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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010 or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
| Washington | 91-1422237 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
1301 “A” Street
Tacoma, Washington 98402
(Address of principal executive offices) (Zip code)
Registrant’s Telephone Number, Including Area Code: (253) 305-1900
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
(Title of class)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
x Large Accelerated Filer ¨ 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, 2010 was $704,786,004 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, 2011 was 39,355,394.
DOCUMENTS INCORPORATED BY REFERENCE:
| Portions of the Registrant’s definitive 2011 Annual Meeting Proxy Statement. |
Part III |
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COLUMBIA BANKING SYSTEM, INC.
FORM 10-K ANNUAL REPORT
DECEMBER 31, 2010
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results:
| • | local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets; |
| • | the local housing/real estate market could continue to decline; |
| • | the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates; |
| • | the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions and infrastructure could not be realized; |
| • | interest rate changes could significantly reduce net interest income and negatively affect funding sources; |
| • | projected business increases following strategic expansion or opening of new branches could be lower than expected; |
| • | changes in the scope and cost of FDIC insurance and other coverages; |
| • | changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking; |
| • | competition among financial institutions could increase significantly; |
| • | the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital; |
| • | the reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers; |
| • | the terms and costs of the numerous actions taken by the Federal Reserve, the U.S. Congress, the Treasury, the FDIC, the SEC and others in response to the liquidity and credit crisis, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity, or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock; |
| • | our ability 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 recently raised capital. |
You should take into account that forward-looking statements speak only as of the date of this report. Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under federal securities laws.
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PART I
| ITEM 1. | BUSINESS |
General
Columbia Banking System, Inc. (referred to in this report as “we,” “our,” and “the Company”) is a registered bank holding company whose wholly owned banking subsidiary, Columbia State Bank (“Columbia Bank” or “the Bank”) also does business under the Bank of Astoria name and conducts full-service commercial banking business in the states of Washington and Oregon. Headquartered in Tacoma, Washington, we provide a full range of banking services to small and medium-sized businesses, professionals and individuals.
The Company was originally organized in 1988 under the name First Federal Corporation, which was later named Columbia Savings Bank. In 1990, an investor group acquired a controlling interest in the Company and a second corporation, Columbia National Bankshares, Inc. (“CNBI”), and CNBI’s sole banking subsidiary, Columbia National Bank. In 1993, the Company was reorganized to take advantage of commercial banking business opportunities in our principal market area. The opportunities to capture commercial banking market share were due to increased consolidations of banks, primarily through acquisitions by out-of-state holding companies, which created dislocation of customers. As part of the reorganization, CNBI was merged into the Company and Columbia National Bank was merged into the then newly chartered Columbia Bank. In 1994, Columbia Savings Bank was merged into Columbia Bank. We have grown from four branch offices at January 1, 1993 to 84 branch offices at December 31, 2010.
At December 31, 2010 Columbia Bank had 84 branch locations in Washington and Oregon. Included in these 84 branch locations are six Columbia Bank branches doing business under the Bank of Astoria name at the Bank of Astoria’s former branches located in Astoria, Warrenton, Seaside and Cannon Beach in Clatsop County and in Manzanita and Tillamook in Tillamook County. Substantially all of Columbia Bank’s loans, loan commitments and core deposits are within its service areas. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions Division of Banks. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.
Recent Acquisitions
On January 22, 2010, Columbia State Bank acquired all of the deposits and certain assets of Columbia River Bank from the FDIC, which was appointed receiver of Columbia River Bank. Columbia State Bank acquired approximately $912.9 million in assets and approximately $893.4 million in deposits located in 21 branches in Oregon and Washington. Columbia River Bank’s loans and other real estate assets acquired of approximately $696.1 million are subject to a loss-sharing agreement with the FDIC. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $43.9 million on net assets acquired. The results of Columbia River Bank’s operations are included in those of Columbia Bank starting January 22, 2010.
On January 29, 2010 Columbia State Bank acquired substantially all of the deposits and assets of American Marine Bank from the FDIC, which was appointed receiver of American Marine Bank. Columbia State Bank acquired approximately $307.8 million in assets and approximately $254.0 million in deposits located in 11 branches on the western Puget Sound. American Marine Bank’s loans and other real estate assets acquired of approximately $257.5 million are subject to a loss-sharing agreement with the FDIC. In addition, Columbia State Bank will continue to operate the Trust and Wealth Management Division of American Marine Bank. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $23.0 million on net assets acquired. The results of American Marine Bank’s operations are included in those of Columbia Bank starting January 29, 2010.
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On July 23, 2007, the Company completed its acquisition of Mountain Bank Holding Company (“Mt. Rainier”), the parent company of Mt. Rainier National Bank, Enumclaw, Washington. Mt. Rainier was merged into the Company and Mt. Rainier National Bank was merged into Columbia Bank doing business as Mt. Rainier Bank. The results of Mt. Rainier Bank’s operations are included in those of Columbia Bank starting on July 23, 2007. On October 1, 2009, branches doing business as Mt. Rainier Bank were renamed Columbia Bank.
On July 23, 2007, the Company completed its acquisition of Town Center Bancorp (“Town Center”), the parent company of Town Center Bank, Portland, Oregon. Town Center was merged into the Company and Town Center Bank was merged into Columbia Bank. The results of Town Center Bank’s operations are included in those of Columbia Bank starting on July 23, 2007.
Executive Officers of the Registrant
| Name |
Principal Position | |
| Melanie J. Dressel |
President & Chief Executive Officer | |
| Andrew McDonald |
Executive Vice President & Chief Credit Officer | |
| Mark W. Nelson |
Executive Vice President & Chief Operating Officer | |
| Kent L Roberts |
Executive Vice President & Human Resources Director | |
| Gary R. Schminkey |
Executive Vice President & Chief Financial Officer |
Business Overview
Our goal is to be a 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 as the bank of choice for retail deposit customers, small to medium-sized businesses and affluent households in all markets we serve.
We have established a network of 84 branches in Washington and Oregon as of December 31, 2010 from which we intend to grow market share. We operate 53 branches in western Washington, 6 branches in eastern Washington, 15 branches in western Oregon, and 10 branches in eastern Oregon. Washington counties include: Benton, Clallam, Clark, Cowlitz, Franklin, Jefferson, King, Kitsap, Klickitat, Mason, Pierce, Thurston, Whatcom and Yakima. Oregon counties include Clackamas, Clatsop, Deschutes, Hood River, Jefferson, Marion, Multnomah, Tillamook, Umatilla, Wasco and Yamhill.
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 product depth of a regional banking company while retaining the appeal and service level of a community bank. We continually evaluate our existing business processes while focusing on maintaining asset quality and balanced loan and deposit portfolios, building our strong core deposit base, expanding total revenue and controlling expenses in an effort to increase our return on average equity and gain operational efficiencies. We believe that, as a result of our strong commitment to highly personalized, relationship-oriented customer service, our varied products, our strategic branch locations and the long-standing community presence of our managers, banking officers and branch personnel, we are well positioned to attract and retain new customers and to increase our market share of loans, deposits, investments, and other financial services. We are committed to increasing market share in the communities we serve by continuing to leverage our existing branch network, adding new branch locations and considering business combinations that are consistent with our expansion strategy throughout the Pacific Northwest.
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Products & Services
We place the highest priority on customer service and assist our customers in making informed decisions when selecting from the products and services we offer. We continuously review our product and service offerings to ensure that we provide our customers with the tools to meet their financial needs. A more complete listing of all the services and products available to our customers can be found on our website: www.columbiabank.com. Some of the core products and services we offer include:
| Personal Banking |
Business Banking | |
| • Checking and Saving Accounts |
• Checking & Saving Accounts | |
| • Online Banking |
• Online Banking | |
| • Electronic Bill Pay |
• Electronic Bill Pay | |
| • Consumer Lending |
• Remote Deposit Capture | |
| • Residential Lending |
• Cash Management | |
| • VISA® Card Services |
• Commercial & Industrial Lending | |
| • Investment Services through CB Financial Services |
• Real Estate and Real Estate Construction Lending | |
| • Private Banking |
• Equipment Finance | |
| • Trust Services |
• Small Business Services | |
| • VISA® Card Services | ||
| • Investment Services through CB Financial Services | ||
| • International Banking | ||
| • Merchant Card Services | ||
| • Professional Banking |
Personal Banking: We offer our personal banking customers an assortment of account products including noninterest and interest-bearing checking, savings, money market and certificate of deposit accounts. Overdraft protection is also available with direct links to the customer’s checking account. Our online banking service, Columbia Online™, provides our personal banking customers with the ability to safely and securely conduct their banking business 24 hours a day, 7 days a week. Personal banking customers are also provided with a variety of borrowing products including fixed and variable rate home equity loans and lines of credit, home mortgages for purchases and refinances, personal loans, and other consumer loans. Eligible personal banking customers with checking accounts are provided a Visa® Debit Card which can be used both to make purchases and as an ATM card. A variety of Visa® Credit Cards are also available to eligible personal banking customers.
Columbia Private Banking offers affluent clientele and their businesses complex financial solutions, such as deposit and cash management services, credit services, and wealth management strategies. Each private banker provides advisory services and coordinates a relationship team of experienced financial professionals to meet the unique needs of each discerning customer.
Through CB Financial Services(1), customers are provided with a full range of investment options including mutual funds, stocks, bonds, retirement accounts, annuities, tax-favored investments, US Government securities as well as long-term care and life insurance policies. Qualified investment professionals are available to provide advisory services(2) and assist customers with retirement, education and other financial planning activities.
| (1) | Securities and insurance products are offered through primevest Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for primevest. * Investment products are Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal government agency * May lose value. |
| (2) | Advisory services may only be offered by Investment Adviser Representatives in connection with an appropriate primevest Advisory Services Agreement and disclosure brochure as provided. |
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Business Banking: We offer our business banking customers the foundation of a variety of checking, savings, interest bearing money market and certificate of deposit accounts to satisfy all their banking needs. In addition to these core banking products we provide a breadth of services to support the complete financial needs of small and middle market businesses including Cash Management, Professional Banking, International Banking , VISA Credit Cards, Merchant Services and Commercial Lending.
Cash Management
Columbia State Bank’s diversified Cash Management Programs are tailored to meet specific banking needs of each individual business. We combine technology with integrated operations and local expertise for safe, powerful, flexible solutions. Columbia customers, of all sizes, choose from a full range of transaction and Cash Management tools to gain more control over—and make more from—their money. Services include Commercial Online Banking, Postive Pay fraud protection, Automated Clearing House (ACH) payments, Remote Deposit Capture, and Merchant Services.
Our Cash Management professionals work with businesses to find the best combination of services to meet their needs. This customized, modular approach will ensures their business banking operations are cost-effective now, with flexibility for future growth.
Professional Banking
Columbia Professional Bankers are uniquely qualified to help medical and dental professionals acquire, build and grow their practice. We offer tailored banking and investment solutions(1) delivered by experienced bankers with the industry knowledge necessary to meet their business’s unique needs. No matter what the needs are now or in the years to come, we guide professionals through all their financial options to make their banking as easy and personal as possible.
International Banking
Columbia Bank’s International services division offers a range of financial services to help forward-thinking independent businesses explore global markets and conduct international trade smoothly and expediently. We’re proud to provide small and mid-size business with the same caliber of expertise and personalized service that national banks usually limit to large businesses.
Our experience with foreign currency exchange, letters of credit, foreign collections and trade finance services can help independent companies open the door to new markets and suppliers overseas. Put simply, the wealth of opportunities that international trade offers growing businesses can have a significant impact on both long-term growth and their bottom line.
Commercial Lending
We offer a variety of loan products tailored to meet the various needs of business banking customers. Commercial loan products include accounts receivable and inventory financing as well as Small Business Administration (SBA) 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.
| (1) | Securities and insurance products are offered through primevest Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for primevest. * Investment products are Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal government agency * May lose value. |
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Business VISA® Credit and Debit Cards
We offer our business banking customers a selection of Visa® Cards including the Business Debit Card that works like a check wherever Visa® is accepted. 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 as well as the Business Edition® and Business Edition Plus® that earns reward points with every purchase.
Merchant Card Services
Business clients that utilize Columbia’s Merchant Card Services have the ability to accept Visa®, MasterCard® and Discover® sales drafts for deposit directly into their business checking account. Merchants are provided with a comprehensive accounting system tailored to meet each merchant’s needs, which includes month-to-date credit card deposit information on a transaction statement. Internet access is available to view merchant reports that allow business customers to review merchant statements, authorized, captured, cleared and settled transactions.
CB Financial Services
Through CB Financial Services(1), customers are provided with an array of investment options and all the tools and resources necessary to assist them in reaching their investment goals. Some of the investment solutions available to customers include 401(k), Simple IRA, Simple Employee Pensions, Buy-Sell Agreements, Key-Man Insurance, Business Succession Planning and personal investments.
Competition
Our industry remains highly competitive in spite of challenging economic conditions. Several other financial institutions with greater resources compete for banking business in our market areas. Among the advantages of some of these institutions are their ability to make larger loans, finance extensive advertising and 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.
| (1) | Securities and insurance products are offered through primevest Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for primevest. * Investment products are Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal government agency * May lose value. |
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Market Areas
Washington: Approximately 40% of our total branches within Washington are located in Pierce County, with an estimated 2010 population of 814,600 residents. At June 30, 2010 our Pierce County branch locations’ share of the county’s total deposit market was 18%(1), ranking first among our competition, and an increase from 16% in 2009. Also located in Pierce County is our Company headquarters in the city of Tacoma and one nearby operational facility. Some of the most significant contributors to the Pierce County economy are the Port of Tacoma, whose activities are related to more than 43,000 jobs in the county, and well over 100,000 in the state of Washington, Joint Base Lewis-McChord which accounts 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 close to 2 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, 2010 our share of the King County deposit market was approximately 1%(1); however, we have made inroads within this market through the acquisition of American Marine Bank and 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 9%(1) of the deposit market share, and Kitsap County, where we operate 6 branches with 8% of the deposit market share. We also have locations in Clallam, Clark, Klickitat, Thurston and Yakima counties where we operate two branch offices in each county, and Benton, Franklin, Jefferson, Mason and Whatcom Counties where we operate one branch in each county.
Oregon: With the acquisition of Columbia River Bank in January, 2010, we significantly expanded our market area in western Oregon, and entered the eastern Oregon market area, bringing our total to 25 branch locations in the state. Oregon counties include Clackamas, Clatsop, Deschutes, Hood River, Jefferson, Marion, Multnomah, Tillamook, Umatilla, Wasco and Yamhill. Columbia ranks twelfth in total deposit market share in Oregon, up from 27th place the prior year. We are first in deposit market share in Hood River, Jefferson, and Wasco counties, and second or 28%(1) of the deposit market share in Clatsop county. Oregon market areas provide a significant opportunity for expansion in the future
Employees
As of December 31, 2010 the Company and its banking subsidiary employed approximately 1,092 full-time equivalent employees, significantly up from the 715 at December 31, 2009. We value our employees and pride ourselves on providing a professional work environment accompanied by comprehensive benefit programs. We are committed to providing flexible and value-added benefits to our employees through a “Total Compensation Philosophy” which incorporates all compensation and benefits. Our continued commitment to employees contributed to Columbia Bank being awarded second place in the large employer category by Seattle Business Magazine’s 100 Best Companies to Work For 2010 and designated one of the Puget Sound Business Journal’s “Washington’s Best Workplaces 2010”.
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.
| (1) | Source: FDIC Annual Summary of Deposit Report as of June 30, 2010. |
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Additionally, reports filed with the SEC can be obtained through our website at www.columbiabank.com. These reports are available through our website as soon as reasonably practicable after they are filed electronically with the SEC. Information contained on our website is not intended to be incorporated by reference into this report.
Supervision and Regulation
General
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to the Company and Columbia State Bank, which operates under the names Columbia State Bank in Washington, and Columbia State Bank and Bank of Astoria in Oregon (collectively, referred to herein as “Columbia Bank”). This regulatory framework is primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory framework, our costs of compliance continue to increase in order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including the interpretation or implementation thereof, could have a material effect on our business or operations. Recently, in light of the recent financial crisis, numerous proposals to modify or expand banking regulation have surfaced. Based on past history, if any are approved, they will add to the complexity and cost of our business.
Federal Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), and is therefore subject to regulation, supervision and examination by the Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must file reports with and provide the Federal Reserve such additional information as it may require. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in nature, such as securities brokerage and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.
Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from Columbia Bank for its cash needs, including funds for payment of dividends, interest and operational expenses.
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Tying Arrangements. We are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.
Support of Subsidiary Bank. Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to Columbia Bank. This means that the Company is required to commit, as necessary, resources to support Columbia Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.
State Law Restrictions. As a Washington corporation, the Company is subject to certain limitations and restrictions under applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.
Federal and State Regulation of Columbia Bank
General. The deposits of Columbia Bank, a Washington chartered commercial bank with branches in Washington and Oregon, are insured by the FDIC. As a result, Columbia Bank is subject to supervision and regulation by the Washington Department of Financial Institutions, Division of Banks and the FDIC. With respect to branches of Columbia Bank in Oregon, the Bank is also subject to supervision and regulation by the Oregon Department of Consumer and Business Services, as well as the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.
Community Reinvestment. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the record of the financial institution in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.
Regulation of Management. Federal law (i) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (ii) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (iii) prohibits management personnel of a bank from serving as a director or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.
Safety and Soundness Standards. Federal law imposes certain non-capital safety and soundness standards upon banks. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset
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quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) relaxed prior interstate branching restrictions under federal law by permitting nationwide interstate banking and branching under certain circumstances. Generally, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. 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. As a result of the Dodd-Frank Act, prior restrictions on de novo branching by out of state banks have been removed. The Dodd-Frank Act generally permits all banks to branch into other states by opening a new branch or purchasing a branch from another financial institution, to the extent that banks chartered under the state in which the new branch is located can do so. In the past, the Interstate Act barred all financial institutions, except for thrifts, from branching into other states unless they purchased or merged with a bank located in the other state.
Dividends
The principal source of the Company’s cash is from dividends received from Columbia Bank, which are subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Washington law also limits a bank’s ability to pay dividends that are greater than the bank’s retained earnings without approval of the applicable banking agency. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum
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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. At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. During these challenging economic times, the federal banking regulators have actively enforced these provisions.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company’s rating at its last inspection.
Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.
Corporate Governance and Accounting
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.
Anti-terrorism
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
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(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.
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.
The Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008. In response to market turmoil and financial crises affecting the overall banking system and financial markets in the United States, the Emergency Economic Stabilization Act of 2008 ( “EESA”) was enacted on October 3, 2008. EESA 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.
Troubled Asset Relief Program. Under the EESA, the Treasury has authority, among other things, to purchase up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions pursuant to the Troubled Asset Relief Program (“TARP”). The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase lending to customers and to each other. Pursuant to the EESA, the Treasury was initially authorized to use $350 billion for TARP. Of this amount, the Treasury allocated $250 billion to the TARP Capital Purchase Program (“CPP”), which funds were used to purchase preferred stock from qualifying financial institutions. The Company applied for and received approximately $76 million in the CPP. Due to its capital position, on August 11, 2010, the Company redeemed all of its 76,898 outstanding shares of preferred stock, originally issued to the Treasury for a total redemption price of $77.8 million, consisting of $76.9 million in principal and $918,504 in accrued and unpaid dividends. On September 1, 2010, the Company repurchased the common stock warrant issued to the Treasury for $3.3 million. The warrant repurchase, together with the Company’s redemption in August 2010 of the entire amount of the preferred stock, represents full repayment of all TARP obligations and cancellation of all equity interests in the Company held by the Treasury.
Temporary Liquidity Guarantee Program. Another program established pursuant to the EESA is the Temporary Liquidity Guarantee Program (“TLGP”), which (i) removed the limit on FDIC deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2009, and (ii) provided FDIC backing for certain types of senior unsecured debt issued from October 14, 2008 through June 30, 2009. The end-date for issuing senior unsecured debt was later extended to October 31, 2009 and the FDIC also extended the Transaction Account Guarantee portion of the TLGP through December 31, 2010. Financial institutions that did not opt out of unlimited coverage for non-interest bearing accounts were initially charged an annualized 10 basis points on individual account balances exceeding $250,000, and those issuing FDIC-backed senior unsecured debt were initially charged an annualized 75 basis points on all such debt, although those rates were subsequently increased. We elected to fully participate in both parts of the TLGP.
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Deposit Insurance
The Bank’s deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments designed to tie what banks pay for deposit insurance more closely to the risks they pose. The Bank has prepaid its quarterly deposit insurance assessments for 2011 and 2012 pursuant to applicable FDIC regulations, but the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010 required the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. As a result, in February 2011, the FDIC approved new rules to, among other things, change the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets (average consolidated total assets minus average tangible equity). Since the new assessment base is larger than the base used under prior regulations, the rules also lower assessment rates, so that the total amount of revenue collected by the FDIC from the industry is not significantly altered. The rule also revises the deposit insurance assessment system for large financial institutions, defined as institutions with at least $10 billion in assets. The rules revise the assessment rate schedule, effective April 1, 2011, and adopt additional rate schedules that will go into effect when the Deposit Insurance Fund reserve ratio reaches various milestones.
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, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. The Dodd-Frank Act permanently raises the current standard maximum deposit insurance amount to $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. EESA also temporarily raised the limit on federal deposit insurance coverage to an unlimited amount for non-interest or low-interest bearing demand deposits. Pursuant to the Dodd-Frank Act, unlimited coverage for non-interest transaction accounts will continue upon expiration of the TLGP until December 31, 2012.
Recent Legislation
Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result of the recent financial crises, on July 21, 2010 the Dodd-Frank Act was signed into law. The Dodd-Frank Act is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes and changes to corporate governance matters affecting public companies. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Among other things, the legislation (i) centralizes responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws; (ii) applies the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies; (iii) requires the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction; (iv) changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital; (v) requires the SEC to complete studies and develop rules or approve stock exchange rules regarding various investor protection issues, including shareholder access to the proxy process, and various matters pertaining to executive compensation and compensation committee oversight; (vi) makes permanent the $250,000 limit for federal deposit insurance and provides unlimited federal deposit insurance until December 31, 2012, for non-interest bearing transaction accounts; (vii) removes prior restrictions on interstate de novo branching; and (viii) repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, the Bank and the financial services industry more generally. However, based on past experience with new legislation, it can be anticipated that the Dodd-Frank Act, directly and indirectly, will impact the business of the Company and the Bank and increase compliance costs.
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American Recovery and Reinvestment Act of 2009. On February 17, 2009 the American Recovery and Reinvestment Act of 2009 (“ARRA) was signed into law. ARRA is intended to help stimulate the economy through a combination of tax cuts and spending provisions applicable to a broad range of areas with an estimated cost of about $780 billion. The impact that ARRA may have on the US economy, the Company and the Bank cannot be predicted with certainty.
Overdrafts. On November 17, 2009, the Board of Governors of the Federal Reserve System promulgated the Electronic Fund Transfer rule with an effective date of January 19, 2010 and a mandatory compliance date of July 1, 2010. The rule, which applies to all FDIC-regulated institutions, prohibits financial institutions from assessing an overdraft fee for paying automated teller machine (ATM) and one-time point-of-sale debit card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions. The opt-in provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit card transactions. Since a percentage of the Company’s service charges on deposits are in the form of overdraft fees on point-of-sale transactions, this could have an adverse impact on our non-interest income.
Proposed Legislation
Proposed legislation is introduced in almost every legislative session. Certain of such legislation could dramatically affect the regulation of the banking industry. We cannot predict if any such legislation will be adopted or if it is adopted how it would affect the business of Columbia Bank or the Company. Past history has demonstrated that new legislation or changes to existing laws or regulations usually results in a greater compliance burden and therefore generally increases the cost of doing business.
Effects of Government Monetary Policy
Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.
| ITEM 1A. | RISK FACTORS |
Our business exposes us to certain risks. The following is a discussion of what we currently believe are the most significant risks and uncertainties that may affect our business, financial condition and future results.
A slow or fragile economic recovery could adversely affect our future results of operations or market price of our stock.
The national economy and the financial services sector in particular are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict how quickly the economy will recover from the recent recession, which has adversely impacted the markets we serve. The U.S. economy has also experienced substantial volatility in the financial markets. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long adverse economic conditions may exist, a slow or fragile recovery could continue to present risks for some time for the industry and our company.
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Economic conditions in the market areas we serve may continue to adversely impact our earnings and could increase our credit risk associated with our loan portfolio and the value of our investment portfolio.
Substantially all of our loans are to businesses and individuals in Washington and Oregon, and a continuing decline in the economies of these market areas could have a material adverse effect on our business, financial condition, results of operations and prospects. There has been a decline in housing prices and unemployment is a continued concern in both Washington and Oregon. A further deterioration in the market areas we serve could result in the following consequences, any of which could have an adverse impact, which could be material, on our business, financial condition, results of operations and prospects:
| • | commercial and consumer loan delinquencies may increase; |
| • | problem assets and foreclosures may increase; |
| • | collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans; |
| • | certain securities within our investment portfolio could become other than temporarily impaired, requiring a write-down through earnings to fair value, thereby reducing equity; |
| • | low cost or non-interest bearing deposits may decrease; and |
| • | demand for our loan and other products and services may decrease. |
Our loan portfolio mix, which has a concentration of loans secured by real estate, could result in increased credit risk in a challenging economy.
Our loan portfolio is concentrated in commercial real estate and commercial business loans. These types of loans, as well as real estate construction loans and land development loans, acquisition and development loans related to the for-sale housing industry, generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy loan concentrations. Because our loan portfolio contains a significant number of construction, commercial business and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in our non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
A further downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both borrowers’ ability to repay their loans and the value of the real property securing such loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans.
Our Allowance for Loan and Lease Losses (“ALLL”) may not be adequate to cover future loan losses, which could continue to adversely affect earnings.
We maintain an ALLL in an amount that we believe is adequate to provide for losses inherent in our portfolio. While we strive to carefully monitor credit quality and to identify loans that may become non-performing, at any time there are loans in the portfolio that could result in losses, but that have not been identified as non-performing or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become non-performing assets, or that we will be able to limit losses on those loans that have been identified. Additionally, the process for determining the ALLL requires different, subjective and complex judgments about the future impact from current economic conditions that might impair the ability of borrowers to repay their loans. As a result, future significant increases to the ALLL may be necessary. Additionally, future increases to the ALLL may be required based on changes in the composition of the loans comprising the portfolio, deteriorating values in underlying collateral (most of which consists of real estate) and
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changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a result of incorrect assumptions by management in determining the ALLL. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our ALLL. These regulatory agencies may require us to increase the ALLL which could have a negative effect on our financial condition and results of operation. Any increase in the ALLL would have an adverse effect, which could be material, on our financial condition and results of operations.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.
Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to elevated levels of nonperforming loans. We do not record interest income on non-accrual loans, thereby adversely affecting our income, and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral if the collateral less selling costs is lower than the carrying amount of the related loan, which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts, and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. There can be no assurance that we will not experience further increases in nonperforming loans in the future.
Our acquisitions and the integration of acquired businesses may not result in all of the benefits anticipated, and future acquisitions may be dilutive to current shareholders.
We have in the past and may in the future seek to grow our business by acquiring other businesses. There can be no assurance that our acquisitions will have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost of integration including management attention and resources; the time required to complete the integration successfully; the amount of longer-term cost savings; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.
We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we acquire. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect our operations or results.
Given the continued market volatility and uncertainty, notwithstanding our loss-sharing arrangements with the FDIC, we may continue to experience increased credit costs or need to take additional markdowns and allowances for loan losses on the assets and loans acquired that could adversely affect our financial condition and results of operations in the future. We may also experience difficulties in complying with the technical requirements of our loss-sharing agreements with the FDIC, which could result in some assets which we acquire in FDIC-assisted transactions losing their coverage under such agreements. There is no assurance that as our integration efforts continue in connection with these transactions, other unanticipated costs, including the diversion of personnel, or losses, will not be incurred.
Acquisitions may also result in business disruptions that cause us to lose customers or cause customers to remove their accounts from us and move their business to competing financial institutions. It is possible that the
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integration process related to acquisitions could result in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients, customers, depositors and employees. The loss of key employees in connection with an acquisition could adversely affect our ability to successfully conduct our business.
We may engage in future acquisitions involving the issuance of additional common stock and/or cash. Any such acquisitions and related issuances of stock may have a dilutive effect on earnings per share and the percentage ownership of current shareholders. The use of cash as consideration in any such acquisitions could impact our capital position and may require us to raise additional capital.
Furthermore, notwithstanding our recent acquisitions, we cannot provide any assurance as to the extent to which we can continue to grow through acquisitions as this will depend on the availability of prospective target opportunities at valuations we find attractive and the competition for such opportunities from other parties.
Our decisions regarding the fair value of assets acquired, including the FDIC loss-sharing assets, could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and future prospects.
Management makes various assumptions and judgments about the collectability of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include loss-sharing agreements, we may record a loss-sharing asset that we consider adequate to absorb the indemnified portion of future losses which may occur in the acquired loan portfolio. The FDIC loss-sharing asset is accounted for on the same basis as the related acquired loans and OREO and primarily represents the present value of the cash flows the Company expects to collect from the FDIC under the loss-sharing agreements.
If our assumptions are incorrect, significant earnings volatility can occur and the balance of the FDIC loss-sharing asset may at any time be insufficient to cover future loan losses, and credit loss provisions may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future loan losses could have a negative effect on our operating results.
FDIC-assisted acquisition opportunities may not become available and increased competition may make it more difficult for us to successfully bid on failed bank transactions.
A part of our near-term business strategy is to pursue failing banks that the FDIC plans to place in receivership. The FDIC may not place banks that meet our strategic objectives into receivership. Failed bank transactions are attractive opportunities in part because of loss-sharing arrangements with the FDIC that limit the acquirer’s downside risk on the purchased loan portfolio and, apart from our assumption of deposit liabilities, we have significant discretion as to the non-deposit liabilities that we assume in such transactions. In addition, assets purchased from the FDIC are marked to their fair value and in many cases there is little or no addition to goodwill arising from an FDIC-assisted transaction. The bidding process for failing banks could become very competitive and the FDIC does not provide information about bids until after the failing bank has been closed. We may not be able to match or beat the bids of other acquirers unless we bid aggressively by increasing the premium paid on assumed deposits or reducing the discount bid on assets purchased, which could make the acquisition less attractive to us.
Our profitability measures could be adversely affected if we are unable to effectively deploy recently raised capital.
We may use the net proceeds of our capital raise completed in May 2010 for selective acquisitions that meet our disciplined acquisition criteria, to fund internal growth, or for general corporate purposes. Although we are periodically engaged in discussions with potential acquisition candidates, we are not currently a party to any purchase or merger agreement. There can be no assurance that we will be able to negotiate future acquisitions on terms acceptable to us. Investing the proceeds of our recent offering in securities until we are able to deploy the
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proceeds would provide lower margins than we generally earn on loans, potentially adversely impacting shareholder returns, including earnings per share, net interest margin, return on assets and return on equity.
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 acquisition method of accounting. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with generally accepted accounting principles, our goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation is based on a variety of factors, including the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples, discounted cash flows, and data from comparable acquisitions. There can be no assurance that future evaluations of goodwill will not result in impairment and ensuing write-down, which could be material, resulting in an adverse impact on our earnings and capital.
Fluctuating interest rates could adversely affect our business.
Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, decreases in interest rates could result in an acceleration of loan prepayments. An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our business.
Further, our profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread, and, in turn, our profitability.
The FDIC has increased insurance premiums to restore and maintain the federal deposit insurance fund, which has increased our costs and could adversely affect our business.
In 2009, the FDIC imposed a special deposit insurance assessment of five basis points on all insured institutions, and also required insured institutions to prepay estimated quarterly risk-based assessments through 2012.
The Dodd-Frank Act established 1.35% as the minimum deposit insurance fund reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0% and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum fund reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not announced how it will implement this offset or how larger institutions will be affected by it.
Despite the FDIC’s actions to restore the deposit insurance fund, the fund will suffer additional losses in the future due to failures of insured institutions. There can be no assurance that there will not be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on the Company’s financial condition and results of operations.
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We operate in a highly regulated environment and changes of or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly-traded company, we are subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies, or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.
In that regard, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010. Among other provisions, the new legislation (i) creates a new Bureau of Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii) creates a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places new limits on electronic debt card interchange fees and (v) will require the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations are expected to increase the overall costs of regulatory compliance.
Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions we are facing. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the Federal Reserve Board.
We cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets, on the Company and on the Bank. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.
A continued tightening of the credit markets and credit market volatility may make it difficult to maintain adequate funding for loan growth, which could adversely affect our earnings.
A continued tightening of the credit markets and the inability to maintain adequate liquidity to fund continued loan growth may negatively affect asset growth and, therefore, our earnings capability. In addition to deposit growth and payments of principal and interest received on loans and investment securities, we also rely on borrowing lines with the FHLB of Seattle and the FRB of San Francisco to fund loans. However, the FHLB has discontinued the repurchase of its stock and discontinued the distribution of dividends. Based on the foregoing, there can be no assurance the FHLB will have sufficient resources to continue to fund our borrowings at their current levels. In the event of a deterioration in our financial condition or a further downturn in the economy, particularly in the housing market, our ability to access these funding resources could be negatively affected, which could limit the funds available to us making it difficult for us to maintain adequate funding for
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loan growth. In addition, our customers’ ability to raise capital and refinance maturing obligations could be adversely affected, resulting in a further unfavorable impact on our business, financial condition and results of operations.
We may be required, in the future, to recognize impairment with respect to investment securities, including the FHLB stock we hold.
Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declines in the fair market value of these securities. We evaluate the securities portfolio for any other than temporary impairment each reporting period, as required by generally accepted accounting principles in the United States of America, and as of December 31, 2010, we did not recognize any securities as other-than-temporarily impaired. There can be no assurance, however, that future evaluations of the securities portfolio will not require us to recognize an impairment charge with respect to these and other holdings.
In addition, as a condition to membership in the FHLB, we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. At December 31, 2010, we had stock in the FHLB totaling $17.9 million. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. The FHLB has discontinued the repurchase of their stock and discontinued the distribution of dividends. As of December 31, 2010, we did not recognize an impairment charge related to our FHLB stock holdings. There can be no assurance, however, that future negative changes to the financial condition of the FHLB may not require us to recognize an impairment charge with respect to such holdings.
Our ability to access markets for funding and acquire and retain customers could be adversely affected by negative public opinion, the deterioration of other financial institutions or the further deterioration of the financial services industry’s reputation.
The financial services industry continues to be featured in negative headlines about the global and national credit crisis and the resulting stabilization legislation enacted by the U.S. federal government. These reports can be damaging to the industry’s image and potentially erode consumer confidence in insured financial institutions, such as our banking subsidiary. In addition, our ability to engage in routine funding and other transactions could be adversely affected by the actions and financial condition of other financial institutions or negative public opinion resulting from our actual or alleged conduct in any number of activities, including lending practices, governmental enforcement actions taken by regulators or community organizations in response to those activities. Financial services institutions are interrelated as a result of trading, clearing, correspondent, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and to losses or defaults by us or by other institutions. We could experience material changes in the level of deposits as a direct or indirect result of other banks’ difficulties or failure, which could affect the amount of capital we need.
Substantial competition in our market areas could adversely affect us.
Commercial banking is a highly competitive business. We compete with other commercial banks, savings and loan associations, credit unions, finance, insurance and other non-depository companies operating in our market areas. We also experience competition, especially for deposits, from internet-based banking institutions, which have grown rapidly in recent years. We are subject to substantial competition for loans and deposits from other financial institutions. Some of our competitors are not subject to the same degree of regulation and restriction as we are. Some of our competitors have greater financial resources than we do. Some of our competitors have severe liquidity issues, which could impact the pricing of deposits in our marketplace. If we are unable to effectively compete in our market areas, our business, results of operations and prospects could be adversely affected.
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Changes in accounting standards could materially impact our financial statements.
From time to time the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be very difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.
There can be no assurance as to the level of dividends we may pay on our common stock.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and there may be circumstances under which we would eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock.
Our ability to receive dividends from our banking subsidiary accounts for most of our revenue and could affect our liquidity and ability to pay dividends.
We are a separate and distinct legal entity from our banking subsidiary, Columbia State Bank. We receive substantially all of our revenue from dividends from our banking subsidiary. In addition to capital raised at the holding company level, these dividends are the principal source of funds to pay dividends on our common stock and principal and interest on our outstanding debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank may pay us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Limitations on our ability to receive dividends from our subsidiary could have a material adverse effect on our liquidity and on our ability to pay dividends on common stock. Additionally, if our subsidiary’s earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our common shareholders or principal and interest payments on our outstanding debt.
Significant legal or regulatory actions could subject us to substantial uninsured liabilities and reputational harm and have a material adverse effect on our business and results of operations.
We are from time to time subject to claims and proceedings related to our operations. These claims and legal actions, which could include supervisory or enforcement actions by our regulators, or criminal proceedings by prosecutorial authorities, could involve large monetary claims, including civil money penalties or fines imposed by government authorities, and significant defense costs. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by government authorities and may not cover all other claims that might be brought against us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.
We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations.
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
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If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of us to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.
We may pursue additional capital, which may not be available on acceptable terms or at all, could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.
In the current economic environment, we believe it is prudent to consider alternatives for raising capital when opportunities to raise capital at attractive prices present themselves, in order to further strengthen our capital and better position ourselves to take advantage of opportunities that may arise in the future. Such alternatives may include issuance and sale of common or preferred stock, trust preferred securities, or borrowings by the Company, with proceeds contributed to our banking subsidiary, Columbia State Bank (the “Bank”). Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at the time, which are outside of our control, and our financial performance. We cannot assure you that such capital will be available to us on acceptable terms or at all. Any such capital raising alternatives could dilute the holders of our outstanding common stock, and may adversely affect the market price of our common stock and our performance measures such as earnings per share.
We have various anti-takeover measures that could impede a takeover.
Our articles of incorporation include certain provisions that could make more difficult the acquisition of us by means of a tender offer, a proxy contest, merger or otherwise. These provisions include certain non-monetary factors that our board of directors may consider when evaluating a takeover offer, and a requirement that any “Business Combination” be approved by the affirmative vote of no less than 66 2/3% of the total shares attributable to persons other than a “Control Person.” These provisions may have the effect of lengthening the time required for a person to acquire control of us though a tender offer, proxy contest or otherwise, and may deter any potentially hostile offers or other efforts to obtain control of us. This could deprive our shareholders of opportunities to realize a premium for their Columbia common stock, even in circumstances where such action is favored by a majority of our shareholders.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
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| ITEM 2. | PROPERTIES |
Locations
The Company’s principal Columbia Bank properties include our corporate headquarters which is located at 13th & A Street, Tacoma, Washington, in Pierce County, where we occupy 62 thousand square feet of office space, 4 thousand square feet of commercial lending space and 750 square feet of branch space under various operating lease agreements, an operations facility in Lakewood, Washington, where we own 57 thousand square feet of office space and an office facility in Tacoma, Washington, that includes a branch where we occupy 26 thousand square feet under various operating lease agreements.
The Company’s branch network as of December 31, 2010 is made up of 84 branches located throughout several Washington and Oregon counties. The number of branches per county, as well as whether it is owned or operated under a lease agreement is detailed in the following table.
| Number
of Branches |
Occupancy Type | |||||||||||
| County |
Owned | Leased | ||||||||||
| Pierce |
23 | 14 | 9 | |||||||||
| King |
12 | 8 | 4 | |||||||||
| Kitsap |
6 | 3 | 3 | |||||||||
| Other Washington Counties |
18 | 10 | 8 | |||||||||
| Total Washington Branches |
59 | 35 | 24 | |||||||||
| Clatsop (dba Bank of Astoria) |
4 | 4 | — | |||||||||
| Tillamook (dba Bank of Astoria) |
2 | 2 | — | |||||||||
| Clackamas |
3 | — | 3 | |||||||||
| Multnomah |
3 | 1 | 2 | |||||||||
| Deschutes |
4 | 2 | 2 | |||||||||
| Other Oregon Counties |
9 | 7 | 2 | |||||||||
| Total Oregon Branches |
25 | 16 | 9 | |||||||||
| Total Columbia Bank Branches |
84 | 51 | 33 | |||||||||
For additional information concerning our premises and equipment and lease obligations, see Note 10 and 20, respectively, to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
| ITEM 3. | LEGAL PROCEEDINGS |
The Company and its banking subsidiary are parties to routine litigation arising in the ordinary course of business. Management believes that, based on the information currently known to them, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
| ITEM 4. | RESERVED |
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Quarterly Common Stock Prices and Dividends
Our common stock is traded on the NASDAQ Global Select Market under the symbol “COLB”. Quarterly high and low sales prices and dividend information for the last two years are presented in the following table. The prices shown do not include retail mark-ups, mark-downs or commissions:
| 2010 |
High | Low | Cash Dividend Declared |
|||||||||
| First quarter |
$ | 22.60 | $ | 16.03 | $ | 0.01 | ||||||
| Second quarter |
$ | 24.96 | $ | 18.17 | 0.01 | |||||||
| Third quarter |
$ | 19.97 | $ | 15.91 | 0.01 | |||||||
| Fourth quarter |
$ | 21.99 | $ | 17.00 | 0.01 | |||||||
| For the year |
$ | 24.96 | $ | 15.91 | $ | 0.04 | ||||||
| 2009 |
High | Low | Cash Dividend Declared |
|||||||||
| First quarter |
$ | 11.87 | $ | 4.93 | $ | 0.04 | ||||||
| Second quarter |
$ | 13.52 | $ | 6.54 | 0.01 | |||||||
| Third quarter |
$ | 17.22 | $ | 9.78 | 0.01 | |||||||
| Fourth quarter |
$ | 16.55 | $ | 13.80 | 0.01 | |||||||
| For the year |
$ | 17.22 | $ | 4.93 | $ | 0.07 | ||||||
On December 31, 2010, the last sale price for our stock on the NASDAQ Global Select Market was $21.06. At January 31, 2011, the number of shareholders of record was 2,154. 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, 2010, a total of 93,964 stock options were outstanding. Additional information about stock options and other equity compensation plans is included in Note 17 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. In addition, the payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In this regard, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
Equity Compensation Plan Information
| Year Ended December 31, 2010 | ||||||||||||
| Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1)(2) |
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |
Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (3) |
||||||||||
| Equity compensation plans approved by security holders |
93,964 | $ | 21.26 | 1,299,510 | ||||||||
| Equity compensation plans not approved by security holders |
— | — | — | |||||||||
| (1) | Includes shares to be issued upon exercise of options under plans of Bank of Astoria, Mountain Bank Holding Company and Town Center Bancorp, which were assumed as a result of their acquisitions. |
| (2) | Consists of shares that are subject to outstanding options. |
| (3) | Includes 620,606 shares available for future issuance under the stock option and equity compensation plan and 678,904 shares available for purchase under the Employee Stock Purchase Plan as of December 31, 2010. |
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Five-Year Stock Performance Graph
The following graph shows a five-year comparison of the total return to shareholders of Columbia’s common stock, the Nasdaq Composite Index (which is a broad nationally recognized index of stock performance by companies listed on the Nasdaq Stock Market) and the Columbia Peer Group (comprised of banks with assets of $1 billion to $5 billion, all of which are located in the western United States). The definition of total return includes appreciation in market value of the stock as well as the actual cash and stock dividends paid to shareholders. The graph assumes that the value of the investment in Columbia’s common stock, the Nasdaq and the Columbia Peer Group was $100 on December 31, 2005, and that all dividends were reinvested.
| Index |
Period Ending | |||||||||||||||||||||||
| 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||
| Columbia Banking System, Inc. |
100.00 | 125.20 | 108.38 | 44.75 | 61.10 | 79.70 | ||||||||||||||||||
| NASDAQ Composite |
100.00 | 110.39 | 122.15 | 73.32 | 106.57 | 125.91 | ||||||||||||||||||
| Columbia Peer Group |
100.00 | 116.61 | 83.98 | 59.34 | 50.77 | 55.14 | ||||||||||||||||||
Source: SNL Financial LC, Charlottesville, VA
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| ITEM 6. | SELECTED FINANCIAL DATA |
Five-Year Summary of Selected Consolidated Financial Data (1)
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in thousands except per share) | ||||||||||||||||||||
| For the Year |
||||||||||||||||||||
| Total revenue |
$ | 217,568 | $ | 145,042 | $ | 134,363 | $ | 136,568 | $ | 122,435 | ||||||||||
| Net interest income |
$ | 164,787 | $ | 115,352 | $ | 119,513 | $ | 108,820 | $ | 97,763 | ||||||||||
| Provision for loan and lease losses, excluding covered loans |
$ | 41,291 | $ | 63,500 | $ | 41,176 | $ | 3,605 | $ | 2,065 | ||||||||||
| Noninterest income |
$ | 52,781 | $ | 29,690 | $ | 14,850 | $ | 27,748 | $ | 24,672 | ||||||||||
| Noninterest expense |
$ | 137,147 | $ | 94,488 | $ | 92,125 | $ | 88,829 | $ | 76,134 | ||||||||||
| Net income (loss) |
$ | 30,784 | $ | (3,968 | ) | $ | 5,968 | $ | 32,381 | $ | 32,103 | |||||||||
| Net income (loss) applicable to common shareholders |
$ | 25,837 | $ | (8,371 | ) | $ | 5,498 | $ | 32,381 | $ | 32,103 | |||||||||
| Per Common Share |
||||||||||||||||||||
| Earnings (loss) (Basic) |
$ | 0.73 | $ | (0.38 | ) | $ | 0.30 | $ | 1.91 | $ | 2.00 | |||||||||
| Earnings (loss) (Diluted) |
$ | 0.72 | $ | (0.38 | ) | $ | 0.30 | $ | 1.89 | $ | 1.98 | |||||||||
| Book Value |
$ | 17.97 | $ | 16.13 | $ | 18.82 | $ | 19.03 | $ | 15.71 | ||||||||||
| Averages |
||||||||||||||||||||
| Total assets |
$ | 4,248,590 | $ | 3,084,421 | $ | 3,134,054 | $ | 2,837,162 | $ | 2,473,404 | ||||||||||
| Interest-earning assets |
$ | 3,583,728 | $ | 2,783,862 | $ | 2,851,555 | $ | 2,599,379 | $ | 2,265,393 | ||||||||||
| Loans |
$ | 2,485,650 | $ | 2,124,574 | $ | 2,264,486 | $ | 1,990,622 | $ | 1,629,616 | ||||||||||
| Securities |
$ | 720,152 | $ | 584,028 | $ | 565,299 | $ | 581,122 | $ | 623,631 | ||||||||||
| Deposits |
$ | 3,270,923 | $ | 2,378,176 | $ | 2,382,484 | $ | 2,242,134 | $ | 1,976,448 | ||||||||||
| Core deposits |
$ | 2,828,246 | $ | 1,945,039 | $ | 1,911,897 | $ | 1,887,391 | $ | 1,664,247 | ||||||||||
| Shareholders’ equity |
$ | 668,469 | $ | 462,127 | $ | 354,387 | $ | 289,297 | $ | 237,843 | ||||||||||
| Financial Ratios |
||||||||||||||||||||
| Net interest margin |
4.76 | % | 4.33 | % | 4.38 | % | 4.35 | % | 4.49 | % | ||||||||||
| Return on average assets |
0.72 | % | (0.13 | %) | 0.19 | % | 1.14 | % | 1.30 | % | ||||||||||
| Return on average common equity |
4.15 | % | (2.16 | %) | 1.59 | % | 11.19 | % | 13.50 | % | ||||||||||
| Efficiency ratio (tax equivalent) (2) |
67.56 | % | 61.53 | % | 59.88 | % | 61.33 | % | 58.95 | % | ||||||||||
| Average equity to average assets |
15.73 | % | 14.98 | % | 11.31 | % | 10.20 | % | 9.62 | % | ||||||||||
| At Year End |
||||||||||||||||||||
| Total assets |
$ | 4,256,363 | $ | 3,200,930 | $ | 3,097,079 | $ | 3,178,713 | $ | 2,553,131 | ||||||||||
| Covered assets, net |
$ | 531,504 | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Loans, excluding covered loans |
$ | 1,915,754 | $ | 2,008,884 | $ | 2,232,332 | $ | 2,282,728 | $ | 1,708,962 | ||||||||||
| Allowance for loan and lease losses |
$ | 60,993 | $ | 53,478 | $ | 42,747 | $ | 26,599 | $ | 20,182 | ||||||||||
| Securities |
$ | 781,774 | $ | 631,645 | $ | 540,525 | $ | 572,973 | $ | 605,133 | ||||||||||
| Deposits |
$ | 3,327,269 | $ | 2,482,705 | $ | 2,382,151 | $ | 2,498,061 | $ | 2,023,351 | ||||||||||
| Core deposits |
$ | 2,998,482 | $ | 2,072,821 | $ | 1,941,047 | $ | 1,996,393 | $ | 1,701,528 | ||||||||||
| Shareholders’ equity |
$ | 706,878 | $ | 528,139 | $ | 415,385 | $ | 341,731 | $ | 252,347 | ||||||||||
| Full-time equivalent employees |
1,092 | 715 | 735 | 775 | 657 | |||||||||||||||
| Banking offices |
84 | 52 | 53 | 55 | 40 | |||||||||||||||
| Nonperforming Assets, Excluding Covered Assets |
||||||||||||||||||||
| Nonaccrual loans |
$ | 89,163 | $ | 110,431 | $ | 106,163 | $ | 14,005 | $ | 2,886 | ||||||||||
| Restructured loans accruing interest |
6,505 | 60 | 587 | 456 | 594 | |||||||||||||||
| Other real estate owned |
30,991 | 19,037 | 2,874 | 181 | — | |||||||||||||||
| Total nonperforming assets, excluding covered assets |
$ | 126,659 | $ | 129,528 | $ | 109,624 | $ | 14,642 | $ | 3,480 | ||||||||||
| Nonperforming loans to year end loans, excluding covered loans |
4.99 | % | 5.50 | % | 4.78 | % | 0.63 | % | 0.20 | % | ||||||||||
| Nonperforming assets to year end assets, excluding covered assets |
3.40 | % | 4.05 | % | 3.54 | % | 0.46 | % | 0.14 | % | ||||||||||
| Allowance for loan and lease losses to year end loans, excluding covered loans |
3.18 | % | 2.66 | % | 1.91 | % | 1.17 | % | 1.18 | % | ||||||||||
| Allowance for loan and lease losses to nonperforming loans, excluding covered loans |
63.75 | % | 48.40 | % | 40.04 | % | 183.94 | % | 579.94 | % | ||||||||||
| Net loan charge-offs |
$ | 33,776 | $ | 52,769 | $ | 25,028 | $ | 380 | $ | 2,712 | ||||||||||
| Risk-Based Capital Ratios |
||||||||||||||||||||
| Total capital |
24.47 | % | 19.60 | % | 14.25 | % | 10.90 | % | 13.23 | % | ||||||||||
| Tier 1 capital |
23.20 | % | 18.34 | % | 12.99 | % | 9.87 | % | 12.21 | % | ||||||||||
| Leverage ratio |
13.99 | % | 14.33 | % | 11.27 | % | 8.54 | % | 9.86 | % | ||||||||||
| (1) | These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report. |
| (2) | Noninterest expense, excluding net cost of operation of other real estate divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gain/loss on sale of investment securities, proceeds from redemption of Visa and Mastercard shares, gain on bank acquisition, incremental interest income accretion on the acquired loan portfolio and the change in FDIC loss sharing asset. |
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Consolidated Five-Year Financial Data (1)
| Years ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
| Interest Income: |
||||||||||||||||||||
| Loans |
$ | 157,292 | $ | 117,062 | $ | 147,830 | $ | 156,253 | $ | 123,998 | ||||||||||
| Taxable securities |
18,276 | 17,300 | 18,852 | 18,614 | 20,018 | |||||||||||||||
| Tax-exempt securities |
9,348 | 8,458 | 7,976 | 7,923 | 7,042 | |||||||||||||||
| Federal funds sold and deposits with banks |
963 | 215 | 402 | 1,427 | 617 | |||||||||||||||
| Total interest income |
185,879 | 143,035 | 175,060 | 184,217 | 151,675 | |||||||||||||||
| Interest Expense: |
||||||||||||||||||||
| Deposits |
16,733 | 23,250 | 45,307 | 59,930 | 40,838 | |||||||||||||||
| Federal Home Loan Bank advances |
2,841 | 2,759 | 7,482 | 11,065 | 10,944 | |||||||||||||||
| Long-term obligations |
1,029 | 1,197 | 1,800 | 2,177 | 1,992 | |||||||||||||||
| Other borrowings |
489 | 477 | 958 | 2,225 | 138 | |||||||||||||||
| Total interest expense |
21,092 | 27,683 | 55,547 | 75,397 | 53,912 | |||||||||||||||
| Net Interest Income |
164,787 | 115,352 | 119,513 | 108,820 | 97,763 | |||||||||||||||
| Provision for loan and lease losses |
41,291 | 63,500 | 41,176 | 3,605 | 2,065 | |||||||||||||||
| Provision for losses on covered loans |
6,055 | — | — | — | — | |||||||||||||||
| Net interest income after provision |
117,441 | 51,852 | 78,337 | 105,215 | 95,698 | |||||||||||||||
| Noninterest income |
52,781 | 29,690 | 14,850 | 27,748 | 24,672 | |||||||||||||||
| Noninterest expense |
137,147 | 94,488 | 92,125 | 88,829 | 76,134 | |||||||||||||||
| Income (loss) before income taxes |
33,075 | (12,946 | ) | 1,062 | 44,134 | 44,236 | ||||||||||||||
| Provision (benefit) for income taxes |
2,291 | (8,978 | ) | (4,906 | ) | 11,753 | 12,133 | |||||||||||||
| Net Income (Loss) |
$ | 30,784 | $ | (3,968 | ) | $ | 5,968 | $ | 32,381 | $ | 32,103 | |||||||||
| Less: Dividends on preferred stock |
4,947 | 4,403 | 470 | — | — | |||||||||||||||
| Net Income (Loss) Applicable to Common Shareholders |
$ | 25,837 | $ | (8,371 | ) | $ | 5,498 | $ | 32,381 | $ | 32,103 | |||||||||
| Per Common Share |
||||||||||||||||||||
| Earnings (loss) basic |
$ | 0.73 | $ | (0.38 | ) | $ | 0.30 | $ | 1.91 | $ | 2.00 | |||||||||
| Earnings (loss) diluted |
$ | 0.72 | $ | (0.38 | ) | $ | 0.30 | $ | 1.89 | $ | 1.98 | |||||||||
| Average number of common shares outstanding (basic) |
35,209 | 21,854 | 17,914 | 16,802 | 15,946 | |||||||||||||||
| Average number of common shares outstanding (diluted) |
35,392 | 21,854 | 18,010 | 16,972 | 16,148 | |||||||||||||||
| Total assets at year end |
$ | 4,256,363 | $ | 3,200,930 | $ | 3,097,079 | $ | 3,178,713 | $ | 2,553,131 | ||||||||||
| Long-term obligations |
$ | 25,735 | $ | 25,669 | $ | 25,603 | $ | 25,519 | $ | 22,378 | ||||||||||
| Cash dividends declared per common share |
$ | 0.04 | $ | 0.07 | $ | 0.58 | $ | 0.66 | $ | 0.57 | ||||||||||
| (1) | These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report. |
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Selected Quarterly Financial Data (1)
The following table presents selected unaudited consolidated quarterly financial data for each quarter of 2010 and 2009. The information contained in this table reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods.
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Year Ended December 31, |
||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
| 2010 |
||||||||||||||||||||
| Total interest income |
$ | 44,287 | $ | 46,148 | $ | 52,075 | $ | 43,369 | $ | 185,879 | ||||||||||
| Total interest expense |
6,013 | 5,416 | 5,110 | 4,553 | 21,092 | |||||||||||||||
| Net interest income |
38,274 | 40,732 | 46,965 | 38,816 | 164,787 | |||||||||||||||
| Provision for loan and lease losses |
15,000 | 13,500 | 9,000 | 3,791 | 41,291 | |||||||||||||||
| Provision for losses on covered loans |
— | — | 453 | 5,602 | 6,055 | |||||||||||||||
| Noninterest income |
18,473 | 13,237 | 5,183 | 15,888 | 52,781 | |||||||||||||||
| Noninterest expense |
33,897 | 34,745 | 33,520 | 34,985 | 137,147 | |||||||||||||||
| Income before income taxes |
7,850 | 5,724 | 9,175 | 10,326 | 33,075 | |||||||||||||||
| Provision (benefit) for income taxes |
(66 | ) | 668 | 3,971 | (2,282 | ) | 2,291 | |||||||||||||
| Net Income |
$ | 7,916 | $ | 5,056 | $ | 5,204 | $ | 12,608 | $ | 30,784 | ||||||||||
| Less: Dividends on preferred stock |
1,107 | 1,110 | 2,730 | — | 4,947 | |||||||||||||||
| Net Income Applicable to Common Shareholders |
$ | 6,809 | $ | 3,946 | $ | 2,474 | $ | 12,608 | $ | 25,837 | ||||||||||
| Per Common Share (2) |
||||||||||||||||||||
| Earnings (basic) |
$ | 0.24 | $ | 0.11 | $ | 0.06 | $ | 0.32 | $ | 0.73 | ||||||||||
| Earnings (diluted) |
$ | 0.24 | $ | 0.11 | $ | 0.06 | $ | 0.32 | $ | 0.72 | ||||||||||
| 2009 |
||||||||||||||||||||
| Total interest income |
$ | 36,029 | $ | 35,530 | $ | 35,700 | $ | 35,776 | $ | 143,035 | ||||||||||
| Total interest expense |
8,126 | 6,999 | 6,582 | 5,976 | 27,683 | |||||||||||||||
| Net interest income |
27,903 | 28,531 | 29,118 | 29,800 | 115,352 | |||||||||||||||
| Provision for loan and lease losses |
11,000 | 21,000 | 16,500 | 15,000 | 63,500 | |||||||||||||||
| Noninterest income |
6,974 | 7,000 | 7,190 | 8,526 | 29,690 | |||||||||||||||
| Noninterest expense |
23,181 | 25,314 | 23,146 | 22,847 | 94,488 | |||||||||||||||
| Income (loss) before income taxes |
696 | (10,783 | ) | (3,338 | ) | 479 | (12,946 | ) | ||||||||||||
| Provision (benefit) for income taxes |
(816 | ) | (5,253 | ) | (1,836 | ) | (1,073 | ) | (8,978 | ) | ||||||||||
| Net Income (Loss) |
$ | 1,512 | $ | (5,530 | ) | $ | (1,502 | ) | $ | 1,552 | $ | (3,968 | ) | |||||||
| Less: Dividends on preferred stock |
1,093 | 1,101 | 1,103 | 1,105 | 4,403 | |||||||||||||||
| Net Income (Loss) Applicable to Common Shareholders |
$ | 419 | $ | (6,631 | ) | $ | (2,605 | ) | $ | 447 | $ | (8,371 | ) | |||||||
| Per Common Share (2) |
||||||||||||||||||||
| Earnings (loss) (basic) |
$ | 0.02 | $ | (0.37 | ) | $ | (0.11 | ) | $ | 0.02 | $ | (0.38 | ) | |||||||
| Earnings (loss) (diluted) |
$ | 0.02 | $ | (0.37 | ) | $ | (0.11 | ) | $ | 0.02 | $ | (0.38 | ) | |||||||
| (1) | These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report. |
| (2) | Due to averaging of shares, quarterly earnings per share may not add up to the totals reported for the full year. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
This discussion should be read in conjunction with our Consolidated Financial Statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date for the previous year.
Critical Accounting Policies
We have established certain accounting policies in preparing our Consolidated Financial Statements that are in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are presented in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. Certain of these policies require the use of judgments, estimates and economic assumptions which may prove inaccurate or are subject to variation that may significantly affect our reported results of operations and financial position for the periods presented or in future periods. Management believes that the judgments, estimates and economic assumptions used in the preparation of the Consolidated Financial Statements are appropriate given the factual circumstances at the time. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) is established to absorb known and inherent losses in our loan and lease portfolio. Our methodology in determining the appropriate level of the ALLL includes components for a general valuation allowance in accordance with the Contingencies topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), a specific valuation allowance in accordance with the Receivables topic of the FASB ASC and an unallocated component. Both quantitative and qualitative factors are considered in determining the appropriate level of the ALLL. Quantitative factors include historical loss experience, delinquency and charge-off trends 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 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.
Business Combinations
The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.
Acquired Impaired Loans
Loans acquired at a discount for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). These loans are recorded at fair value at the time of acquisition. Fair value of acquired impaired
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loans is determined using a discounted cash flow model based on assumptions about the amount and timing of principal and interest payments, principal repayments and estimates of principal defaults, loss given default and current market rates. Estimated credit losses are included in the determination of fair value, therefore, an allowance for loan losses is not recorded on the acquisition date. The excess of expected cash flows at acquisition over the initial investment in acquired loans (“accretable yield”) is recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable. Subsequent to acquisition, the Company aggregates loans into pools of loans with common risk characteristics. Increases in estimated cash flows over those expected at the acquisition date are recognized as interest income, prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. Loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and the purchase price discount on those loans is not recorded as interest income until the timing and amount of future cash flows can be reasonably estimated.
FDIC Loss Sharing Asset
In conjunction with the FDIC-assisted acquisitions, the Bank entered into loss sharing agreements with the FDIC. At the date of the acquisitions, the Company elected to account for amounts receivable under the loss sharing agreements as a loss sharing asset in accordance with the Business Combinations topic of the FASB ASC. Subsequent to the acquisitions, the loss sharing asset is accounted for on the same basis as the related covered assets and is the present value of the cash flows the Company expects to collect from the FDIC under the loss sharing agreements. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC is accreted into noninterest income over the life of the FDIC loss sharing asset. The FDIC loss sharing asset is adjusted for any changes in expected cash flows based on the performance of the covered assets. Any increases in cash flows of those covered assets over those expected will reduce the FDIC loss sharing asset and any decreases in cash flows of the covered assets from those expected will increase the FDIC loss sharing asset. Increases and decreases to the FDIC loss sharing asset are recorded as adjustments to noninterest income.
Valuation and Recoverability of Goodwill
Goodwill represented $109.6 million of our $4.26 billion in total assets and $706.9 million in total shareholders’ equity as of December 31, 2010. The Company has one, single reporting unit. We review goodwill for impairment annually, on September 30th and also test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our 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 reporting unit with its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the reporting unit, goodwill is not deemed to be impaired, and no further testing is necessary. If the carrying amount of the reporting unit were to exceed the fair value of the reporting unit, we would perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. Specifically, we would allocate the fair value of the reporting unit to all of the assets and liabilities of the reporting unit in a hypothetical calculation that would determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference.
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The accounting estimates related to our goodwill require us to make considerable assumptions about fair values. Our assumptions regarding fair values require significant judgment about economic factors, industry factors and technology considerations, as well as our views regarding the growth and earnings prospects of the retail banking unit. Changes in these judgments, either individually or collectively, may have a significant effect on the estimated fair values.
Based on the results of the annual goodwill impairment test, we determined that no goodwill impairment charges were required at September 30, 2010. As of December 31, 2010 we determined there were no events or circumstances which would more likely than not reduce the fair value of our reporting unit below its carrying amount.
Even though we determined that there was no goodwill impairment during 2010, additional adverse changes in the operating environment for the financial services industry may result in a future impairment charge.
Please refer to Note 11 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report for further discussion.
2010 Overview
| • | Consolidated net income applicable to common shareholders for 2010 was $25.8 million, or $0.72 per diluted common share, compared with a net loss of $8.4 million, or $0.38 per diluted common share, in 2009. Net income (loss) applicable to common shareholders reflects net income (loss) less dividends on preferred stock related to the Company’s participation in the U.S. Department of the Treasury’s Capital Purchase Program. The increase in net income applicable to common shareholders is primarily due to lower provision expense for loan and lease losses recorded during 2010, the August redemption of the preferred stock issued to the U.S. Department of the Treasury, and the two FDIC assisted acquisitions. |
| • | Noninterest income was $52.8 million for 2010, an increase from $29.7 million for 2009. Noninterest income was significantly affected by the two FDIC assisted acquisitions. The Company recognized a net of tax bargain purchase gain through noninterest income of $9.8 million related to the American Marine Bank transaction. In addition, noninterest income increased $4.9 million due to the impact of recognizing the estimated economic benefit of the loss sharing asset stemming from the Company’s loss share agreements with the FDIC. Finally, service charges and other fees increased $9.5 million due to additional transaction volume associated with a larger customer base. |
| • | Total assets at December 31, 2010 were $4.26 billion, up 33% from $3.20 billion at the end of 2009. At December 31, 2010 net assets acquired covered by FDIC loss share agreements (referred to as “covered” assets or loans) represented $531.5 million and the loss sharing asset associated with the Company’s loss share agreements with the FDIC was $206.0 million. The allowance for noncovered loan and lease losses increased to $61.0 million at December 31, 2010 from $53.5 million at December 31, 2009. The Company’s allowance amounts to 3.18% of total uncovered loans, compared with 2.66% at the end of 2009. Separate from the allowance for noncovered loan and lease losses, the Company recorded expense of $6.1 million and $0 through the provision for losses on covered loans in 2010 and 2009 respectively. The impact to earnings of the $6.1 million of provision expense for covered loans is offset through noninterest income by a $4.9 million increase in the loss sharing asset related to the Company’s loss share agreements with the FDIC. |
| • | Nonperforming assets totaled $126.7 million as of December 31, 2010, compared with $129.5 million at December 31, 2009. Net loan charge-offs were $33.8 million in 2010, compared with $52.8 million in 2009. The Company’s commercial business portfolio experienced a $13.4 million increase in nonaccrual loans with a December 31, 2010 balance of $32.4 million. The increase in nonaccrual loans within the commercial business portfolio was more than offset by a $38.3 million decline in the real estate construction portfolio. |
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| • | Investment securities available for sale totaled $763.9 million at December 31, 2010 compared to $620.0 million at December 31, 2009. |
| • | Deposits totaled $3.33 billion at December 31, 2010 compared to $2.48 billion at December 31, 2009. Core deposits totaled $3.00 billion at December 31, 2010, comprising 90% of total deposits compared to $2.07 billion, or 83%, of total deposits at December 31, 2009. |
| • | The Company is well capitalized with a total risk-based capital ratio of 24.47% at December 31, 2010 compared to 19.60% at December 31, 2009. These ratios reflect the net proceeds to the Company of $229.1 million from an underwritten public offering of common shares completed in May, 2010 as well as the payment of $76.9 million for the retirement of the preferred shares issued under the U.S. Department of the Treasury’s Capital Purchase Program and $3.3 million paid by the Company to retire the warrants associated with the preferred shares. |
Business Combinations
On January 22, 2010, Columbia State Bank acquired all of the deposits and certain assets of Columbia River Bank from the FDIC, which was appointed receiver of Columbia River Bank. Columbia State Bank acquired approximately $912.9 million in assets and approximately $893.4 million in deposits located in 21 branches in Oregon and Washington. Columbia River Bank’s loans and other real estate assets acquired of approximately $696.1 million are subject to a loss-sharing agreement with the FDIC. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $43.9 million on net assets acquired.
On January 29, 2010 Columbia State Bank acquired substantially all of the deposits and assets of American Marine Bank from the FDIC, which was appointed receiver of American Marine Bank. Columbia State Bank acquired approximately $307.8 million in assets and approximately $254.0 million in deposits located in 11 branches on the western Puget Sound. American Marine Bank’s loans and other real estate assets acquired of approximately $257.5 million is subject to a loss-sharing agreement with the FDIC. In addition, Columbia State Bank will continue to operate the Trust and Wealth Management Division of American Marine Bank. The Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $23.0 million on net assets acquired.
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RESULTS OF OPERATIONS
Summary
A summary of the Company’s results of operations on for each of the last five years ended December 31 follows:
| Year Ended 2010 |
Increase (Decrease) |
Year Ended 2009 |
Increase (Decrease) |
Years ended December 31, | ||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) |
||||||||||||||||||||||||||||||||||||
| Interest income |
$ | 185,879 | $ | 42,844 | 30 | $ | 143,035 | $ | (32,025 | ) | (18 | ) | $ | 175,060 | $ | 184,217 | $ | 151,675 | ||||||||||||||||||
| Interest expense |
21,092 | (6,591 | ) | (24 | ) | 27,683 | (27,864 | ) | (50 | ) | 55,547 | 75,397 | 53,912 | |||||||||||||||||||||||
| Net interest income |
164,787 | 49,435 | 43 | 115,352 | (4,161 | ) | (3 | ) | 119,513 | 108,820 | 97,763 | |||||||||||||||||||||||||
| Provision for loan and lease losses |
41,291 | (22,209 | ) | (35 | ) | 63,500 | 22,324 | 54 | 41,176 | 3,605 | 2,065 | |||||||||||||||||||||||||
| Provision for losses on covered loans |
6,055 | 6,055 | 100 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Noninterest income |
52,781 | 23,091 | 78 | 29,690 | 14,840 | 100 | 14,850 | 27,748 | 24,672 | |||||||||||||||||||||||||||
| Noninterest expense: |
||||||||||||||||||||||||||||||||||||
| Staff expense |
69,780 | 22,505 | 48 | 47,275 | (2,040 | ) | (4 | ) | 49,315 | 46,703 | 38,769 | |||||||||||||||||||||||||
| Other expense |
67,367 | 20,154 | 43 | 47,213 | 4,403 | 10 | 42,810 | 42,126 | 37,365 | |||||||||||||||||||||||||||
| Total |
137,147 | 42,659 | 45 | 94,488 | 2,363 | 3 | 92,125 | 88,829 | 76,134 | |||||||||||||||||||||||||||
| Income (loss) before income taxes |
33,075 | 46,021 | (355 | ) | (12,946 | ) | (14,008 | ) | (1,319 | ) | 1,062 | 44,134 | 44,236 | |||||||||||||||||||||||
| Provision (benefit) for income taxes |
2,291 | 11,269 | (126 | ) | (8,978 | ) | (4,072 | ) | 83 | (4,906 | ) | 11,753 | 12,133 | |||||||||||||||||||||||
| Net income (loss) |
$ | 30,784 | $ | 34,752 | (876 | ) | $ | (3,968 | ) | $ | (9,936 | ) | (166 | ) | $ | 5,968 | $ | 32,381 | $ | 32,103 | ||||||||||||||||
| Less: Dividends on preferred stock |
4,947 | 544 | 12 | 4,403 | 3,933 | NM | 470 | — | — | |||||||||||||||||||||||||||
| Net income (loss) applicable to common shareholders |
$ | 25,837 | $ | 34,208 | (409 | ) | $ | (8,371 | ) | $ | (13,869 | ) | (252 | ) | $ | 5,498 | $ | 32,381 | $ | 32,103 | ||||||||||||||||
| Earnings (loss) per common share, diluted |
$ | 0.72 | $ | 1.10 | (289 | ) | $ | (0.38 | ) | $ | (0.68 | ) | (227 | ) | $ | 0.30 | $ | 1.89 | $ | 1.98 | ||||||||||||||||
NM –Not Meaningful
Net Interest Income
Net interest income is the difference between interest income and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total interest-earning assets is referred to as the net interest margin, which represents the average net effective yield on interest-earning assets.
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The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to interest-earning liabilities:
Net Interest Income Summary
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Average Balances (1) |
Interest Earned/ Paid |
Average Rate |
Average Balances (1) |
Interest Earned/ Paid |
Average Rate |
Average Balances (1) |
Interest Earned/ Paid |
Average Rate |
||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||||||||||||||
| Loans (1)(2) |
$ | 2,485,650 | $ | 157,835 | 6.35 | % | $ | 2,124,574 | $ | 117,497 | 5.53 | % | $ | 2,264,486 | $ | 148,240 | 6.55 | % | ||||||||||||||||||
| Taxable securities |
491,306 | 18,276 | 3.72 | % | 386,571 | 17,300 | 4.48 | % | 379,052 | 18,852 | 4.97 | % | ||||||||||||||||||||||||
| Tax exempt securities (2) |
228,846 | 14,505 | 6.34 | % | 197,457 | 13,151 | 6.66 | % | 186,246 | 12,868 | 6.91 | % | ||||||||||||||||||||||||
| Interest-earning deposits with banks and federal funds sold |
377,926 | 963 | 0.25 | % | 75,260 | 215 | 0.29 | % | 21,771 | 402 | 1.85 | % | ||||||||||||||||||||||||
| Total interest-earning assets |
3,583,728 | 191,579 | 5.35 | % | 2,783,862 | 148,163 | 5.32 | % | 2,851,555 | 180,362 | 6.33 | % | ||||||||||||||||||||||||
| Other earning assets |
51,446 | 49,488 | 47,753 | |||||||||||||||||||||||||||||||||
| Noninterest-earning assets |
613,416 | 251,071 | 234,746 | |||||||||||||||||||||||||||||||||
| Total assets |
$ | 4,248,590 | $ | 3,084,421 | $ | 3,134,054 | ||||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||||||||||||||
| Certificates of deposit |
$ | 763,829 | $ | 8,705 | 1.14 | % | $ | 706,799 | $ | 15,931 | 2.25 | % | $ | 780,092 | $ | 28,120 | 3.60 | % | ||||||||||||||||||
| Savings accounts |
199,117 | 287 | 0.14 | % | 133,348 | 352 | 0.26 | % | 118,073 | 437 | 0.37 | % | ||||||||||||||||||||||||
| Interest-bearing demand |
637,983 | 2,157 | 0.34 | % | 458,450 | 2,221 | 0.48 | % | 445,449 | 6,009 | 1.35 | % | ||||||||||||||||||||||||
| Money market accounts |
851,673 | 5,584 | 0.66 | % | 568,320 | 4,746 | 0.84 | % | 578,123 | 10,741 | 1.86 | % | ||||||||||||||||||||||||
| Total interest-bearing deposits |
2,452,602 | 16,733 | 0.68 | % | 1,866,917 | 23,250 | 1.25 | % | 1,921,737 | 45,307 | 2.36 | % | ||||||||||||||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank borrowings |
122,860 | 2,841 | 2.31 | % | 149,416 | 2,759 | 1.85 | % | 297,193 | 7,573 | 2.55 | % | ||||||||||||||||||||||||
| Long-term subordinated debt |
25,701 | 1,029 | 4.00 | % | 25,635 | 1,197 | 4.67 | % | 25,558 | 1,800 | 7.04 | % | ||||||||||||||||||||||||
| Other borrowings and interest-bearing liabilities |
24,881 | 489 | 1.96 | % | 25,046 | 477 | 1.90 | % | 32,934 | 867 | 2.63 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities |
2,626,044 | 21,092 | 0.80 | % | 2,067,014 | 27,683 | 1.34 | % | 2,277,422 | 55,547 | 2.44 | % | ||||||||||||||||||||||||
| Noninterest-bearing deposits |
818,321 | 511,259 | 460,747 | |||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities |
135,756 | 44,021 | 41,498 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity |
668,469 | 462,127 | 354,387 | |||||||||||||||||||||||||||||||||
| Total liabilities & shareholders’ equity |
$ | 4,248,590 | $ | 3,084,421 | $ | 3,134,054 | ||||||||||||||||||||||||||||||
| Net interest income |
$ | 170,487 | $ | 120,480 | $ | 124,815 | ||||||||||||||||||||||||||||||
| Net interest spread |
4.55 | % | 3.98 | % | 3.89 | % | ||||||||||||||||||||||||||||||
| Net interest margin |
4.76 | % | 4.33 | % | 4.38 | % | ||||||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
136.47 | % | 134.68 | % | 125.21 | % | ||||||||||||||||||||||||||||||
| (1) | Nonaccrual loans were included in loans. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $2.1 million in 2010, $2.8 million in 2009, $3.5 million in 2008. |
| (2) | Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%. |
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Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and the mix of interest-earning assets and interest-bearing liabilities. The following table shows changes in net interest income on a fully taxable-equivalent basis between 2010 and 2009, as well as between 2009 and 2008 broken down between volume and rate. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
Changes in Net Interest Income
| 2010 compared to 2009 Increase (Decrease) Due to |
2009 compared to 2008 Increase (Decrease) Due to |
|||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Interest Income |
||||||||||||||||||||||||
| Loans |
$ | 21,550 | $ | 18,788 | $ | 40,338 | $ | (8,754 | ) | $ | (21,989 | ) | $ | (30,743 | ) | |||||||||
| Taxable securities |
4,200 | (3,224 | ) | 976 | 368 | (1,920 | ) | (1,552 | ) | |||||||||||||||
| Tax-exempt securities |
2,014 | (660 | ) | 1,354 | 757 | (474 | ) | 283 | ||||||||||||||||
| Interest earning deposits with banks and |
773 | (25 | ) | 748 | 367 | (554 | ) | (187 | ) | |||||||||||||||
| Interest income |
$ | 28,537 | $ | 14,879 | $ | 43,416 | $ | (7,262 | ) | $ | (24,937 | ) | $ | (32,199 | ) | |||||||||
| Interest Expense |
||||||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||
| Certificates of deposit |
$ | 1,196 | $ | (8,422 | ) | $ | (7,226 | ) | $ | (2,444 | ) | $ | (9,745 | ) | $ | (12,189 | ) | |||||||
| Savings accounts |
133 | (198 | ) | (65 | ) | 51 | (136 | ) | (85 | ) | ||||||||||||||
| Interest-bearing demand |
721 | (785 | ) | (64 | ) | 170 | (3,958 | ) | (3,788 | ) | ||||||||||||||
| Money market accounts |
2,012 | (1,174 | ) | 838 | (179 | ) | (5,816 | ) | (5,995 | ) | ||||||||||||||
| Total interest on deposits |
4,062 | (10,579 | ) | (6,517 | ) | (2,402 | ) | (19,655 | ) | (22,057 | ) | |||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank borrowings |
(542 | ) | 624 | 82 | (3,098 | ) | (1,716 | ) | (4,814 | ) | ||||||||||||||
| Long-term subordinated debt |
3 | (171 | ) | (168 | ) | 5 | (608 | ) | (603 | ) | ||||||||||||||
| Other borrowings and interest-bearing liabilities |
(3 | ) | 15 | 12 | (181 | ) | (209 | ) | (390 | ) | ||||||||||||||
| Interest expense |
$ | 3,520 | $ | (10,111 | ) | $ | (6,591 | ) | $ | (5,676 | ) | $ | (22,188 | ) | $ | (27,864 | ) | |||||||
| $ | 25,017 | $ | 24,990 | $ | 50,007 | $ | (1,586 | ) | $ | (2,749 | ) | $ | (4,335 | ) | ||||||||||
Taxable-equivalent net interest income totaled $170.5 million in 2010, compared with $120.5 million for 2009. Relatively flat interest rates from 2009 to 2010 resulted in a slight uptick in the yield on interest earning assets. The significant increase in net interest income during 2010 resulted from a combination of a higher volume of total interest earning assets and a significant reduction in the average rate paid on deposits. The yield on earning assets increased 3 basis points while the cost of interest-bearing liabilities declined 54 basis points. The net effect of the additional volume of interest earning assets and interest bearing liabilities was an increase in net interest income of $25.0 million. The net interest margin was favorably impacted by the acquired loan portfolios, which interest income is accounted for on a level yield basis over the remaining life of the loan. The nuances of accounting for loans on a level yield basis can introduce volatility into the net interest margin, but generally for the Company’s acquired portfolios, the result is an increased net interest margin.
The net interest margin was down slightly in 2009 compared to 2008, declining 5 basis points to 4.33% from 4.38%. Average loan yields decreased 102 basis points with average deposit costs decreasing 111 basis points from 2008. In addition, average borrowing costs from the Federal Home Loan Bank and Federal Reserve Bank decreased 70 basis points.
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Provision for Loan and Lease Losses
The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses and provision for loan and lease losses. The provision is the expense recognized in the consolidated statements of income to adjust the allowance to the levels deemed appropriate by management, as determined through its application of the Company’s allowance methodology procedures. Impairment valuation adjustments and allowance for loan and lease losses on acquired loans, including those subject to the Company’s loss share agreements with the FDIC, are accounted for separately from the allowance for loan and lease losses. 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 Commitments and Letters of Credit” and “Critical Accounting Policies” sections of this discussion.
For noncovered loans, the Company recorded expense of $41.3 million and $63.5 million through the provision for loan and lease losses in 2010 and 2009, respectively. The provision recorded in 2010 reflects management’s ongoing assessment of the credit quality of the Company’s loan portfolio, which is impacted by various economic trends, including the protracted recovery of the Pacific Northwest economy. Additional factors affecting the provision include credit quality migration, size and composition of the loan portfolio and changes in the economic environment during the period. See “Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit” section of this discussion for further information on factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.
The Company recorded expense of $6.1 million and $0 through the provision for losses on covered loans in 2010 and 2009 respectively. The impact to earnings of the $6.1 million of provision expense for covered loans is offset through noninterest income by a $4.9 million increase in the loss sharing asset related to the Company’s loss share agreements with the FDIC.
For the years ended December 31, 2010, 2009 and 2008, net loan charge-offs amounted to $33.8 million, $52.8 million, and $25.0 million, respectively. Loans in the real estate construction portfolio accounted for 34% of the 2010 net charge-offs while loans in the commercial business portfolio accounted for an additional 37% of the 2010 net charge-offs compared to 69% and 23%, respectively, in 2009.
Noninterest Income
Noninterest income for the year totaled $52.8 million, an increase of $23.1 million from 2009. Noninterest income represented 24% of total revenues in 2010, compared with 20% and 11% in 2009 and 2008, respectively. Noninterest income for 2010 included the net of tax bargain purchase gain of $9.8 million related to the American Marine Bank transaction. In addition, the Company accounts for changes in the FDIC loss sharing asset through noninterest income. As a result of the change in the loss sharing asset during 2010, noninterest income was increased $4.9 million. Removing the effect in 2010 of the aforementioned bargain purchase gain and the change in loss sharing asset, noninterest income would have increased $8.4 million from 2009, due primarily to an increase in the service charges and other fees line item. Service charges and other fees are volume driven and the increase is attributed to a larger customer base rather than higher incremental per transaction fees. Management believes it is useful for investors to understand the components of the two FDIC assisted transactions that impact 2010 noninterest income.
2008 noninterest income was lower than 2009 primarily due to the $19.5 million impairment charge on investment securities described below, partially offset by the $3.0 million gain from the redemption of Visa and Mastercard shares described below. Excluding securities impairment charges of $19.5 million in 2008, net gains on sales of securities of $1.1 million in 2009 and $846 thousand in 2008 and proceeds from redemption of Visa and Mastercard stock of $49 thousand in 2009 and $3.0 million in 2008, noninterest income in 2009 was relatively flat when compared to 2008. Management believes that it is useful for investors to understand the impact of the impairment charge, net gains on sales of securities and proceeds from redemption of Visa and Mastercard stock on the Company’s results of operations.
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The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
| Years ended December 31, | ||||||||||||||||||||||||||||
| 2010 | $ Change |
% Change |
2009 | $ Change |
% Change |
2008 | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Fees and Other Income |
||||||||||||||||||||||||||||
| Gain on bank acquisitions |
$ | 9,818 | $ | 9,818 | 100 | % | $ | — | $ | — | 0 | % | $ | — | ||||||||||||||
| Service charges, loan fees and other fees |
24,698 | 9,517 | 63 | % | 15,181 | 368 | 2 | % | 14,813 | |||||||||||||||||||
| Merchant services fees |
7,502 | 181 | 2 | % | 7,321 | (719 | ) | -9 | % | 8,040 | ||||||||||||||||||
| Redemption of Visa and Mastercard shares |
— | (49 | ) | -100 | % | 49 | (2,979 | ) | 100 | % | 3,028 | |||||||||||||||||
| Gain on sale of investment securities, net |
58 | (1,019 | ) | -95 | % | 1,077 | 231 | 100 | % | 846 | ||||||||||||||||||
| Impairment charge on investment securities |
— | — | 0 | % | — | 19,541 | -100 | % | (19,541 | ) | ||||||||||||||||||
| Bank owned life insurance (BOLI) |
2,041 | 18 | 1 | % | 2,023 | (52 | ) | -3 | % | 2,075 | ||||||||||||||||||
| Change in indemnification asset |
4,908 | 4,908 | 100 | % | — | — | 0 | % | — | |||||||||||||||||||
| Other Income |
3,756 | (283 | ) | -7 | % | 4,039 | (1,550 | ) | -28 | % | 5,589 | |||||||||||||||||
| Total noninterest income |
$ | 52,781 | $ | 23,091 | 78 | % | $ | 29,690 | $ | 14,840 | 100 | % | $ | 14,850 | ||||||||||||||
Service charges, loan fees and other fees increased $9.5 million in 2010 over 2009, or 63%, due to higher transaction volumes. Service charges, loan fees and other fees increased $368 thousand in 2009 over 2008, or 2%.
Merchant services fees increased $181 thousand in 2010 over 2009, or 2%. Merchant services fees declined $719 thousand in 2009 over 2008, or 9%. Even though for 2010, merchant services fees increased from the prior year, they were still below the level of 2008 fee income. These reductions reflect lower volumes of merchant activity.
Proceeds from the redemption of Visa and Mastercard shares totaled $49 thousand and $3.0 million in 2009 and 2008, respectively. There was no redemption of these shares in 2010.
The impairment charge on investment securities was $19.5 million in 2008 due to the impairment charge on Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) preferred stock resulting from these government-sponsored enterprises being placed into conservatorship in a plan announced by the U.S. Treasury Department (“Treasury”) and the Federal Housing Finance Agency (“FHFA”). There was no impairment charge on investment securities in 2010 or 2009. During the fourth quarter of 2009, all of the Company’s Freddie Mac and Fannie Mae preferred stock was sold resulting in a net gain on sale of $166 thousand.
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Table of Contents
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, | ||||||||||||||||||||||||||||
| 2010 | $ Change |
% Change |
2009 | $ Change |
% Change |
2008 | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Gain on disposal of assets |
$ | 118 | $ | 4 | 4 | % | $ | 114 | $ | (378 | ) | -77 | % | $ | 492 | |||||||||||||
| Mortgage banking |
450 | 68 | 18 | % | 382 | (246 | ) | -39 | % | 628 | ||||||||||||||||||
| Cash management 12b-1 fees |
11 | (234 | ) | -96 | % | 245 | (221 | ) | -47 | % | 466 | |||||||||||||||||
| Letter of credit fees |
432 | (96 | ) | -18 | % | 528 | 101 | 24 | % | 427 | ||||||||||||||||||
| Late charges |
456 | 149 | 49 | % | 307 | (31 | ) | -9 | % | 338 | ||||||||||||||||||
| Currency exchange income |
360 | 67 | 23 | % | 293 | (63 | ) | -18 | % | 356 | ||||||||||||||||||
| New Markets Tax Credit dividend |
71 | 5 | 8 | % | 66 | (8 | ) | -11 | % | 74 | ||||||||||||||||||
| Miscellaneous fees on loans |
984 | 142 | 17 | % | 842 | (73 | ) | -8 | % | 915 | ||||||||||||||||||
| Interest rate swap income |
428 | 163 | 62 | % | 265 | (382 | ) | -59 | % | 647 | ||||||||||||||||||
| Credit card fees |
183 | 56 | 44 | % | 127 | (15 | ) | -11 | % | 142 | ||||||||||||||||||
| Life insurance death benefit |
— | — | 0 | % | — | (612 | ) | 100 | % | 612 | ||||||||||||||||||
| Miscellaneous |
263 | (607 | ) | -70 | % | 870 | 378 | 77 | % | 492 | ||||||||||||||||||
| Total noninterest income |
$ | 3,756 | $ | (283 | ) | -7 | % | $ | 4,039 | $ | (1,550 | ) | -28 | % | $ | 5,589 | ||||||||||||
Included in gain on disposal of assets are amounts related to the sale and lease-back of two buildings which occurred in September 2004. The resulting $1.3 million gain on the sale was deferred and recognized over the life of the leases, the unamortized gain balance at December 31, 2010 and 2009 was $317 thousand and $400 thousand, respectively, and is included in other liabilities on our consolidated balance sheets. During 2010, 2009 and 2008 the Company recognized amortized gains associated with the sale and lease-back transaction of $83 thousand per year. The decrease in other noninterest income was primarily due to the reductions in cash management fee income and letter of credit fees.
Noninterest Expense
Noninterest expense was $137.1 million in 2010, an increase of $42.7 million, or 45%, over 2009. Noninterest expense increased $2.4 million, or 3%, in 2009 over 2008.
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, | ||||||||||||||||||||||||||||
| 2010 | $ Change |
% Change |
2009 | $ Change |
% Change |
2008 | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Compensation and employee benefits |
$ | 69,780 | $ | 22,505 | 48 | % | $ | 47,275 | $ | (2,040 | ) | -4 | % | $ | 49,315 | |||||||||||||
| All other noninterest expense: |
||||||||||||||||||||||||||||
| Occupancy |
16,814 | 4,686 | 39 | % | 12,128 | (710 | ) | -6 | % | 12,838 | ||||||||||||||||||
| Merchant processing |
4,364 | 915 | 27 | % | 3,449 | (109 | ) | -3 | % | 3,558 | ||||||||||||||||||
| Advertising and promotion |
3,081 | 1,138 | 59 | % | 1,943 | (381 | ) | -16 | % | 2,324 | ||||||||||||||||||
| Data processing |
8,769 | 3,287 | 60 | % | 5,482 | 469 | 9 | % | 5,013 | |||||||||||||||||||
| Legal and professional services |
5,684 | 1,813 | 47 | % | 3,871 | 1,902 | 97 | % | 1,969 | |||||||||||||||||||
| Taxes, license and fees |
2,858 | 380 | 15 | % | 2,478 | (439 | ) | -15 | % | 2,917 | ||||||||||||||||||
| Regulatory premiums |
6,485 | 708 | 12 | % | 5,777 | 3,636 | 170 | % | 2,141 | |||||||||||||||||||
| Net cost operation of other real estate owned |
787 | (74 | ) | -9 | % | 861 | 910 | -1857 | % | (49 | ) | |||||||||||||||||
| Amortization of intangibles |
3,922 | 2,877 | 275 | % | 1,045 | (97 | ) | -8 | % | 1,142 | ||||||||||||||||||
| Other |
14,603 | 4,424 | 43 | % | 10,179 | (778 | ) | -7 | % | 10,957 | ||||||||||||||||||
| Total all other noninterest expense |
67,367 | 20,154 | 43 | % | 47,213 | 4,403 | 10 | % | 42,810 | |||||||||||||||||||
| Total noninterest expense |
$ | 137,147 | $ | 42,659 | 45 | % | $ | 94,488 | $ | 2,363 | 3 | % | $ | 92,125 | ||||||||||||||
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Compensation and employee benefits expense increased to $69.8 million, or 48% in 2010 from $47.3 million in 2009 reflecting staffing increases in the current year related to the two FDIC assisted acquisitions as well as the addition of teams of bankers in conjunction with the execution of our de novo expansion strategy. Compensation and employee benefits expense decreased 4% in 2009 from 2008, reflecting the Company’s limited expansion during the prior year. Full-time equivalent staff increased to1,092 at December 31, 2010 from 715 at December 31, 2009 and 735 at December 31, 2008.
The remaining noninterest expense categories increased $20.2 million, or 43%, between 2009 and 2010. Occupancy expense increased $4.7 million due to significantly more branch locations. Advertising and promotion expense was up 59% in 2010 from the prior year as a result of the Company’s marketing efforts to establish its brand in newly served market areas. Data processing expense increased 60% due to higher transaction volumes and conversion expenses stemming from the two FDIC assisted transactions. Amortization of intangibles expense increased $2.9 million, or 275%, as a result of the core deposit intangible recorded in conjunction with the two FDIC assisted transactions. Finally, legal and professional services expense increased $1.8 million as the Company continues to incur significant expense while working toward the resolution of nonperforming and covered assets.
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, | ||||||||||||||||||||||||||||
| 2010 | $ Change |
% Change |
2009 | $ Change |
% Change |
2008 | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| CRA partnership investment expense (1) |
$ | 269 | $ | (232 | ) | -46 | % | $ | 501 | $ | (167 | ) | -25 | % | $ | 668 | ||||||||||||
| Software support & maintenance |
1,057 | 418 | 65 | % | 639 | (74 | ) | -10 | % | 713 | ||||||||||||||||||
| Federal Reserve Bank processing fees |
328 | 1 | 0 | % | 327 | (95 | ) | -23 | % | 422 | ||||||||||||||||||
| Supplies |
1,447 | 558 | 63 | % | 889 | (175 | ) | -16 | % | 1,064 | ||||||||||||||||||
| Postage |
1,769 | 524 | 42 | % | 1,245 | (175 | ) | -12 | % | 1,420 | ||||||||||||||||||
| Sponsorships & charitable contributions |
764 | 166 | 28 | % | 598 | (44 | ) | -7 | % | 642 | ||||||||||||||||||
| Travel |
962 | 560 | 139 | % | 402 | (69 | ) | -15 | % | 471 | ||||||||||||||||||
| Investor relations |
180 | (24 | ) | -12 | % | 204 | 22 | 12 | % | 182 | ||||||||||||||||||
| Insurance |
781 | 281 | 56 | % | 500 | (5 | ) | -1 | % | 505 | ||||||||||||||||||
| Director expenses |
441 | 1 | 0 | % | 440 | (13 | ) | -3 | % | 453 | ||||||||||||||||||
| Employee expenses |
472 | 122 | 35 | % | 350 | (249 | ) | -42 | % | 599 | ||||||||||||||||||
| ATM Network |
842 | 247 | 42 | % | 595 | (64 | ) | -10 | % | 659 | ||||||||||||||||||
| Miscellaneous |
5,291 | 1,802 | 52 | % | 3,489 | 330 | 10 | % | 3,159 | |||||||||||||||||||
| Total other noninterest expense |
$ | 14,603 | $ | 4,424 | 43 | % | $ | 10,179 | $ | (778 | ) | -7 | % | $ | 10,957 | |||||||||||||
| (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 year ended December 31, 2010, $511 thousand of such credits was taken as a reduction in our current period income tax expense. In addition, we recognized a tax benefit of $97 thousand associated with this investment expense during the twelve months ended December 31, 2010. |
Income Tax
For the years ended December 31, 2010, 2009 and 2008 we recorded an income tax provision of $2.3 million and income tax benefits of $9.0 million and $4.9 million, respectively. The effective tax rate was 7% in 2010 and the effective tax benefit was 69% in 2009 and 463% in 2008. For additional information, see Note 16 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. Our effective tax rate is less than our statutory rate of 36.02% and continues to be much lower than our historical range of 24% to 28% primarily due to 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.
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Table of Contents
Financial Condition
Our total assets increased 33% to $4.26 billion at December 31, 2010 from $3.20 billion at December 31, 2009. Interest-earning deposits with bank balances increased $209.1 million. The inability to prepay advances without significant penalty from the Federal Home Loan Bank contributed to this increase. Our investment portfolio increased 23% or $143.8 million. This increase was primarily a result of investment security purchases in the fourth quarter of 2010. The loan portfolio increased 21% or $423.9 million to $2.43 billion. The increase in the loan portfolio can be attributed to the two FDIC-assisted transactions. Excluding the acquired loans, the legacy portfolio declined $93.1 million due to a combination of loan payoffs, pay downs, reduced demand from qualified borrowers, and loan charge-offs. Property, plant and equipment, net, increased $30.4 million, of which $21.9 million was related to the purchase of 18 branches from the FDIC in connection with the acquisitions of Columbia River Bank and American Marine Bank. Deposit balances increased $844.6 million or 34% to $3.33 billion and borrowings increased 16% to $145.0 million. The increase in borrowings is due to Federal Home Loan Bank advances assumed in conjunction with the two FDIC assisted transactions.
Investment Portfolio
We invest in securities to generate revenues for the Company, to manage liquidity while minimizing interest rate risk and to provide collateral for certain public deposits and short-term borrowings. The amortized cost amounts represent the Company’s original cost for the investments, adjusted for accumulated amortization or accretion of any yield adjustments related to the security. The estimated fair values are the amounts we believe the securities could be sold for as of the dates indicated. As of December 31, 2010 we had 75 available for sale securities in an unrealized loss position. Based on past experience with these types of securities and our own financial performance, we do not intend to sell any impaired securities nor does available evidence suggest it is more likely than not that management will be required to sell any impaired securities before the recovery of the amortized cost basis. We review these investments for other-than-temporary impairment on an ongoing basis.
Purchases during 2010 totaled $179.3 million while maturities and repayments and sales totaled $92.8 million compared to purchases of $162.4 million and maturities and repayments of $67.7 million during 2009. At December 31, 2010 U.S. Government agency and government-sponsored enterprise mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) comprised 67% of our investment portfolio and state and municipal securities were 33%. Our entire investment portfolio is categorized as available for sale and carried on our balance sheet at fair value. The average duration of our investment portfolio was approximately 3 years and 11 months at December 31, 2010. For further information on our investment portfolio see Note 5 of the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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Table of Contents
The following table presents the contractual maturities and weighted average yield of our investment portfolio:
Securities Available for Sale
| December 31, 2010 | ||||||||||||
| Amortized Cost |
Fair Value |
Yield | ||||||||||
| (dollars in thousands) | ||||||||||||
| U.S. Government agency and government-sponsored enterprise mortgage-backed securities & collateralized mortgage obligations (1) |
||||||||||||
| Over 1 through 5 years |
$ | 33,074 | $ | 34,245 | 4.39 | % | ||||||
| Over 5 through 10 years |
99,202 | 101,003 | 3.32 | % | ||||||||
| Over 10 years |
361,210 | 373,363 | 3.26 | % | ||||||||
| Total |
$ | 493,486 | $ | 508,611 | 3.35 | % | ||||||
| State and municipal securities (2) |
||||||||||||
| Due through 1 year |
$ | 5,784 | $ | 5,922 | 7.22 | % | ||||||
| Over 1 through 5 years |
31,132 | 32,542 | 5.53 | % | ||||||||
| Over 5 through 10 years |
56,746 | 59,450 | 5.65 | % | ||||||||
| Over 10 years |
153,499 | 154,098 | 6.55 | % | ||||||||
| Total |
$ | 247,161 | $ | 252,012 | 6.23 | % | ||||||
| (1) | The maturities reported for mortgage-backed securities collateralized mortgage obligations are based on contractual maturities and principal amortization. |
| (2) | Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%. |
FHLB Stock
As a condition of membership in the Federal Home Loan Bank of Seattle (“FHLB”), the Company is required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. Our FHLB stock has a par value of $100 and is redeemable at par for cash.
FHLB stock is carried at cost and is subject to recoverability testing per the Financial Services – Depository and Lending topic of the FASB ASC. The FHLB is currently classified as undercapitalized by the Federal Housing Finance Agency (“Finance Agency”). Under Finance Agency regulations, a Federal Home Loan Bank that fails to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital stock. However, management believes, despite the undercapitalized classification, the FHLB has adequate capital to cover the risks reflected on their balance sheet. Accordingly, as of December 31, 2010 we did not recognize an impairment charge related to our FHLB stock holdings. We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of our investment.
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Loan Portfolio
We are a full service commercial bank, which originates a wide variety of loans, and concentrates its lending efforts on originating commercial business and commercial real estate loans. The following table sets forth our loan portfolio by type of loan for the dates indicated:
| December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2010 | % of Total |
2009 | % of Total |
2008 | % of Total |
2007 | % of Total |
2006 | % of Total |
|||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Commercial business |
$ | 795,369 | 41.5 | % | $ | 744,440 | 37.1 | % | $ | 810,922 | 36.3 | % | $ | 762,365 | 33.4 | % | $ | 617,899 | 36.1 | % | ||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||||||||||||||
| One-to-four family residential |
49,383 | 2.6 | % | 63,364 | 3.1 | % | 57,237 | 2.6 | % | 60,991 | 2.7 | % | 51,277 | 3.0 | % | |||||||||||||||||||||||||
| Commercial and five or more family residential properties |
794,329 | 41.5 | % | 856,260 | 42.6 | % | 862,595 | 38.6 | % | 852,139 | 37.3 | % | 687,635 | 40.3 | % | |||||||||||||||||||||||||
| Total real estate |
843,712 | 43.9 | % | 919,624 | 45.7 | % | 919,832 | 41.2 | % | 913,130 | 40.0 | % | 738,912 | 43.3 | % | |||||||||||||||||||||||||
| Real estate construction: |
||||||||||||||||||||||||||||||||||||||||
| One-to-four family residential |
67,961 | 3.5 | % | 107,620 | 5.4 | % | 209,682 | 9.4 | % | 269,115 | 11.8 | % | 92,124 | 5.4 | % | |||||||||||||||||||||||||
| Commercial and five or more family residential properties |
30,185 | 1.6 | % | 41,829 | 2.1 | % | 81,176 | 3.6 | % | 165,490 | 7.2 | % | 115,185 | 6.8 | % | |||||||||||||||||||||||||
| Total real estate construction |
98,146 | 5.2 | % | 149,449 | 7.5 | % | 290,858 | 13.0 | % | 434,605 | 19.0 | % | 207,309 | 12.2 | % | |||||||||||||||||||||||||
| Consumer |
182,017 | 9.5 | % | 199,987 | 10.0 | % | 214,753 | 9.7 | % | 176,559 | 7.8 | % | 147,782 | 8.6 | % | |||||||||||||||||||||||||
| Subtotal |
1,919,244 | 100.2 | % | 2,013,500 | 100.2 | % | 2,236,365 | 100.2 | % | 2,286,659 | 100.2 | % | 1,711,902 | 100.2 | % | |||||||||||||||||||||||||
| Less deferred loan fees and other |
(3,490 | ) | -0.2 | % | (4,616 | ) | -0.2 | % | (4,033 | ) | -0.2 | % | (3,931 | ) | -0.2 | % | (2,940 | ) | -0.2 | % | ||||||||||||||||||||
| Total loans not covered under FDIC loss share agreements, net of deferred fees |
1,915,754 | 100.0 | % | 2,008,884 | 100.0 | % | 2,232,332 | 100.0 | % | 2,282,728 | 100.0 | % | 1,708,962 | 100.0 | % | |||||||||||||||||||||||||
| Loans covered under FDIC loss share agreements |
||||||||||||||||||||||||||||||||||||||||
| Covered loans |
517,061 | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Total loans, net |
$ | 2,432,815 | $ | 2,008,884 | $ | 2,232,332 | $ | 2,282,728 | $ | 1,708,962 | ||||||||||||||||||||||||||||||
| Loans held for sale |
$ | 754 | $ | — | $ | 1,964 | $ | 4,482 | $ | 933 | ||||||||||||||||||||||||||||||
At December 31, 2010, total loans were $2.43 billion compared with $2.01 billion in the prior year, an increase of $423.9 million or 21%. Generally, loan volumes were down across all categories with significant declines in real estate and real estate construction; commercial business loans were the exception, increasing $50.9 million. The increase in total loans was due to covered loans acquired in conjunction with the two FDIC assisted transactions. At December 31, 2010, net covered loans were $517.1 million. Total loans represented 57% and 63% of total assets at December 31, 2010 and 2009, respectively. Although balances declined during 2010 and 2009, the compound annual growth rate of our loan portfolio over the last five years is 9%. The decreased lending activity is due to a lack of demand for loan services on the part of qualified customers.
Commercial Business Loans: Commercial business loans increased $50.9 million, or 7%, to $795.4 million from year-end 2009, representing 42% of total loans at year end. The Company has focused on expanding its relationship with its existing customer base while reaching out to develop new business relationships in its primary market areas. The Company will continue to grow its commercial business as the economy improves to meet the needs and demands from our customer base.
Real Estate Loans: Residential real estate loans in our portfolio are secured by properties located within our primary market area, and typically have loan-to-value ratios of 80% or lower at origination. These loans are used to collateralize outstanding advances from the FHLB and borrowings from the FRB. Currently, we originate purchase money residential loans on a limited basis as well as refer customers seeking such loans to third parties.
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Typically, commercial and five-or-more family residential real estate loans are made to borrowers who have existing banking relationships with us. Our underwriting standards generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
Real Estate Construction Loans: Our underwriting guidelines for commercial and five-or-more family residential real estate construction loans generally require that the loan-to-value ratio not exceed 75% and stabilized debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. The recent economic environment has resulted in the Company having a substantially reduced desire to originate these types of loans. However, when we do originate such loans we endeavor to maintain the highest practical underwriting standards.
Currently, on a selected basis, we originate a variety of real estate construction loans. One-to-four family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and to provide financing to builders for the construction of pre-sold homes and speculative residential construction. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits and loan advance limits, as applicable.
Consumer Loans: Consumer loans made by us include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans, and miscellaneous personal loans.
Covered Loans: Covered loans are comprised of loans and loan commitments acquired in connection with the 2010 FDIC assisted acquisitions of Columbia River Bank and American Marine Bank. These loans are generically referred to as covered because they are generally subject to one of the loss sharing agreements between the Company and the FDIC. The loss sharing agreements limit the Company’s losses to 20% of the contractual balance outstanding up to a stated threshold amount of $206.0 million for Columbia River Bank and $66.0 million for American Marine Bank. If losses exceed the stated threshold, the Company’s share of the remaining losses decreases to 5%.
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 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the maturity distribution of our covered and noncovered 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, 2010. Covered loan balances do not reflect valuation discount arising from acquisition accounting:
| Maturing | ||||||||||||||||
| Due Through 1 Year |
Over 1 Through 5 Years |
Over 5 Years |
Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Commercial business |
$ | 467,233 | $ | 277,602 | $ | 215,790 | $ | 960,625 | ||||||||
| Real estate construction |
118,686 | 47,007 | 13,829 | 179,522 | ||||||||||||
| Total |
$ | 585,919 | $ | 324,609 | $ | 229,619 | $ | 1,140,147 | ||||||||
| Fixed rate loans due after 1 year |
$ | 177,371 | $ | 61,008 | $ | 238,379 | ||||||||||
| Variable rate loans due after 1 year |
147,238 | 168,611 | 315,849 | |||||||||||||
| Total |
$ | 324,609 | $ | 229,619 | $ | 554,228 | ||||||||||
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, 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 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 management 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 reasonable 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
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nonaccrual status, which occurs when there are serious doubts about the collectability 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. Covered loans accounted for under ASC 310-30 are generally considered accruing and performing as the loans accrete interest income over the estimated lives of the loans when cash flows are reasonably estimable. Accordingly, covered impaired loans contractually past due are still considered to be accruing and performing loans.
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 collectability of principal or interest within the existing terms of the loan; (ii) in most cases restructured loans, for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition (interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur); (iii) other real estate owned; and (iv) other personal property owned, if applicable. Nonperforming assets totaled $126.7 million, or 3.40% of year-end assets at December 31, 2010, compared to $129.5 million or 4.05% of year end assets at December 31, 2009.
The following table sets forth information with respect to our noncovered, nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), other real estate owned, other personal property owned, total nonperforming assets, accruing loans past-due 90 days or more, and potential problem loans:
Nonperforming Loans and OREO
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Nonaccrual: |
||||||||||||||||||||
| Commercial business |
$ | 32,367 | $ | 18,979 | $ | 2,976 | $ | 2,170 | $ | 2,249 | ||||||||||
| Real Estate: |
||||||||||||||||||||
| One-to-four family residential |
2,996 | 1,860 | 905 | 204 | 366 | |||||||||||||||
| Commercial and five or more family residential real estate |
23,192 | 24,354 | 5,710 | 3,476 | 217 | |||||||||||||||
| Real Estate Construction: |
||||||||||||||||||||
| One-to-four family residential |
18,004 | 47,653 | 69,668 | 7,317 | — | |||||||||||||||
| Commercial and five or more family residential real estate |
7,584 | 16,230 | 25,752 | — | — | |||||||||||||||
| Consumer |
5,020 | 1,355 | 1,152 | 838 | 54 | |||||||||||||||
| Total nonaccrual loans: |
89,163 | 110,431 | 106,163 | 14,005 | 2,886 | |||||||||||||||
| Restructured loans accruing interest: |
||||||||||||||||||||
| Commercial business |
— | 60 | 587 | 456 | 594 | |||||||||||||||
| Commercial and five or more family residential real estate |
5,747 | — | — | — | — | |||||||||||||||
| One-to-four family residential construction |
758 | — | — | — | — | |||||||||||||||
| Total nonperforming loans |
95,668 | |||||||||||||||||||