0 | 0 | 14,152 | 17,099 | |||||||||||||||||||||
Construction 1-4 Family |
||||||||||||||||||||||||||||
Land & Acquisition |
25,362 | 11,543 | 533 | 549 | 3 | 11,013 | 20,718 | |||||||||||||||||||||
Residential Construction |
24,655 | 6,400 | 915 | 1,723 | 62 | 5,585 | 9,824 | |||||||||||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||||||||||||||
Income Property Multifamily Construction |
10,666 | 7,584 | 6,792 | 10,515 | 175 | 792 | 2,401 | |||||||||||||||||||||
Owner Occupied RE Construction |
11,935 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Consumer |
177,484 | 4,533 | 0 | 0 | 0 | 4,533 | 4,691 | |||||||||||||||||||||
Total |
$ | 1,828,071 | $ | 91,173 | $ | 17,188 | $ | 23,984 | $ | 974 | $ | 76,939 | $ | 97,704 | ||||||||||||||
(1) | Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest. |
Acquired Loans
Acquired loans accounted for under ASC Topic 310-30, are comprised primarily of covered loans acquired in the Federal Deposit Insurance Corporation (the FDIC) assisted acquisitions of Columbia River Bank and American Marine Bank and are subject to loss-sharing agreements with the FDIC. Acquired loans subject to loss-sharing agreements with the FDIC are referred to as covered loans. The balance of covered loans, net of allowance for loan losses, was $486.3 million at March 31, 2011.
Under ASC Topic 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
Changes in accretable yield for acquired loans were as follows for the three months ended March 31, 2011:
Three months ended March 31, 2011 |
||||
(in thousands) |
Accretable Yield | |||
Balance at beginning of period |
$ | 256,572 | ||
Accretion |
(21,303 | ) | ||
Cash receipts, disposals and change in cash flows |
(17,918 | ) | ||
Balance at end of period |
$ | 217,351 | ||
11
6. Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit
We maintain an allowance for loan and lease losses (ALLL) to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:
1. | General valuation allowance consistent with the Contingencies topic of the FASB ASC. |
2. | Classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with the Receivables topic of the FASB ASC. |
3. | The unallocated allowance provides for other factors 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 quarterly based on trends in credit losses, the results of credit reviews and overall economic trends. |
The general valuation allowance is systematically calculated quarterly using quantitative and qualitative information about specific loan classes. The minimum required level in which an entity develops a systematic methodology to determine its allowance for loan and lease losses is at the segment level. However, the Companys systematic methodology in determining its allowance for loan and lease losses is prepared at the class level, which is more detailed than the segment level. The quantitative information uses historical losses from a specific loan class and incorporates the loans risk rating migration from origination to the point of loss. A loans risk rating is primarily determined based upon the borrowers ability to fulfill its debt obligation from a cash flow perspective. In the event there is financial deterioration of the borrower, the borrowers other sources of income or repayment are also considered, including recent appraisal values for collateral dependent loans. The qualitative information takes into account general economic and business conditions affecting our market place, seasoning of the loan portfolio, duration of the business cycle, etc. to ensure our methodologies reflect the current economic environment and other factors as using historical loss information exclusively may not give an accurate estimate of inherent losses within the Companys loan portfolio.
The specific valuation allowance is a reserve for each loan determined to be impaired and the value of the impaired loan is less than its recorded investment. The Company measures the impairment based on the discounted expected future cash flows, observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependant or if foreclosure is probable. The specific reserve for each loan is equal to the difference between the recorded investment in the loan and its determined impairment value.
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 the Companys management believes the best information available is used 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.
We have used the same methodology for ALLL calculations during the three months ended March 31, 2011 and 2010. 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. The Company reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments when appropriate. The Company continues to strive towards maintaining a conservative approach to credit quality and will continue to prudently add to our ALLL as necessary in order to maintain adequate reserves. The Company carefully monitors the loan portfolio and continues to emphasize the importance of credit quality while continuously strengthening loan monitoring systems and controls.
12
The following table shows a detailed analysis of the allowance for loan and lease losses for noncovered loans as of the three months ended March 31, 2011 and the year ended December 31, 2010:
(in thousands) |
Beginning Balance |
Charge-offs | Recoveries | Provision | Ending Balance |
Specific Reserve |
General Allocation |
|||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||||||
Commercial Business |
||||||||||||||||||||||||||||
Secured |
$ | 21,811 | ($ | 3,287 | ) | $ | 96 | $ | 3,687 | $ | 22,307 | $ | 247 | $ | 22,060 | |||||||||||||
Unsecured |
738 | (84 | ) | 9 | (45 | ) | 618 | 73 | 545 | |||||||||||||||||||
Real Estate 1-4 Family |
||||||||||||||||||||||||||||
Residential RE Perm |
1,100 | (448 | ) | 0 | 448 | 1,100 | 1 | 1,099 | ||||||||||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||||||||||||||
Commercial RE Land |
634 | 0 | 0 | (79 | ) | 555 | 58 | 497 | ||||||||||||||||||||
Income Property Multifamily Perm |
15,210 | (365 | ) | 42 | (2,591 | ) | 12,296 | 51 | 12,245 | |||||||||||||||||||
Owner Occupied RE Perm |
9,692 | 0 | 31 | 689 | 10,412 | 0 | 10,412 | |||||||||||||||||||||
Construction 1-4 Family |
||||||||||||||||||||||||||||
Land & Acquisition |
3,769 | (768 | ) | 1,068 | (773 | ) | 3,296 | 355 | 2,941 | |||||||||||||||||||
Residential Construction |
2,292 | (659 | ) | 36 | 449 | 2,118 | 34 | 2,084 | ||||||||||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||||||||||||||
Income Property Multifamily Construction |
274 | (487 | ) | 0 | 340 | 127 | 0 | 127 | ||||||||||||||||||||
Owner Occupied RE Construction |
70 | 0 | 0 | (2 | ) | 68 | 0 | 68 | ||||||||||||||||||||
Consumer |
2,120 | (925 | ) | 63 | 1,160 | 2,418 | 0 | 2,418 | ||||||||||||||||||||
Unallocated |
3,283 | 0 | 0 | (3,283 | ) | 0 | 0 | 0 | ||||||||||||||||||||
Total |
$ | 60,993 | ($ | 7,023 | ) | $ | 1,345 | $ | 0 | $ | 55,315 | $ | 819 | $ | 54,496 | |||||||||||||
(in thousands) |
Beginning Balance |
Charge-offs | Recoveries | Provision | Ending Balance |
Specific Reserve |
General Allocation |
|||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||||||
Commercial Business |
||||||||||||||||||||||||||||
Secured |
$ | 20,409 | ($ | 12,779 | ) | $ | 1,218 | $ | 12,963 | $ | 21,811 | $ | 600 | $ | 21,211 | |||||||||||||
Unsecured |
1,560 | (2,100 | ) | 1,171 | 107 | 738 | 75 | 663 | ||||||||||||||||||||
Real Estate 1-4 Family |
||||||||||||||||||||||||||||
Residential RE Perm |
1,072 | (406 | ) | 15 | 419 | 1,100 | 0 | 1,100 | ||||||||||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||||||||||||||
Commercial RE Land |
664 | (2,165 | ) | 0 | 2,135 | 634 | 0 | 634 | ||||||||||||||||||||
Income Property Multifamily Perm |
9,860 | (1,969 | ) | 124 | 7,195 | 15,210 | 59 | 15,151 | ||||||||||||||||||||
Owner Occupied RE Perm |
6,690 | (2,039 | ) | 2 | 5,039 | 9,692 | 0 | 9,692 | ||||||||||||||||||||
Construction 1-4 Family |
||||||||||||||||||||||||||||
Land & Acquisition |
5,711 | (8,409 | ) | 1,199 | 5,268 | 3,769 | 3 | 3,766 | ||||||||||||||||||||
Residential Construction |
2,304 | (2,447 | ) | 474 | 1,961 | 2,292 | 62 | 2,230 | ||||||||||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||||||||||||||
Income Property Multifamily Construction |
2,453 | (3,107 | ) | 775 | 153 | 274 | 175 | 99 | ||||||||||||||||||||
Owner Occupied RE Construction |
36 | 0 | 0 | 34 | 70 | 0 | 70 | |||||||||||||||||||||
Consumer |
1,282 | (3,982 | ) | 649 | 4,171 | 2,120 | 0 | 2,120 | ||||||||||||||||||||
Unallocated |
1,437 | 0 | 0 | 1,846 | 3,283 | 0 | 3,283 | |||||||||||||||||||||
Total |
$ | 53,478 | ($ | 39,403 | ) | $ | 5,627 | $ | 41,291 | $ | 60,993 | $ | 974 | $ | 60,019 | |||||||||||||
Changes in the allowance for unfunded commitments and letters of credit are summarized as follows:
Three Months Ended March 31, |
||||||||
(in thousands) |
2011 | 2010 | ||||||
Beginning balance |
$ | 1,165 | $ | 775 | ||||
Net changes in the allowance for unfunded commitments and letters of credit |
495 | 40 | ||||||
Ending balance |
$ | 1,660 | $ | 815 | ||||
Risk Elements
The extension of credit in the form of loans 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.
13
The monitoring process for the loan portfolio includes periodic reviews of individual loans with risk ratings assigned to each loan. Based on the analysis, loans are given a risk rating of 1-10 based on the following criteria:
1) | ratings of 1-3 indicate minimal to low credit risk, |
2) | ratings of 4-5 indicate an average to above average credit risk with adequate repayment capacity when prolonged periods of adversity do not exist, |
3) | ratings of 6-7 indicate potential weaknesses and higher credit risk requiring greater attention by bank personnel and management to help prevent further deterioration, |
4) | rating of 8 indicates a loss is possible if loan weaknesses are not corrected, |
5) | rating of 9 indicates loss is highly probable; however, the amount of loss has not yet been determined, |
6) | and a rating of 10 indicates the loan is uncollectable, and when identified is charged-off. |
Loans with a risk rating of 1-6 are considered Pass loans and loans with risk ratings of 7, 8, 9 and 10 are considered Special Mention, Substandard, Doubtful and Loss, respectively. Loans with a risk rating of Substandard or worse are reported as classified loans in our allowance for loan and lease losses analysis. 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. Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of loss on the loan increases. In the event 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.
The following is an analysis of the credit quality of our noncovered loan portfolio as of March 31, 2011 and December 31, 2010:
March 31, 2011 | December 31, 2010 | |||||||||||||||
(dollars in thousands) |
Weighted- Average Risk Rating |
Recorded Investment Noncovered Loans (1) |
Weighted- Average Risk Rating |
Recorded Investment Noncovered Loans (1) |
||||||||||||
Commercial Business |
||||||||||||||||
Secured |
4.98 | $ | 745,141 | 4.96 | $ | 757,372 | ||||||||||
Unsecured |
4.46 | 37,536 | 4.23 | 41,175 | ||||||||||||
Real Estate 1-4 Family |
||||||||||||||||
Residential RE Perm |
4.93 | 50,720 | 4.96 | 49,436 | ||||||||||||
Real Estate Commercial & Multifamily |
||||||||||||||||
Commercial RE Land |
5.90 | 24,545 | 5.75 | 24,956 | ||||||||||||
Income Property Multifamily Perm |
5.03 | 433,411 | 5.07 | 406,711 | ||||||||||||
Owner Occupied RE Perm |
5.14 | 331,245 | 5.12 | 366,284 | ||||||||||||
Construction 1-4 Family |
||||||||||||||||
Land & Acquisition |
6.71 | 33,065 | 6.79 | 37,054 | ||||||||||||
Residential Construction |
6.48 | 28,334 | 6.63 | 31,293 | ||||||||||||
Construction Commercial & Multifamily |
||||||||||||||||
Income Property Multifamily Construction |
5.72 | 18,290 | 6.38 | 18,296 | ||||||||||||
Owner Occupied RE Construction |
4.87 | 11,898 | 4.93 | 11,990 | ||||||||||||
Consumer |
4.41 | 177,465 | 4.31 | 182,624 | ||||||||||||
Total recorded investment of noncovered loans |
$ | 1,891,650 | $ | 1,927,191 | ||||||||||||
(1) | Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest. |
14
The following is an analysis of our covered loans, net of related allowance for losses on covered loans as of March 31, 2011 and December 31, 2010:
(dollars in thousands) |
Covered Loans March 31, 2011 |
Weighted- Average Risk Rating |
Allowance for Loan Losses |
|||||||||
Commercial Business |
$ | 144,388 | 5.76 | $ | 861 | |||||||
Real Estate 1-4 Family |
62,281 | 4.75 | 327 | |||||||||
Real Estate Commercial & Multifamily |
329,192 | 5.68 | 2,731 | |||||||||
Construction 1-4 Family |
37,283 | 7.42 | 937 | |||||||||
Construction Commercial & Multifamily |
32,290 | 6.68 | 628 | |||||||||
Consumer |
53,976 | 4.52 | 149 | |||||||||
Subtotal of covered loans |
659,410 | $ | 5,633 | |||||||||
Less: |
||||||||||||
Valuation discount resulting from acquisition accounting |
167,432 | |||||||||||
Allowance for loan losses |
5,633 | |||||||||||
Covered loans, net of allowance for loan losses |
$ | 486,345 | ||||||||||
(dollars in thousands) |
Covered Loans December 31, 2010 |
Weighted- Average Risk Rating |
Allowance for Loan Losses |
|||||||||
Commercial Business |
$ | 165,255 | 5.74 | $ | 2,903 | |||||||
Real Estate 1-4 Family |
68,700 | 4.77 | 1,013 | |||||||||
Real Estate Commercial & Multifamily |
341,063 | 5.70 | 821 | |||||||||
Construction 1-4 Family |
39,754 | 7.29 | 98 | |||||||||
Construction Commercial & Multifamily |
41,624 | 6.79 | 469 | |||||||||
Consumer |
58,337 | 4.49 | 751 | |||||||||
Subtotal of covered loans |
714,733 | $ | 6,055 | |||||||||
Less: |
||||||||||||
Valuation discount resulting from acquisition accounting |
191,617 | |||||||||||
Allowance for loan losses |
6,055 | |||||||||||
Covered loans, net of allowance for loan losses |
$ | 517,061 | ||||||||||
Acquired loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. Management monitors and estimates expected future cash flows of acquired loans on a quarterly basis. Acquired loans are also subject to the Companys internal and external credit review and are risk rated using the same criteria as loans originated by the Company. However, risk ratings are not a clear indicator of losses on acquired loans as a majority of the losses are recoverable from the FDIC under the loss sharing agreements.
Draws on acquired loans, advanced subsequent to the loan acquisition date, are accounted for under ASC 450-20 and those amounts are also subject to the Companys internal and external credit review. An allowance for loan losses is estimated in a similar manner as the originated loan portfolio, and a provision for loan losses is charged to earnings as necessary.
During the quarter ended March 31, 2011, the Company recorded a $422 thousand provision expense recapture for losses on covered loans. Of this amount, $482 thousand was impairment expense calculated in accordance with ASC 310-30 and $904 thousand was negative provision to adjust the allowance for loss calculated under ASC 450-20 for draws on acquired loans. The impact to earnings of the $422 thousand of provision expense recapture for covered loans was offset through noninterest income by a $338 thousand decrease in the FDIC loss sharing asset.
15
7. Changes in Other Real Estate Owned
The following table sets forth activity in noncovered OREO for the period:
(in thousands) |
March 31, 2011 |
|||
Noncovered OREO: |
||||
Balance, beginning of period |
$ | 30,991 | ||
Transfers in, net of write-downs ($91 and $193, respectively) |
2,042 | |||
OREO improvements |
251 | |||
Additional OREO write-downs |
(1,910 | ) | ||
Proceeds from sale of OREO property |
(5,372 | ) | ||
Gain on sale of OREO |
79 | |||
Total noncovered OREO, end of period |
$ | 26,081 | ||
The following table sets forth activity in covered OREO at carrying value for the period:
(in thousands) |
March 31, 2011 |
|||
Covered OREO: |
||||
Balance, beginning of period |
$ | 14,443 | ||
Established through acquisitions |
0 | |||
Transfers in, net of write-downs ($418 and $2,087, respectively) |
3,425 | |||
OREO improvements |
0 | |||
Additional OREO write-downs |
(15 | ) | ||
Proceeds from sale of OREO property |
(6,959 | ) | ||
Gain on sale of OREO |
2,633 | |||
Total covered OREO, end of period |
$ | 13,527 | ||
The covered OREO is covered by loss-sharing agreements with the FDIC in which the FDIC will assume 80% of additional write-downs and losses on covered OREO sales, or 95% of additional write-downs and losses on covered OREO sales if the minimum loss share thresholds are met.
8. Goodwill and Intangible Assets
In accordance with the Intangibles Goodwill and Other topic of the FASB ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level during the third quarter on an annual basis and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company completed its annual goodwill impairment test during the third quarter of 2010 and determined the fair value of the Companys single reporting unit exceeded its carrying value.
The core deposit intangible (CDI) is evaluated for impairment if events and circumstances indicate a possible impairment. The CDI is amortized on an accelerated basis over an estimated life of approximately 10 years.
16
The following table sets forth activity for goodwill and intangible assets for the period:
Three Months Ended March 31, |
||||||||
(in thousands) |
2011 | 2010 | ||||||
Total goodwill, beginning of period |
$ | 109,639 | $ | 95,519 | ||||
Established through acquisitions |
0 | 14,120 | ||||||
Total goodwill, end of period |
109,639 | 109,639 | ||||||
Gross core deposit intangible balance, beginning of period |
26,651 | 8,896 | ||||||
Accumulated amortization, beginning of period |
(7,955 | ) | (4,033 | ) | ||||
Core deposit intangible, net, beginning of period |
18,696 | 4,863 | ||||||
Established through acquisitions |
0 | 17,755 | ||||||
CDI current period amortization |
(984 | ) | (787 | ) | ||||
Total core deposit intangible, end of period |
17,712 | 21,831 | ||||||
Total goodwill and intangible assets, end of period |
$ | 127,351 | $ | 131,470 | ||||
The following table provides the estimated future amortization expense of core deposit intangibles for the remaining nine months ending December 31, 2011 and the succeeding four years:
(in thousands) |
Amount | |||
Year ending December 31, |
||||
2011 |
$ | 2,842 | ||
2012 |
3,441 | |||
2013 |
3,066 | |||
2014 |
2,604 | |||
2015 |
1,958 |
9. Shareholders Equity
Common Stock. On February 3, 2011, the Company declared a quarterly cash dividend of $0.03 per share, payable on March 3, 2011 to shareholders of record as of the close of business on February 17, 2011. The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both Federal and State regulatory requirements. Subsequent to quarter end, on April 27 the Company declared a quarterly cash dividend of $0.05 per share, payable on May 25, 2011 to shareholders of record at the close of business May 11, 2011.
17
10. Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended March 31, |
||||||||
(in thousands) |
2011 | 2010 | ||||||
Net income as reported |
$ | 5,779 | $ | 7,916 | ||||
Unrealized gain from securities: |
||||||||
Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($1,284) and ($1,956) |
2,313 | 3,556 | ||||||
Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $0 and $20 |
0 | (38 | ) | |||||
Net unrealized gain from securities, net of reclassification adjustment |
2,313 | 3,518 | ||||||
Cash flow hedging instruments: |
||||||||
Reclassification adjustment of net gain included in income, net of tax of $79 and $264 |
(142 | ) | (479 | ) | ||||
Net change in cash flow hedging instruments |
(142 | ) | (479 | ) | ||||
Pension plan liability adjustment: |
||||||||
Net unrealized gain (loss) from unfunded defined benefit plan liability arising during the period, net of tax of $154 and $(12) |
(261 | ) | 23 | |||||
Less: amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($8) and $(4) |
14 | 7 | ||||||
Pension plan liability adjustment, net |
(247 | ) | 30 | |||||
Total comprehensive income |
$ | 7,703 | $ | 10,985 | ||||
11. Fair Value Accounting and Measurement
The Fair Value Measurements and Disclosures topic of the FASB ASC 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.
18
Fair values are determined as follows:
Securities at fair value are priced using matrix pricing based on the securities relationship to other benchmark quoted prices, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC are considered a Level 2 input method.
Interest rate contract 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 Companys financial assets and liabilities that were accounted for at fair value on a recurring basis at March 31, 2011 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
(in thousands) |
Fair value
at March 31, 2011 |
Fair Value Measurements at Reporting Date Using | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets |
||||||||||||||||
Securities available for sale |
||||||||||||||||
U.S. government agency |
$ | 2,024 | $ | 0 | $ | 2,024 | $ | 0 | ||||||||
U.S. government agency and sponsored enterprise mortgage-back securities and collateralized mortgage obligations |
626,920 | 0 | 626,920 | 0 | ||||||||||||
State and municipal debt securities |
256,018 | 0 | 256,018 | 0 | ||||||||||||
Other securities |
3,226 | 0 | 3,226 | 0 | ||||||||||||
Total securities available for sale |
$ | 888,188 | $ | 0 | $ | 888,188 | $ | 0 | ||||||||
Other assets (Interest rate contracts) |
$ | 9,050 | $ | 0 | $ | 9,050 | $ | 0 | ||||||||
Liabilities |
||||||||||||||||
Other liabilities (Interest rate contracts) |
$ | 9,050 | $ | 0 | $ | 9,050 | $ | 0 |
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:
Impaired loans - A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured by the fair market value of the collateral less estimated costs to sell.
Other real estate owned - OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is recorded at the lower of the carrying amount of the loan or fair value less estimated costs to sell. This amount becomes the propertys new basis. Any write-downs based on the property fair value less estimated cost to sell at the date of acquisition are charged to the allowance for loan and lease losses. Management periodically reviews OREO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any write-downs subsequent to acquisition are charged to earnings.
The following table presents information about the Companys assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made and not necessarily the fair value at the reporting date.
Fair value
at March 31, 2011 |
Fair Value Measurements at Reporting Date Using |
Losses During
the Three Months Ended March 31, 2011 |
||||||||||||||||||
(in thousands) |
Level 1 | Level2 | Level 3 | |||||||||||||||||
Impaired loans |
$ | 31,712 | $ | 0 | $ | 0 | $ | 31,712 | $ | 4,908 | ||||||||||
Non-covered OREO |
4,490 | 0 | 0 | 4,490 | 2,001 | |||||||||||||||
$ | 36,202 | $ | 0 | $ | 0 | $ | 36,202 | $ | 6,909 | |||||||||||
The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on non-covered OREO disclosed above represent the writedowns taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent writedowns from updated appraisals that were charged to earnings.
19
12. Fair Value of Financial Instruments
Because broadly traded markets do not exist for most of the Companys financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks and interest-earning deposits with banksThe fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value that approximates carrying value.
Securities available for saleSecurities at fair value are priced using matrix pricing based on the securities relationship to other benchmark quoted prices.
Loans Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. For most performing loans, fair value is estimated using expected duration and lending rates that would have been offered on March 31, 2011 for loans which mirror the attributes of the loans with similar rate structures and average maturities. Commercial loans and construction loans, which are variable rate and short-term are reflected with fair values equal to carrying value. The fair values resulting from these calculations are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers credit quality since the loans were originated. For nonperforming loans, fair value is estimated by applying a valuation discount based upon loan sales data from the FDIC.
FDIC loss sharing asset - The FDIC loss sharing asset is considered to have a fair value that approximates carrying value.
Interest rate contractsInterest rate swap positions are valued in models, which use as their basis, readily observable market parameters.
Deposits For deposits with no contractual maturity, the fair value is equal to the carrying value. The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and current market rates for deposits of similar remaining maturities.
FHLB and FRB borrowingsThe fair value of Federal Home Loan Bank of Seattle (the FHLB) advances and Federal Reserve Bank of San Francisco (the FRB) borrowings are estimated based on discounting the future cash flows using the market rate currently offered.
Repurchase AgreementsThe fair value of securities sold under agreement to repurchase are estimated based on discounting the future cash flows using the market rate currently offered.
Long-term subordinated debtThe fair value of long-term subordinated debt are estimated based on discounting the future cash flows using an estimated market rate.
Other Financial InstrumentsThe majority of our commitments to extend credit and standby letters of credit carry current market interest rates if converted to loans, as such, carrying value is assumed to equal fair value.
20
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:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
(in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 74,973 | $ | 74,973 | $ | 55,492 | $ | 55,492 | ||||||||
Interest-earning deposits with banks |
401,355 | 401,355 | 458,638 | 458,638 | ||||||||||||
Securities available for sale |
888,188 | 888,188 | 763,866 | 763,866 | ||||||||||||
FHLB stock |
17,908 | 17,908 | 17,908 | 17,908 | ||||||||||||
Loans held for sale |
542 | 542 | 754 | 754 | ||||||||||||
Loans |
2,315,236 | 2,440,528 | 2,371,822 | 2,525,113 | ||||||||||||
FDIC loss sharing asset |
193,053 | 193,053 | 205,991 | 205,991 | ||||||||||||
Interest rate contracts |
9,050 | 9,050 | 10,167 | 10,167 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
$ | 3,336,213 | $ | 3,336,809 | $ | 3,327,269 | $ | 3,330,616 | ||||||||
FHLB Advances |
115,265 | 117,725 | 119,405 | 122,722 | ||||||||||||
Repurchase agreements |
25,000 | 27,175 | 25,000 | 27,251 | ||||||||||||
Other borrowings |
84 | 84 | 642 | 642 | ||||||||||||
Long-term subordinated debt |
25,752 | 23,455 | 25,735 | 20,156 | ||||||||||||
Interest rate contracts |
9,050 | 9,050 | 10,167 | 10,167 |
13. Derivatives and Hedging Activities
The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customers variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings.
The following table presents the fair value of derivative instruments at March 31, 2011 and 2010:
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||
As of March 31, | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||||
(in thousands) | Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
||||||||||||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||||||||||
Interest rate contracts |
Other assets | $ | 9,050 | Other assets | $ | 13,623 | Other liabilities | $ | 9,050 | Other liabilities | $ | 13,623 |
21
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of Columbia Banking System, Inc. (referred to in this report as we, our, and the Company) and notes thereto presented elsewhere in this report and with the December 31, 2010 audited consolidated financial statements and its accompanying notes included in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as expects, anticipates, intends, plans, believes, should, projects, seeks, estimates or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations in this report, the following factors, among others, could cause actual results to differ materially from the anticipated results:
| local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets; |
| the local housing/real estate market could continue to decline; |
| the risks presented by a continued challenging economy, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates; |
| the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions and infrastructure could not be realized; |
| interest rate changes could significantly reduce net interest income and negatively affect funding sources; |
| projected business increases following strategic expansion or opening of new branches could be lower than expected; |
| the scope and cost of FDIC insurance and other coverages could increase; |
| changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking could increase costs or adversely affect our financial results; |
| competition among financial institutions could increase significantly; |
| the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital; |
| we may not be able to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk; and |
| our profitability measures could be adversely affected if we are unable to effectively deploy the capital we raised in 2010. |
Please take into account that forward-looking statements speak only as of the date of this report. We do not undertake any obligation to publicly correct or update any forward-looking statement whether as a result of new information, future events or otherwise.
22
CRITICAL ACCOUNTING POLICIES
Management has identified the accounting policies related to the allowance for loan and lease losses, business combinations, acquired impaired loans, FDIC loss sharing asset and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation under the headings Allowance for Loan and Lease Losses, Business Combinations, Acquired Impaired Loans, FDIC Loss Sharing Asset and Valuation and Recoverability of Goodwill in our 2010 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies as compared to those disclosed in our 2010 Annual Report on Form 10-K.
Significant Influences on the Quarter Ended March 31, 2011
Earnings Summary
The Company reported net income for the first quarter of $5.8 million applicable to common shareholders or $0.15 per diluted common share, compared to $6.8 million or $0.24 per diluted common share for the first quarter of 2010. The decrease in net income from the prior year period was attributable to a decline in noninterest income and an increase in noninterest expense. These reductions, however, were partially offset by an increase in net interest income. Return on average assets and return on average common equity were 0.55% and 3.30%, respectively, for the first quarter of 2011, compared with returns of 0.81% and 5.93%, respectively for the same period of 2010.
Revenue (net interest income plus noninterest income) for the three months ended March 31, 2011 was $45.0 million, 21% less than the same period in 2010. The decrease was primarily a result of a decline in noninterest income due to the gain recorded on the acquisition of American Marine Bank during the first quarter of 2010, as well as the $14.8 million loss recorded during the first three months of 2011 as a result of a change in the FDIC loss sharing asset. The noninterest income decline was partially offset by an increase in net interest income as a result of recording incremental accretion income of $12.4 million on the acquired loan portfolios. The incremental accretion income represents the amount of income recorded on the acquired loans above the contractual rate stated in the individual loan notes.
Total noninterest expense in the quarter ended March 31, 2011 was $37.3 million, a 10% increase from the first quarter of 2010. The increase was primarily due to the additional operating expenses of the two FDIC assisted acquisitions for the entire first quarter of 2011, compared to only the last two months of the first quarter in 2010.
The provision for loan and lease losses for the first quarter of 2011 was $0 for the noncovered loan portfolio and a negative $422 thousand for the covered loan portfolio compared with $15.0 million for the noncovered loan portfolio and $0 for the covered loan portfolio during first quarter of 2010. As discussed in more detail elsewhere in this report, the provision decision is made quarterly, based on a detailed process to determine the adequacy and appropriateness of the Companys allowance for loan losses. Accordingly, the level of provisioning in the first quarter of 2011 does not necessarily signal a trend. As a result of not recording a provision, the Companys total allowance for loan and lease losses was 2.94% of net noncovered loans at March 31, 2011 compared to 3.18% at year-end 2010 and 2.92% at the end of the first quarter 2010. Net charge-offs for the current quarter were $5.7 million compared to $11.5 million for the first quarter of 2010.
RESULTS OF OPERATIONS
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
Net Interest Income
Net interest income for the first quarter of 2011 was $50.4 million, an increase of 32% from $38.3 million for the same quarter in 2010. The Companys net interest margin increased to 5.80% in the first quarter of 2011, from 4.78% for the same quarter last year. The increases in net interest income and margin were primarily due to the impact of income accretion on the acquired loan portfolios. The incremental accretion income represents the amount of income recorded on the acquired loans above the contractual rate stated in the individual loan notes. The additional income stems from the discount established at the time these loan portfolios were acquired, and increases net interest income and the net interest margin. The incremental accretion income had a positive impact of approximately 1.38% on the first quarters net interest margin. For the same period last year, the incremental accretion income had a positive impact of approximately 0.05% on the net interest margin.
23
The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest- bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total net interest income and net interest margin.
Three months ended March 31, | Three months ended March 31, | |||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
(in thousands) |
Average Balances (1) |
Interest Earned / Paid |
Average Rate |
Average Balances (1) |
Interest Earned / Paid |
Average Rate |
||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Loans, net (1) (2) |
$ | 2,388,076 | $ | 47,569 | 8.08 | % | $ | 2,440,415 | $ | 37,064 | 6.16 | % | ||||||||||||
Taxable securities |
526,817 | 4,417 | 3.40 | % | 487,959 | 4,745 | 3.94 | % | ||||||||||||||||
Tax exempt securities(2) |
240,543 | 3,828 | 6.45 | % | 222,689 | 3,796 | 6.91 | % | ||||||||||||||||
Interest-earning deposits with banks and federal funds sold |
477,227 | 298 | 0.25 | % | 217,178 | 149 | 0.28 | % | ||||||||||||||||
Total interest-earning assets |
3,632,663 | $ | 56,112 | 6.26 | % | 3,368,241 | $ | 45,754 | 5.51 | % | ||||||||||||||
Other earning assets |
52,709 | 50,675 | ||||||||||||||||||||||
Noninterest-earning assets |
582,976 | 526,126 | ||||||||||||||||||||||
Total assets |
$ | 4,268,348 | $ | 3,945,042 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||||||
Certificates of deposit |
$ | 608,154 | $ | 1,447 | 0.96 | % | $ | 858,577 | $ | 2,840 | 1.34 | % | ||||||||||||
Savings accounts |
215,034 | 46 | 0.09 | % | 182,164 | 82 | 0.18 | % | ||||||||||||||||
Interest-bearing demand |
682,746 | 411 | 0.24 | % | 594,059 | 653 | 0.45 | % | ||||||||||||||||
Money market accounts |
923,887 | 1,175 | 0.52 | % | 760,762 | 1,366 | 0.73 | % | ||||||||||||||||
Total interest-bearing deposits |
2,429,821 | 3,079 | 0.51 | % | 2,395,562 | 4,941 | 0.84 | % | ||||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank borrowings |
115,193 | 694 | 2.44 | % | 125,350 | 705 | 2.28 | % | ||||||||||||||||
Long-term obligations |
25,742 | 251 | 3.96 | % | 25,676 | 249 | 3.93 | % | ||||||||||||||||
Other borrowings |
26,077 | 138 | 2.15 | % | 25,000 | 118 | 1.91 | % | ||||||||||||||||
Total interest-bearing liabilities |
2,596,833 | $ | 4,162 | 0.65 | % | 2,571,588 | $ | 6,013 | 0.95 | % | ||||||||||||||
Noninterest-bearing deposits |
876,347 | 740,387 | ||||||||||||||||||||||
Other noninterest-bearing liabilities |
84,886 | 93,211 | ||||||||||||||||||||||
Shareholders equity |
710,282 | 539,856 | ||||||||||||||||||||||
Total liabilities & shareholders equity |
$ | 4,268,348 | $ | 3,945,042 | ||||||||||||||||||||
Net interest income (2) |
$ | 51,950 | $ | 39,741 | ||||||||||||||||||||
Net interest margin |
5.80 | % | 4.78 | % | ||||||||||||||||||||
(1) | Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $224 thousand and $590 thousand for the three months ended March 31, 2011 and 2010, respectively. |
(2) | Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%. |
24
The following tables set 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:
(in thousands) |
Three Months Ended March 31, 2011 Compared to 2010 Increase (Decrease) Due to |
|||||||||||
Volume | Rate | Total | ||||||||||
Interest earning assets |
||||||||||||
Loans (1)(2) |
$ | (811 | ) | $ | 11,316 | $ | 10,505 | |||||
Taxable securities |
359 | (687 | ) | (328 | ) | |||||||
Tax exempt securities (2) |
293 | (261 | ) | 32 | ||||||||
Interest earning deposits with banks and federal funds sold |
163 | (14 | ) | 149 | ||||||||
Interest income (2) |
$ | 4 | $ | 10,354 | $ | 10,358 | ||||||
Interest bearing liabilities |
||||||||||||
Deposits: |
||||||||||||
Certificates of deposit |
$ | (710 | ) | $ | (683 | ) | $ | (1,393 | ) | |||
Savings accounts |
13 | (49 | ) | (36 | ) | |||||||
Interest-bearing demand |
87 | (329 | ) | (242 | ) | |||||||
Money market accounts |
257 | (448 | ) | (191 | ) | |||||||
Total interest on deposits |
(353 | ) | (1,509 | ) | (1,862 | ) | ||||||
FHLB and Federal Reserve Bank borrowings |
(59 | ) | 48 | (11 | ) | |||||||
Long-term obligations |
(0 | ) | 2 | 2 | ||||||||
Other borrowings |
5 | 15 | 20 | |||||||||
Interest expense |
$ | (407 | ) | $ | (1,444 | ) | $ | (1,851 | ) | |||
(1) | Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $224 thousand and $590 thousand for the three months ended March 31, 2011 and 2010, respectively. |
(2) | Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%. |
Provision for Loan and Lease Losses
During the first quarter of 2011, the Company recorded no provision for loan and lease losses on noncovered loans, compared to $15.0 million for the same period in 2010. The decision to record no provision was made in accordance with the Companys methodology for determining the ALLL, discussed in Note 6 to the Companys consolidated condensed financial statements presented elsewhere in this report, and was based upon improving credit metrics in the noncovered loan portfolio and contraction of the portfolio. The Companys total allowance for loan losses was 2.94% of noncovered loans at March 31, 2011 compared to 3.18% of noncovered loans at December 31, 2010. For the covered loan portfolio, the Company recorded a negative provision for loan losses of $422 thousand for the quarter ended March 31, 2011.
25
Noninterest Income (Loss)
Noninterest loss was $5.4 million for the first quarter of 2011, compared to income of $18.5 million for the prior-year period. The decrease was primarily due to the $14.8 million change in the FDIC loss sharing asset recorded in the current quarter. The change in the FDIC loss sharing asset recognizes the decreased amount that Columbia expects to collect from the FDIC under the terms of its loss sharing agreements due to loan prepayments and removals activity during the quarter. The decrease in noninterest income was also due to the fact that the first quarter of 2010 included the $9.8 million bargain purchase gain from the American Marine Bank transaction. The current quarter includes no such bargain purchase gain.
Noninterest Expense
Total noninterest expense for the first quarter of 2011 was $37.3 million, an increase of 10% from $33.9 million a year earlier. The addition of operating expenses for the two 2010 FDIC-assisted transactions was the primary reason for the increase. The most significant increases were in compensation and employee benefits, occupancy and regulatory premiums. The increase in compensation and employee benefits resulted from two FDIC assisted transactions and the addition of two new banking teams. Occupancy expenses increased due to the Company actively remediating deferred maintenance issues at branches acquired through the FDIC-assisted transactions. The increase in regulatory premiums is a result of the increase in the Companys deposit base through both acquisition and organic growth. Finally, other noninterest expense increased $1.8 million from the first quarter of 2010. The increase was primarily due to the Company recording a clawback liability of $1.7 million. The Companys Purchase & Assumption agreement with the FDIC requires the Company to reimburse the FDIC at the conclusion of the loss share agreement period, February 2020, a calculated amount if total losses on the acquired loan portfolios fail to reach a minimum threshold level. The $1.7 million liability recorded in the first quarter represents the net present value of managements clawback liability estimate of $2.7 million. The clawback liability is evaluated at the individual portfolio level each quarter and adjusted upward or downward according to the total expected losses over the loss share period.
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
Three months ended March 31, | ||||||||||||||||
2011 | $ Change | % Change | 2010 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Compensation |
$ | 15,587 | $ | 3,819 | 32 | % | $ | 11,768 | ||||||||
Employee benefits |
3,269 | 754 | 30 | % | 2,515 | |||||||||||
Contract labor |
65 | (2,638 | ) | -98 | % | 2,703 | ||||||||||
18,921 | 1,935 | 11 | % | 16,986 | ||||||||||||
All other noninterest expense: |
||||||||||||||||
Occupancy |
4,397 | 428 | 11 | % | 3,969 | |||||||||||
Merchant processing |
883 | (217 | ) | -20 | % | 1,100 | ||||||||||
Advertising and promotion |
901 | 63 | 8 | % | 838 | |||||||||||
Data processing and communications |
1,924 | 45 | 2 | % | 1,879 | |||||||||||
Legal and professional fees |
1,413 | (85 | ) | -6 | % | 1,498 | ||||||||||
Taxes, license and fees |
865 | 301 | 53 | % | 564 | |||||||||||
Regulatory premiums |
2,195 | 699 | 47 | % | 1,496 | |||||||||||
Net cost of operation of other real estate owned |
(442 | ) | (1,754 | ) | -134 | % | 1,312 | |||||||||
Amortization of intangibles |
984 | 197 | 25 | % | 787 | |||||||||||
Other |
5,305 | 1,837 | 53 | % | 3,468 | |||||||||||
Total all other noninterest expense |
18,425 | 1,514 | 9 | % | 16,911 | |||||||||||
Total noninterest expense |
$ | 37,346 | $ | 3,449 | 10 | % | $ | 33,897 | ||||||||
26
The following table presents selected items included in other noninterest expense and the associated change from period to period:
Three months ended March 31, |
Increase (Decrease) Amount |
|||||||||||
(in thousands) |
2011 | 2010 | ||||||||||
FDIC clawback expenses |
$ | 1,700 | $ | | $ | 1,700 | ||||||
Postage |
529 | 476 | 53 | |||||||||
Software support & maintenance |
310 | 246 | 64 | |||||||||
Supplies |
267 | 309 | (42 | ) | ||||||||
Insurance |
222 | 234 | (12 | ) | ||||||||
ATM Network |
222 | 177 | 45 | |||||||||
Travel |
215 | 164 | 51 | |||||||||
Employee expenses |
171 | 133 | 38 | |||||||||
Sponsorships and charitable contributions |
130 | 191 | (61 | ) | ||||||||
Directors fees |
115 | 111 | 4 | |||||||||
Federal Reserve Bank processing fees |
79 | 68 | 11 | |||||||||
CRA partnership investment expense |
54 | 66 | (12 | ) | ||||||||
Investor relations |
25 | 20 | 5 | |||||||||
Miscellaneous |
1,266 |