Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - COLUMBIA BANCORP \OR\ | v54094exv31w1.htm |
EX-31.2 - EX-31.2 - COLUMBIA BANCORP \OR\ | v54094exv31w2.htm |
EX-32.1 - EX-32.1 - COLUMBIA BANCORP \OR\ | v54094exv32w1.htm |
EX-32.2 - EX-32.2 - COLUMBIA BANCORP \OR\ | v54094exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to to
Commission file number: 0-27938
COLUMBIA BANCORP
(Exact name of registrant as specified in its charter)
Oregon | 93-1193156 | |
(State of incorporation) | (I.R.S. Employer | |
Identification No.) |
401 East Third Street, Suite 200
The Dalles, Oregon 97058
(Address of principal executive offices)
The Dalles, Oregon 97058
(Address of principal executive offices)
(541) 298-6649
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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 (Section 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 o No o
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a 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 o No þ
As of November 16, 2009, there were 10,062,545 shares of common stock of Columbia Bancorp, no par
value, outstanding.
COLUMBIA BANCORP
FORM 10-Q
September 30, 2009
Table of Contents
2
Table of Contents
PART I. FINANCIAL INFORMATION
These consolidated financial statements should be read in conjunction with the financial
statements, accompanying notes and other relevant information included in the Companys report on
Form 10-K for the year ended December 31, 2008, and the notes and other information included in
this report.
ITEM 1. | FINANCIAL STATEMENTS |
CONSOLIDATED FINANCIAL STATEMENTS OF COLUMBIA BANCORP AND SUBSIDIARY
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
CASH AND CASH EQUIVALENTS |
||||||||
Cash and due from banks |
$ | 9,828,004 | $ | 39,245,220 | ||||
Interest bearing deposits with other banks |
223,156,429 | 25,742,260 | ||||||
Federal funds sold |
325,714 | 117,491,560 | ||||||
Total cash and cash equivalents |
233,310,147 | 182,479,040 | ||||||
INVESTMENT SECURITIES |
||||||||
Debt securities available-for-sale, at fair value |
28,275,031 | 19,218,096 | ||||||
Equity securities available-for-sale, at fair value |
1,762,083 | 1,673,409 | ||||||
Debt securities held-to-maturity, at amortized cost,
estimated fair value $5,411,625 and $8,284,350
at September 30, 2009 and December 31, 2008, respectively |
5,219,687 | 8,130,397 | ||||||
Restricted equity securities |
3,054,500 | 3,054,500 | ||||||
Total investment securities |
38,311,301 | 32,076,402 | ||||||
LOANS |
||||||||
Loans, net of unearned loan fees of $583,018 and $562,175
at September 30, 2009 and December 31, 2008, respectively |
735,630,170 | 863,441,864 | ||||||
Allowance for loan losses |
(19,606,951 | ) | (24,492,350 | ) | ||||
Net loans |
716,023,219 | 838,949,514 | ||||||
OTHER ASSETS |
||||||||
Property and equipment, net of accumulated depreciation |
21,541,977 | 23,627,864 | ||||||
Other real estate owned |
15,245,699 | 9,622,472 | ||||||
Accrued interest receivable |
5,373,785 | 4,843,767 | ||||||
Other assets |
27,911,178 | 30,694,506 | ||||||
Total other assets |
70,072,639 | 68,788,609 | ||||||
TOTAL ASSETS |
$ | 1,057,717,306 | $ | 1,122,293,565 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
DEPOSITS |
||||||||
Non-interest bearing demand deposits |
$ | 198,306,869 | $ | 215,922,354 | ||||
Money market and NOW accounts |
290,123,366 | 271,244,206 | ||||||
Savings accounts |
30,758,900 | 30,873,113 | ||||||
Time certificates |
490,802,135 | 486,156,648 | ||||||
Total deposits |
1,009,991,270 | 1,004,196,321 | ||||||
OTHER LIABILITIES |
||||||||
Federal Home Loan Bank advances and other short-term borrowings |
18,400,406 | 36,612,730 | ||||||
Accrued interest payable and other liabilities |
6,095,218 | 6,435,889 | ||||||
Total other liabilities |
24,495,624 | 43,048,619 | ||||||
TOTAL LIABILITIES |
1,034,486,894 | 1,047,244,940 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, no par value; 20,000,000 shares
authorized, 10,062,585 issued and outstanding
(10,067,347 at December 31, 2008) |
55,740,050 | 55,698,975 | ||||||
(Accumulated deficit)/retained earnings |
(32,848,577 | ) | 19,242,169 | |||||
Accumulated other comprehensive income, net of taxes |
338,939 | 107,481 | ||||||
TOTAL SHAREHOLDERS EQUITY |
23,230,412 | 75,048,625 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 1,057,717,306 | $ | 1,122,293,565 | ||||
See accompanying notes.
3
Table of Contents
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(Unaudited)
Three Months Ended | Nine Month Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans |
$ | 11,443,252 | $ | 15,522,487 | $ | 35,753,361 | $ | 49,379,539 | ||||||||
Interest on investments: |
||||||||||||||||
Taxable investment securities |
249,753 | 160,841 | 660,078 | 674,588 | ||||||||||||
Nontaxable investment securities |
45,040 | 97,314 | 181,176 | 298,463 | ||||||||||||
Interest on federal funds sold |
1,257 | 242,564 | 72,395 | 558,416 | ||||||||||||
Other interest and dividend income |
101,173 | 156,160 | 167,343 | 423,444 | ||||||||||||
Total interest income |
11,840,475 | 16,179,366 | 36,834,353 | 51,334,450 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on interest bearing deposit and savings accounts |
956,378 | 1,524,073 | 3,244,872 | 5,006,696 | ||||||||||||
Interest on time deposit accounts |
3,977,347 | 4,048,067 | 12,879,900 | 11,714,082 | ||||||||||||
Other borrowed funds |
140,442 | 416,844 | 538,815 | 850,173 | ||||||||||||
Total interest expense |
5,074,167 | 5,988,984 | 16,663,587 | 17,570,951 | ||||||||||||
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES |
6,766,308 | 10,190,382 | 20,170,766 | 33,763,499 | ||||||||||||
PROVISION FOR LOAN LOSSES |
20,250,000 | 25,400,000 | 44,350,000 | 34,100,000 | ||||||||||||
NET
INTEREST LOSS AFTER PROVISION FOR LOAN LOSSES |
(13,483,692 | ) | (15,209,618 | ) | (24,179,234 | ) | (336,501 | ) | ||||||||
NON-INTEREST INCOME |
||||||||||||||||
Service charges and fees |
1,255,034 | 1,309,748 | 3,701,430 | 3,663,437 | ||||||||||||
Mortgage banking revenue |
| 835,958 | | 2,930,351 | ||||||||||||
Payment system revenue, net |
317,731 | (20,450 | ) | 849,661 | 249,276 | |||||||||||
Financial services revenue |
235,882 | 278,835 | 636,182 | 840,535 | ||||||||||||
Credit card discounts and fees |
| 174,979 | 90,675 | 474,518 | ||||||||||||
Gain on sale of credit card portfolio |
| 1,233,844 | | 1,233,844 | ||||||||||||
Other non-interest income |
205,733 | 224,616 | 1,075,257 | 984,659 | ||||||||||||
Total non-interest income |
2,014,380 | 4,037,530 | 6,353,205 | 10,376,620 | ||||||||||||
NON-INTEREST EXPENSE |
||||||||||||||||
Salaries and employee benefits |
4,202,763 | 5,549,086 | 12,936,089 | 16,347,507 | ||||||||||||
FDIC premiums and state assessments |
1,322,930 | 206,235 | 4,663,753 | 568,492 | ||||||||||||
Occupancy expense |
1,521,797 | 1,381,330 | 4,614,564 | 3,998,945 | ||||||||||||
Other real estate owned impairment and (gain)/loss on sale, net |
803,035 | 1,973,325 | 1,331,352 | 1,927,256 | ||||||||||||
Other non-interest expenses |
2,588,015 | 3,083,074 | 8,202,254 | 9,369,782 | ||||||||||||
Total non-interest expense |
10,438,540 | 12,193,050 | 31,748,012 | 32,211,982 | ||||||||||||
LOSS
BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES |
(21,907,852 | ) | (23,365,138 | ) | (49,574,041 | ) | (22,171,863 | ) | ||||||||
PROVISION FOR (BENEFIT FROM) INCOME TAXES |
| (9,274,000 | ) | 2,516,705 | (9,094,173 | ) | ||||||||||
NET LOSS |
(21,907,852 | ) | (14,091,138 | ) | (52,090,746 | ) | (13,077,690 | ) | ||||||||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES |
||||||||||||||||
Unrealized holding gains (losses) arising during the period |
203,367 | 32,273 | 232,526 | (66,399 | ) | |||||||||||
Reclassification adjustment for gains included in net loss |
| (9,797 | ) | (1,068 | ) | (11,131 | ) | |||||||||
Decrease in fair value of interest rate swap |
| | | (12,739 | ) | |||||||||||
Total other comprehensive income (loss), net of taxes |
203,367 | 22,476 | 231,458 | (90,269 | ) | |||||||||||
COMPREHENSIVE LOSS |
$ | (21,704,485 | ) | $ | (14,068,662 | ) | $ | (51,859,288 | ) | $ | (13,167,959 | ) | ||||
Loss per share of common stock |
||||||||||||||||
Basic |
||||||||||||||||
Diluted |
$ | (2.18 | ) | $ | (1.41 | ) | $ | (5.18 | ) | $ | (1.31 | ) | ||||
Weighted average common shares outstanding |
$ | (2.18 | ) | $ | (1.41 | ) | $ | (5.18 | ) | $ | (1.31 | ) | ||||
Basic |
||||||||||||||||
Diluted |
10,062,696 | 10,024,085 | 10,052,514 | 10,018,590 | ||||||||||||
10,062,696 | 10,024,085 | 10,052,514 | 10,018,590 |
See accompanying notes.
4
Table of Contents
COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited)
(Unaudited)
(Accumulated | Accumulated | |||||||||||||||||||
Deficit) / | Other | Total | ||||||||||||||||||
Common | Retained | Comprehensive | Shareholders | |||||||||||||||||
Shares | Stock | Earnings | Income | Equity | ||||||||||||||||
BALANCE, December 31, 2007 |
10,043,572 | $ | 55,393,110 | $ | 46,764,304 | $ | 80,418 | $ | 102,237,832 | |||||||||||
Cumulative effect of change in accounting
principle split-dollar life insurance
benefit |
| | (59,094 | ) | | (59,094 | ) | |||||||||||||
Stock-based compensation expense |
| 344,801 | | | 344,801 | |||||||||||||||
Stock options exercised
and stock awards granted |
27,985 | 63,676 | | | 63,676 | |||||||||||||||
Income tax effect from stock
options exercised |
| 1,563 | | | 1,563 | |||||||||||||||
Income tax adjustment for stock awards |
| (67,180 | ) | | | (67,180 | ) | |||||||||||||
Repurchase of common stock |
(4,210 | ) | (36,995 | ) | | | (36,995 | ) | ||||||||||||
Cash dividends, $0.11 per common share |
| | (1,105,092 | ) | | (1,105,092 | ) | |||||||||||||
Net (loss) and comprehensive loss |
| | (26,357,949 | ) | 27,063 | (26,330,886 | ) | |||||||||||||
BALANCE, December 31, 2008 |
10,067,347 | 55,698,975 | 19,242,169 | 107,481 | 75,048,625 | |||||||||||||||
Stock-based compensation expense |
| 104,663 | | | 104,663 | |||||||||||||||
Stock awards forfeited |
(6,020 | ) | (6,703 | ) | | | (6,703 | ) | ||||||||||||
Stock awards granted |
2,500 | | | | | |||||||||||||||
Income tax adjustment for stock awards |
| (55,545 | ) | | | (55,545 | ) | |||||||||||||
Repurchase of common stock |
(1,242 | ) | (1,340 | ) | | | (1,340 | ) | ||||||||||||
Net (loss) and comprehensive loss |
| | (52,090,746 | ) | 231,458 | (51,859,288 | ) | |||||||||||||
BALANCE, September 30, 2009 |
10,062,585 | $ | 55,740,050 | $ | (32,848,577 | ) | $ | 338,939 | $ | 23,230,412 | ||||||||||
See accompanying notes.
5
Table of Contents
COLUMBIA
BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (52,090,746 | ) | $ | (13,077,690 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: |
||||||||
Net amortization (accretion) of discounts and premiums on investment securities |
451,405 | (22,792 | ) | |||||
Net gain on called investment securities |
(1,747 | ) | (17,711 | ) | ||||
Gain on sale of credit card portfolio |
| (1,233,844 | ) | |||||
Loss on sale of mortgage loans |
| 789,177 | ||||||
Depreciation and amortization of property and equipment |
2,313,137 | 2,103,781 | ||||||
Loss on sale or write-down of property and equipment |
120,005 | 4,771 | ||||||
Loss on sale or write-down of other real estate owned |
1,331,352 | 1,927,256 | ||||||
Loss on limited partnerships |
192,563 | 170,419 | ||||||
Stock-based compensation expense |
97,960 | 324,205 | ||||||
Income tax benefit from stock-based compensation expense |
| (1,563 | ) | |||||
Provision for loan losses |
44,350,000 | 34,100,000 | ||||||
(Benefit from) provision for losses from off-balance sheet financial instruments |
(126,000 | ) | 133,000 | |||||
Increase (decrease) in cash due to changes in assets/liabilities: |
||||||||
Accrued interest receivable |
(530,018 | ) | (495,543 | ) | ||||
Proceeds from the sale of mortgage loans held-for-sale |
| 117,312,244 | ||||||
Production of mortgage loans held-for-sale |
| (111,711,979 | ) | |||||
Other assets |
2,657,869 | (7,069,001 | ) | |||||
Accrued interest payable and other liabilities |
(335,958 | ) | (5,474,845 | ) | ||||
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES |
(1,570,178 | ) | 17,759,885 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Proceeds from maturity of available-for-sale securities |
16,825,383 | 9,056,925 | ||||||
Proceeds from called available-for-sale securities |
2,000,000 | 2,268,087 | ||||||
Proceeds from sale of available-for-sale securities |
| 3,015,587 | ||||||
Proceeds from maturity of held-to-maturity securities |
593,796 | 960,993 | ||||||
Proceeds from called held-to-maturity securities |
2,315,000 | | ||||||
Purchases of available-for-sale securities |
(28,039,918 | ) | (5,542,567 | ) | ||||
Purchases of restricted equity securities |
| (615,400 | ) | |||||
Net change in loans made to customers |
67,545,402 | (89,644,623 | ) | |||||
Proceeds from sale of loans |
| 7,772,738 | ||||||
Capital contributions to low-income housing partnerships |
(148,722 | ) | (143,949 | ) | ||||
Investment in state energy tax credits |
| (1,431,069 | ) | |||||
Proceeds from sale of other real estate owned |
4,076,314 | 403,800 | ||||||
Purchases of property and equipment |
(347,255 | ) | (4,656,692 | ) | ||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
64,820,000 | (78,556,170 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net change in demand deposit and savings accounts |
1,149,462 | (19,410,593 | ) | |||||
Net change in time deposits |
4,645,487 | 111,587,006 | ||||||
Net borrowings of short-term notes payable |
| (850,000 | ) | |||||
Proceeds from long-term borrowings |
| 40,000,000 | ||||||
Repayments of long-term borrowings |
(18,212,324 | ) | (5,018,053 | ) | ||||
Repayment of junior subordinated debentures |
| (4,124,000 | ) | |||||
Cash paid for dividends and fractional shares |
| (2,110,877 | ) | |||||
Proceeds from stock options exercised |
| 44,024 | ||||||
Excess tax benefit from stock-based compensation expense |
| 1,563 | ||||||
Repurchase of common stock |
(1,340 | ) | (14,455 | ) | ||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
(12,418,715 | ) | 120,104,615 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
50,831,107 | 59,308,330 | ||||||
CASH AND CASH EQUIVALENTS, beginning of period |
182,479,040 | 92,223,800 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 233,310,147 | $ | 151,532,130 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Interest paid in cash |
$ | 17,130,579 | $ | 18,056,953 | ||||
Taxes paid in cash |
| 2,200,000 | ||||||
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Change in unrealized loss on available-for-sale securities, net of taxes |
$ | 231,458 | $ | (77,530 | ) | |||
Change in fair value of interest rate swap, net of taxes |
| (12,739 | ) | |||||
Transfer of loans to other real estate owned |
11,030,893 | 7,047,571 |
See accompanying notes.
6
Table of Contents
COLUMBIA
BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim consolidated financial statements include the accounts of Columbia Bancorp (Columbia
or the Company), an Oregon corporation and a registered bank holding company, and its
wholly-owned subsidiary Columbia River Bank (CRB or the Bank), after elimination of
intercompany transactions and balances. CRB is an Oregon state-chartered bank, headquartered in
The Dalles, Oregon. Substantially all activity of Columbia is conducted through its subsidiary
bank, CRB.
The interim financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
Columbia has traditionally only provided a complete financial statement on an annual basis, in Form
10-K. The financial information included in this interim report has been prepared by management.
Columbias annual report contains audited financial statements. All adjustments, including normal
recurring accruals necessary for the fair presentation of results of operations for the interim
periods included herein, have been made. The results of operations for the three and nine months
ended September 30, 2009, are not necessarily indicative of results to be anticipated for the year
ending December 31, 2009.
Certain reclassifications have been made to the 2008 consolidated financial statements to conform
to the current year presentations. These reclassifications have no effect on previously reported
net income (loss).
In preparing these financial statements, Columbia has evaluated events and transactions for
potential recognition or disclosure through November 16, 2009, the date the financial statements
were available to be issued. In managements opinion, all accounting adjustments necessary to
accurately reflect the financial position and results of operations on the accompanying financial
statements have been made. These adjustments include normal and recurring accruals considered
necessary for a fair and accurate presentation. The results for interim periods are not
necessarily indicative of results for the full year or any other interim period.
2. Managements Estimates and Assumptions
Various elements of Columbias accounting policies are inherently subject to estimation techniques,
valuation assumptions and other subjective assessments. In particular, management has identified
certain policies that are critical to an understanding of the consolidated financial statements due
to the judgments, estimates and assumptions inherent in those policies. These policies and
judgments, estimates and assumptions are described in greater detail in the notes to the
consolidated financial statements included in Columbias 2008 annual report on Form 10-K, filed
March 26, 2009.
Management believes the judgments, estimates and assumptions used in the preparation of the
consolidated financial statements are appropriate given the factual circumstances at the time.
However, given the sensitivity of the consolidated financial statements to these critical
accounting policies, the use of other judgments, estimates and assumptions could result in material
differences in the results of operations or financial conditions.
7
Table of Contents
3. Regulatory Order and Managements Plan
As disclosed in Columbias 2008 annual report on Form 10-K, on February 9, 2009, the Bank
stipulated to the issuance of a cease and desist order (the Order) against the Bank by the
Federal Deposit Insurance Corporation (FDIC) and the Oregon Department of Consumer and Business
Services, Division of Finance and Corporate Securities (DFCS), based on certain findings from an
examination of the Bank concluded in September 2008.
Material provisions of the Order were as follows:
| Retain qualified management and notify FDIC in writing when the Bank proposes to add any individual to its board of directors or to employ any new senior executive officer. | ||
| Increase capital and maintain Tier 1 leverage ratio and total risk-based capital ratio of 10%. | ||
| Increase allowance for loan losses by $25 million (recognized in quarter ended September 30, 2008). | ||
| Adapt policy for estimating allowance for loan loss policy to address current state of local and regional economy, particularly in the real estate sector. | ||
| Eliminate all loans classified as loss and one-half of loans classified as substandard as of September 2008 exam date; reduce substandard and doubtful loans to 75% of capital. | ||
| Not extend additional credit to borrowers whose loans have been charged-off or classified as loss and is uncollected. | ||
| Develop written plan for reduction and collection of delinquent loans. | ||
| Develop written plan for systematically reducing commercial real estate loans. | ||
| Develop written three year strategic plan, including specific goals for loans, deposits and investment securities. | ||
| Formulate and implement a written profit plan to improve and sustain earnings. | ||
| Enhance written liquidity and funds management policy, including provisions to reduce reliance on non-core funding sources. | ||
| Develop policies and plans for maintaining liquid assets at 15% of total assets, including ongoing monitoring of liquidity. | ||
| Submit quarterly progress reports to FDIC and DFCS detailing actions to comply with the Order. |
As of September 30, 2009 and through the date of this report, requirements related to increasing
the Banks Tier 1 leverage ratio and total risk-based capital ratio to 10% have not been met. As
of September 30, 2009, the Banks Tier 1 leverage ratio was 2.07% and its total risk-based capital
ratio was 4.05%, resulting in classification of the Bank as significantly undercapitalized by
regulatory standards. The required improvement of capital levels is the most significant provision
of the Order that has not been complied with to date. Because capital raising in the current
economic environment is very limited, it is uncertain whether the Bank will be able to increase its
capital to required levels. In addition, due to continued deterioration in the Banks asset quality
and the resulting impact on capital, reductions to classified loan levels have been insufficient to
comply with the provisions of the Order. The Bank believes it has materially complied with the
remaining provisions of the Order.
The economic environment in our market areas and the duration of the downturn in the real estate
market will continue to have a significant impact on the implementation of the Banks business
plans. While the Company plans to continue its efforts to aggressively resolve non-performing
assets, reduce expenses and improve net interest margin, it is unlikely such efforts will meet the Orders requirements for capital levels without a significant infusion of capital from a third party.
In this regard, the Company is aggressively pursuing and evaluating opportunities to raise capital.
8
Table of Contents
If the Banks tangible equity as a percentage of total assets falls below 2.00%, the Bank would be
categorized as critically undercapitalized for regulatory capital purposes. The classification
would subject the Bank to the following limitations: (i) prohibit the Bank from paying any bonus to
a senior executive officer or providing compensation to a senior executive officer at a rate
exceeding the officers average rate of compensation (excluding bonuses, stock options and
profit-sharing) during the 12 months preceding the month in which the Bank became undercapitalized,
without prior written approval from the FDIC; (ii) require the FDIC to impose one or more of the
following on the Bank: (A) require a sale of Bank shares or obligations of the Bank sufficient to
return the Bank to adequately capitalized status; (B) if grounds exist for the appointment of a
receiver or conservator for the Bank, require the Bank to be acquired or merged with another
institution; (C) impose additional restrictions on transactions with affiliates beyond the normal
restrictions applicable to all banks; (D) restrict interest paid on deposits to prevailing rates in
the Banks area as determined by the FDIC; (E) impose more stringent growth restrictions than those
discussed in the immediately preceding paragraph, or require the Bank to reduce its total assets;
(F) require the Bank to alter, reduce or terminate any activities the FDIC determines pose
excessive risk to the Bank; (G) order a new election of Bank directors; (H) require the Bank to
dismiss any senior executive officer or director who held office for more than 180 days before the
Bank became undercapitalized; (I) require the Bank to employ qualified senior executive officers;
(J) prohibit the Bank from accepting, renewing or rolling over deposits from correspondent
institutions; (K) prohibit the Corporation from making capital distributions without Federal
Reserve Board approval; (L) require the Corporation to divest the Bank if the regulators determine
that the divestiture would improve the Banks financial condition and future prospects; and (M)
require the Bank to take any other action that the FDIC determines will better carry out the
purposes of the statute requiring the imposition of one or more of the restrictions described in
(A)-(L) above; and (iii) requiring prior regulatory approval for material transactions outside the
usual course of business, extending credit for a highly leveraged transactions, amending the Banks
charter or bylaws, making a material change to accounting methods, paying excessive compensate on
or bonuses, and paying interest on new or renewed liabilities at a rate that would increase the
Banks weighted average cost of funds to a level significantly exceeding the prevailing rates on
interest on deposits in the Banks normal market areas.
There are no assurances that plans to achieve objectives set forth in the Order will successfully
improve the Banks results of operation or financial condition or result in the termination of the
Order from the FDIC and the DFCS. In addition, failure to increase capital levels consistent with
the requirements of the Order could result in further enforcement actions by the FDIC and/or DFCS
or the placing of the Bank into conservatorship or receivership. The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the discharge of liabilities in the normal course of business for the
foreseeable future, and do not include any adjustments to reflect the possible future effects on
the recoverability or classification of assets, and the amounts or classification of liabilities
that may result from the outcome of any regulatory action, which would affect the Companys ability
to continue as a going concern.
9
Table of Contents
4. Investment Securities
The amortized cost and estimated fair values of investment securities as of September 30, 2009 and
December 31, 2008 were as follows:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
September 30, 2009 | Cost | Gains | Losses | Value | ||||||||||||
Debt securities available-for-sale: |
||||||||||||||||
Mortgage-backed
securities |
$ | 13,236,576 | $ | 423,315 | $ | | $ | 13,659,891 | ||||||||
State bonds |
1,972,235 | 9,065 | | 1,981,300 | ||||||||||||
Obligations of U.S.
government agencies |
12,500,000 | 133,840 | | 12,633,840 | ||||||||||||
$ | 27,708,811 | $ | 566,220 | $ | | $ | 28,275,031 | |||||||||
Equity securities available-for-sale |
$ | 1,772,833 | $ | 32,375 | $ | (43,125 | ) | $ | 1,762,083 | |||||||
Debt securities held-to-maturity: |
||||||||||||||||
Mortgage-backed
securities |
$ | 1,191,817 | $ | 58,599 | $ | | $ | 1,250,416 | ||||||||
Municipal securities |
4,027,870 | 146,167 | (12,828 | ) | 4,161,209 | |||||||||||
$ | 5,219,687 | $ | 204,766 | $ | (12,828 | ) | $ | 5,411,625 | ||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2008 | Cost | Gains | Losses | Value | ||||||||||||
Debt securities available-for-sale: |
||||||||||||||||
U.S. Treasuries |
$ | 8,995,450 | $ | | $ | | $ | 8,995,450 | ||||||||
Obligations of U.S.
government agencies |
9,996,379 | 226,267 | | 10,222,646 | ||||||||||||
$ | 18,991,829 | $ | 226,267 | $ | | $ | 19,218,096 | |||||||||
Equity securities available-for-sale |
$ | 1,723,766 | $ | | $ | (50,357 | ) | $ | 1,673,409 | |||||||
Debt securities held-to-maturity: |
||||||||||||||||
Mortgage-backed
securities |
$ | 1,556,394 | $ | 24,959 | $ | | $ | 1,581,353 | ||||||||
Municipal securities |
6,574,003 | 141,921 | (12,927 | ) | 6,702,997 | |||||||||||
$ | 8,130,397 | $ | 166,880 | $ | (12,927 | ) | $ | 8,284,350 | ||||||||
Restricted equity securities consisted of the following as of September 30, 2009 and December 31,
2008:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Federal Home Loan Bank of Seattle stock |
$ | 3,045,100 | $ | 3,045,100 | ||||
Federal Agriculture Mortgage Corporation stock |
9,400 | 9,400 | ||||||
$ | 3,054,500 | $ | 3,054,500 | |||||
10
Table of Contents
The following table presents the gross unrealized losses and fair value of investment securities,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, as of September 30, 2009:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
Municipal securities |
$ | | $ | | $ | 428,060 | $ | (12,828 | ) | $ | 428,060 | $ | (12,828 | ) | ||||||||||
Equity securities |
| | 31,875 | (43,125 | ) | 31,875 | (43,125 | ) | ||||||||||||||||
$ | | $ | | $ | 459,935 | $ | (55,953 | ) | $ | 459,935 | $ | (55,953 | ) | |||||||||||
Fair values are compared to current carrying values to determine whether a security is in a gain or
loss position. Due to changes in market interest rates since the purchase date, one municipal debt
security was in an unrealized loss position for 12 months or more as of September 30, 2009.
Unrealized losses on the municipal security resulted from interest rate increases subsequent to the
purchase of the security. Management monitors published credit ratings of this security and no
material adverse ratings changes has occurred in the portfolio from the purchase date to September
30, 2009. As of September 30, 2009, Columbia did not intend to sell the municipal security in an
unrealized loss position and based on cash flow projections and forecasts, Columbia believes it is
more likely than not that it will not be required to sell said security before recovery of the
security to its amortized cost basis. Because the decline in fair value is attributable to changes
in interest rates and not credit quality, and because Columbia has the ability and intent to hold
this investment until a market price recovery or to maturity, this security is not considered
other-than-temporarily impaired.
Equity securities in an unrealized loss position in excess of 12 months consisted of an investment
in common shares of a financial institution. The financial institution is a small, de novo
institution in the Pacific Northwest. Unrealized losses on the common stock resulted from a
devaluation of trading value of the common stock on the open market, which Management believes is a
direct result of the current nation-wide financial crisis. Columbia presently has no intent to
sell this security and believes that it is not more likely than not that it will be required to
sell the security before market price recovery. This security is not considered
other-than-temporarily impaired.
There were no gross realized gains from the sale or call of investment securities for the three
months ended September 30, 2009. Gross realized gains from the sale or call of investment
securities were $15,587 for the three months ended September 30, 2008. There were no gross realized
losses from the sale or call of investment securities for the three months ended September 30, 2009
and 2008. Gross realized gains from the sale or call of investment securities were $4,065 and
$18,087, respectively, for the nine months ended September 30, 2009 and 2008, respectively. Gross
realized losses from the sale or call of investment securities were $2,318 and $376, respectively,
for the nine months ended September 30, 2009 and 2008.
11
Table of Contents
The amortized cost and estimated fair value of investment securities as of September 30, 2009,
by contractual maturity, are presented below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Due in one year or less |
$ | 10,934,436 | $ | 11,282,296 | $ | 1,121,012 | $ | 1,142,871 | ||||||||
Due in one year through
five years |
4,302,140 | 4,397,595 | 3,521,231 | 3,694,046 | ||||||||||||
Due in five years through
ten years |
10,500,000 | 10,613,840 | 564,029 | 559,885 | ||||||||||||
Due after ten years |
1,972,235 | 1,981,300 | 13,415 | 14,823 | ||||||||||||
Debt securities |
27,708,811 | 28,275,031 | 5,219,687 | 5,411,625 | ||||||||||||
Equity securities |
1,772,833 | 1,762,083 | | | ||||||||||||
$ | 29,481,644 | $ | 30,037,114 | $ | 5,219,687 | $ | 5,411,625 | |||||||||
For the purpose of the maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the weighted-average
contractual maturities of underlying collateral. Mortgage-backed securities may mature earlier
than their weighted-average contractual maturities because of principal prepayments.
As of September 30, 2009 and December 31, 2008, investment securities with an amortized cost of
$21.43 million and $26.53 million, respectively, were pledged to secure notes payable at the
Federal Home Loan Bank of Seattle (FHLB), the Federal Reserve Bank and public or other deposits,
as required by law. As of September 30, 2009, the Bank held $3.05 million of common stock in the
FHLB. This security is reported at par value, which represents the Banks cost. The FHLB has
reported a risk-based capital deficiency under the regulations of the Federal Housing Finance
Agency (the FHFA), its primary regulator. As a result, the FHLB has stopped paying a dividend and
stated that it would suspend the repurchase and redemption of outstanding common stock until its
retained earnings deficiency was reclaimed. The Bank monitors this issue on a consistent basis.
The FHLB has communicated to the Bank that it believes the calculation of risk-based capital under
the current rules of the FHFA significantly overstates the market and credit risk of the FHLBs
private-label mortgage-backed securities in the current market environment and that it has enough
capital to cover the risks reflected in the FHLBs balance sheet. As a result, the Bank has not
recorded an other-than-temporary impairment on its investment in FHLB stock. However, continued
deterioration in the FHLBs financial position may result in impairment in the value of those
securities, or the requirement that the Bank contribute additional funds to recapitalize the FHLB,
or reduce the Banks ability to borrow funds from the FHLB, which may impair the Banks ability to
meet liquidity demands.
5. Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and by
unearned loan fees, net of deferred loan costs. Interest on loans is calculated using the
simple-interest method on daily balances of the principal amount outstanding. Loan origination
fees and certain direct origination costs are capitalized and recognized as an adjustment of the
yield over the life of the related loan.
12
Table of Contents
The loan portfolio consisted of the following as of September 30, 2009 and December 31, 2008:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Real estate secured loans: |
||||||||
Commercial property |
$ | 238,086,240 | $ | 250,888,198 | ||||
Farmland |
46,162,503 | 65,474,029 | ||||||
Construction |
181,553,408 | 253,682,700 | ||||||
Residential |
40,153,564 | 44,208,284 | ||||||
Home equity lines |
25,893,702 | 29,230,366 | ||||||
531,849,417 | 643,483,577 | |||||||
Commercial |
109,509,961 | 127,597,505 | ||||||
Agriculture |
77,178,209 | 74,630,411 | ||||||
Consumer |
13,556,200 | 14,414,445 | ||||||
Other loans |
4,119,401 | 3,878,101 | ||||||
736,213,188 | 864,004,039 | |||||||
Less allowance for loan losses |
(19,606,951 | ) | (24,492,350 | ) | ||||
Less unearned loan fees |
(583,018 | ) | (562,175 | ) | ||||
Loans, net of allowance for loan losses
and unearned loan fees |
$ | 716,023,219 | $ | 838,949,514 | ||||
The Bank does not accrue interest on loans for which payment in full of principal and interest is
not expected, or for which payment of principal or interest has been in default 90 days or more,
unless the loan is well-secured and in the process of collection. As of September 30, 2009, no
loans in default 90 days or more were still accruing interest. In certain instances, the Bank may
place on non-accrual status loans that are not yet past due 90 days or more, but have risk factors
indicating full collection of principal and interest is not expected.
Non-accrual loans for which payment in full of principal and interest is not expected, or for which
payment of principal or interest has been in default 90 days or more, unless in process of
collection, are considered impaired loans. Each impaired loan is carried at the present value of
expected future cash flows discounted at the loans effective interest rate, the loans market
price, or the net realizable value of collateral if the loan is collateral-dependent. When a loan
is placed on non-accrual status, all unpaid accrued interest is reversed. Cash payments received
on non-accrual loans are applied to the principal balance of the loan. Large groups of smaller
balance, homogeneous loans may be collectively evaluated for impairment. Accordingly, the Bank may
not separately identify individual consumer and residential loans for evaluation of impairment.
Loans on non-accrual status as of September 30, 2009 and December 31, 2008, were $103.22 million
and $92.35 million, respectively. Impaired loans as of September 30, 2009 and December 31, 2008,
were $107.93 million and $92.41 million, respectively.
The allowance for loan losses represents managements best estimate of probable losses associated
with the Banks loan portfolio and deposit account overdrafts. The estimate is based on
evaluations of loan collectability and prior loan loss experience. The appropriateness of the
recorded allowance is evaluated each quarter in a manner consistent with the Interagency Policy
Statement issued by the Federal Financial Institutions Examination Council and United States
Generally Accepted Accounting Principles (GAAP). In determining the level of the allowance, the
Bank estimates losses inherent in all loans and evaluates impaired loans to determine the amount,
if any, necessary for a specific reserve. Loans not evaluated for impairment and not requiring a
specific allocation are subject to a general allocation based on historical loss rates and other
subjective factors. An important element in determining the adequacy of the allowance is an
analysis of loans by loan risk rating categories. The Bank regularly reviews the loan portfolio to
evaluate the accuracy of risk ratings throughout the life of loans.
13
Table of Contents
The methodology for estimating inherent losses in the portfolio takes into consideration all loans
in the portfolio, segmented by industry type and risk rating, and utilizes a number of subjective
factors in addition to historical loss rates. Subjective factors include: the economic outlook on
both a national and regional level; the volume and severity of non-performing loans; the nature and
value of collateral securing the loans; trends in loan growth; concentrations in borrowers,
industries and geographic regions; and competitive issues that impact loan underwriting.
Increases to the allowance occur when amounts are expensed to the provision for loan losses or when
there is a recovery for a loan or overdrafts previously charged-off. Decreases occur when loans
are charged-off or for overdrafts that are deemed uncollectible. The Bank determines the
appropriateness and amount of these charges by assessing the risk potential in the portfolio on an
ongoing basis. Loan charge-offs do not necessarily result in the recognition of additional
expense, except in cases where the amount of a loan charge-off exceeds the loss amount previously
provided for in the allowance for loan losses and additional provisions are expensed for the
difference.
The liability for off-balance-sheet financial instruments represents the Banks estimate of
probable losses associated with off-balance-sheet financial instruments, which consist of
commitments to extend credit, and commercial and standby letters of credit. The liability is
included as a component of Accrued interest payable and other liabilities on the balance sheet.
The adequacy of the liability for credit losses from off-balance-sheet financial instruments are
evaluated based upon reviews of individual credit facilities, current economic conditions, the risk
characteristics of the various categories of commitments and other relevant factors. The liability
is based on estimates, which are evaluated on a regular basis, and, as adjustments become
necessary, they are reported in earnings in the periods in which they become known.
Various regulatory agencies, as a regular part of their examination process, periodically review
the Banks allowance for loan losses. Such agencies may require the Bank to recognize additions to
the allowance based on their judgment of information available to them at the time of the
examinations.
Changes in the allowance for loan losses were as follows for the three and nine months ended
September 30, 2009 and 2008:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
BALANCE, beginning of period |
$ | 22,743,182 | $ | 17,099,148 | $ | 24,492,350 | $ | 11,174,199 | ||||||||
Provision for loan losses |
20,250,000 | 25,400,000 | 44,350,000 | 34,100,000 | ||||||||||||
Loans charged off |
(23,499,936 | ) | (21,423,938 | ) | (49,618,820 | ) | (24,368,275 | ) | ||||||||
Loan recoveries |
113,705 | 71,181 | 383,421 | 240,467 | ||||||||||||
Adjustment for credit card sales |
| (219,416 | ) | | (219,416 | ) | ||||||||||
BALANCE, end of period |
$ | 19,606,951 | $ | 20,926,975 | $ | 19,606,951 | $ | 20,926,975 | ||||||||
6. Other Real Estate Owned
Other real estate owned (OREO) represents property acquired through foreclosure or deeds in lieu
of foreclosure and is carried at the lower of cost or estimated net realizable value. Net
realizable value is determined based on real estate appraisals less estimated selling costs. When property is
acquired, any excess of the loan balance over its estimated net realizable value is charged to the
allowance for loan losses. Subsequent write-downs to the net realizable value, if any, or any
disposition gains or losses are recognized in current earnings. As of September 30, 2009 and
December 31, 2008, OREO totaled $15.25 million and $9.62 million, respectively.
14
Table of Contents
7. Federal Funds Purchased and Federal Home Loan Bank Advances
The Bank does not maintain any federal funds lines of credit, presently or, as of September 30,
2009.
The Bank is a member of the Federal Home Loan Bank (FHLB) of Seattle and has entered into credit
arrangements with the FHLB under which authorized borrowings are collateralized by the Banks FHLB
stock as well as loans or other instruments which may be pledged. Interest rates on outstanding
borrowings range from 2.72% to 5.48%. As of September 30, 2009, maximum available FHLB borrowings
were $41.12 million, of which $22.72 million was available based on outstanding borrowings and
collateral balances.
FHLB borrowings outstanding as of September 30, 2009 and December 31, 2008 were as follows:
September 30, 2009 | December 31, 2008 | |||||||||||||||||||
Weighted- | Weighted- | |||||||||||||||||||
Maturity | Average | Maturity | Average | |||||||||||||||||
Amount | Year | Interest Rate | Amount | Year | Interest Rate | |||||||||||||||
$ | | 2009 |
| % | $ | 18,151,613 | 2009 | 2.94 | % | |||||||||||
18,000,000 | 2010 |
2.80 | % | 18,000,000 | 2010 | 2.80 | % | |||||||||||||
400,406 | 2013 |
5.47 | % | 461,117 | 2013 | 5.47 | % | |||||||||||||
$ | 18,400,406 | 2.86 | % | $ | 36,612,730 | 2.91 | % | |||||||||||||
The Bank has a secured credit arrangement with the Federal Reserve Bank of San Francisco (FRB)
under which authorized borrowings are collateralized by loans and other instruments which may be
pledged. Borrowings outstanding under this agreement bear interest at 1.00% as of September 30,
2009. As of September 30, 2009, there were no outstanding borrowings under this agreement and
maximum available borrowings were limited to $63.35 million, based on collateral balances.
8. Loss Per Share
Basic loss per share is computed by dividing net loss available to shareholders by the
weighted-average number of common shares outstanding during the period, after giving retroactive
effect to stock dividends and splits. Diluted loss per share is computed similar to basic loss per
share except the denominator is increased to include the number of additional common shares that
would have been outstanding if dilutive potential common shares had been issued, unless the impact
is anti-dilutive. Due to Columbias year to date net loss position, potentially dilutive common
shares under the treasury stock method have been excluded, including un-exercised stock options,
totaling 280,599 and 289,325 weighted average shares for the three and nine months ended September
30, 2009, respectively.
9. Income Tax
During the three months ended June 30, 2009, Columbia recorded a deferred tax asset (DTA)
valuation allowance of $12.00 million. Under GAAP, management is required to assess whether it is
more likely than not that some or all of the companys DTA will not be realized. The asset must be
written down to the extent that tax rules may potentially limit the ultimate realization of the DTA
(generally through a carryback to prior years taxable income). While the benefit of the DTA may
still be realized in the future, accounting rules limit the extent to which a company may utilize
projections of future income to support current DTAs. For the three months ended September 30,
2009, an additional $10.34 million was added to the established valuation allowance for changes in
the deferred tax asset position.
15
Table of Contents
A company is required to project what its effective tax rate will be for the full year
(including the impact of any valuation allowances for temporary differences originating during the
year). This annualized effective tax rate is then applied to each interim quarter during the year.
The change in valuation allowance is attributable to deferred tax assets (including DTAs related
to the allowance for loan losses, valuation adjustments to OREO properties and purchased state tax
credits) that originated in 2009. Therefore, management determined that it is appropriate to
adjust the estimated annual effective tax rate for the year.
In November 2009, the U.S. Congress passed, and the President signed into law, a bill that would
extend the allowable period of carry-back for net operating losses from two years to five years for
losses incurred in either 2008 or 2009 (H.R. 3548). As a result and based on net losses for the
nine months ended September 30, 2009, Columbia expects to recognize approximately $5.00 million of
income tax benefit during the three months ended December 31, 2009. The tax benefit would be
recorded as income thereby increasing capital by an equal amount. The amount of additional benefit
will vary based on the final amount of net operating loss for 2009.
10. Fair Value of Financial Instruments and Fair Value Measurements
The following table presents estimates of fair value and the related carrying amounts of Columbias
financial instruments:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(dollars in thousands) | Amount | Value | Amount | Value | ||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 233,310 | $ | 233,310 | $ | 182,479 | $ | 182,479 | ||||||||
Investment securities available-for-sale |
30,037 | 30,037 | 20,892 | 20,892 | ||||||||||||
Investment securities held-to-maturity |
5,220 | 5,412 | 8,130 | 8,284 | ||||||||||||
Restricted equity securities |
3,055 | 3,055 | 3,055 | 3,055 | ||||||||||||
Loans, net of allowance for loan losses
and unearned loan
fees |
716,023 | 681,204 | 838,950 | 790,467 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Demand and savings deposits |
$ | 519,189 | $ | 519,189 | $ | 518,040 | $ | 518,040 | ||||||||
Time certificates |
490,802 | 497,870 | 486,157 | 495,880 | ||||||||||||
FHLB Advances |
18,400 | 18,670 | 36,613 | 37,037 |
GAAP provides the following hierarchy of valuation techniques:
|
Level 1 | Quoted unadjusted prices in active markets for identical assets or liabilities | ||
|
Level 2 | Significant observable inputs other than quoted prices in Level 1, such as quoted prices in active markets for similar assets or liabilities, or quoted prices for identical assets or liabilities in markets that are not active | ||
|
Level 3 | Significant unobservable inputs based on the companys own assumptions about the assumptions that market participants would use in pricing the asset or liability |
Certain assets and liabilities are measured at fair value on a recurring or non-recurring basis.
Assets and liabilities measured at fair value on a recurring basis are initially measured at fair
value and then re-measured at fair value at each financial statement reporting date. Assets and liabilities measured
at fair value on a non-recurring basis result from write-downs due to impairment or
lower-of-cost-or-market accounting on assets or liabilities not initially measured at fair value.
16
Table of Contents
The following table presents financial assets and liabilities measured at fair value on a recurring
basis as of September 30, 2009:
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2009 | Inputs | Inputs | Inputs | |||||||||||||
Debt securities, available-for-sale |
$ | 28,275,031 | $ | | $ | 28,275,031 | $ | | ||||||||
Equity securities, available-for-sale |
1,762,083 | 1,762,083 | | | ||||||||||||
Total assets measured at fair value on recurring basis |
$ | 30,037,114 | $ | 1,762,083 | $ | 28,275,031 | $ | | ||||||||
The following table presents assets and liabilities measured at fair value on a non-recurring basis
as of September 30, 2009:
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2009 | Inputs | Inputs | Inputs | |||||||||||||
Other real estate owned |
$ | 15,245,699 | $ | | $ | | $ | 15,245,699 | ||||||||
Collateral-dependent impaired loans measured at
fair value of loans collateral |
86,805,261 | | | 86,805,261 | ||||||||||||
Total assets measured at fair value on
non-recurring basis |
$ | 102,050,960 | $ | | $ | | $ | 102,050,960 | ||||||||
During the three and nine months ended September 30, 2009, impairments charges of $525,760 and
$1.07 million, respectively, were recognized to adjust the carrying value of OREO properties to
updated fair values. Specific allowances to adjust collateral-dependent impaired loans to updated
fair values totaled $18.46 million and $38.61 million, respectively, for the three and nine months
ended September 30, 2009.
As of September 30, 2009, certain impaired loans were not considered totally collateral-dependent
because borrowers were still making payments from normal cash flow sources outside of the
liquidation of the primary and secondary collateral base. These accounts generally were real
estate secured loans where expected cash flow projections reflected an ability to make payments, or
borrowers and credits whose circumstances were substantially similar.
The following table reconciles collateral-dependent impaired loans to total impaired loans as of
September 30, 2009:
Carrying value of collateral-dependent impaired loans
measured at fair value of loans collateral |
$ | 86,805,261 | ||
Fair market value adjustment |
4,715,573 | |||
Original book value of collateral-dependent loans |
91,520,834 | |||
Impaired loans carried at historical cost: |
||||
Commercial |
1,342,083 | |||
Real Estate |
10,546,845 | |||
Agriculture |
1,388,945 | |||
Other |
3,130,885 | |||
Total impaired loans |
$ | 107,929,592 | ||
17
Table of Contents
The following methods and assumptions were used by Columbia in estimating fair values of financial
instruments as disclosed herein:
Held-to-maturity and available-for-sale debt securities, equity securities and restricted equity
securities Fair values for investment securities, excluding restricted equity securities, are
based on quoted market prices in active markets. If quoted prices are not available, fair value is
based on an independent vendor pricing models, which utilizes quoted prices of similar securities,
discounted cash flows, market interest rate curves, credit spreads, and estimated pre-payment
rates, as applicable. Changes in the fair value of available-for-sale securities are recorded in
other comprehensive income. The carrying value of restricted equity securities approximates fair
value.
Loans receivable The carrying value of variable rate loans that re-price frequently and have no
significant change in credit risk approximates fair value. Fair values for certain mortgage loans
(for example, one-to-four family residential loans) and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for fixed-rate commercial real estate and
commercial loans are estimated using a present value of future expected cash flow methodology which
includes, among other factors, estimated liquidity discounts. The carrying value of impaired loans
approximates fair value.
Other real estate owned Fair values of OREO are based on a combination of independent appraisals
performed on the individual properties within OREO, internal valuations performed by on-staff
certified appraisers and managements evaluation of expected sales prices and selling costs. When
property is acquired, any excess of the loan balance over its estimated net realizable value is
charged to the allowance for loan losses. Subsequent analyses of fair market values are performed
on a regular basis, and carrying values of properties are written down as necessary.
Collateral-dependent impaired loans Collateral-dependent impaired loans are measured at the fair
value of the underlying collateral less estimated costs to sell. Collateral values are based on
property appraisals and managements judgment. Adjustments to reflect the fair value of
collateral-dependent impaired loans are a component in determining an appropriate allowance for
loan losses. As a result, adjustments to the fair value of collateral-dependent impaired loans may
result in increases or decreases to the provision for loan losses recorded in current earnings.
The associated increase in the allowance
for loan losses is reflected in the provision for loan losses in the income statement.
Collateral-dependent loans do not necessarily include all non-accrual notes, as certain loans
classified as non-accrual notes may have other sources of cash flow excluding the liquidation of
collateral. These accounts are typically agricultural credits where projected crop sales and
expected cash flow projections reflect an ability to make payments or borrowers whose circumstances
were substantially similar.
Deposit liabilities The fair value of deposits with no stated maturity is equal to the amount
payable on demand. The fair value of time certificates of deposit is estimated using a present
value of future cash flow methodology. Present value is measured using current market interest
rates and contractual cash flows.
Short-term borrowings The carrying value of federal funds purchased, borrowings under repurchase
agreements and other short-term borrowings maturing within 90 days approximates fair value. Fair
values of other borrowings are estimated using discounted cash flow analyses based on the Banks
current incremental borrowing rates for similar types of borrowing arrangements.
Long-term debt The fair value of Columbias long-term debt is estimated using a discounted cash
flow analysis based on Columbias current incremental borrowing rate for similar types of borrowing
arrangements.
18
Table of Contents
Off-balance-sheet instruments The Banks off-balance-sheet instruments include unfunded
commitments to extend credit and standby and performance letters of credit. The fair value of
these instruments is not considered practicable to estimate because of the lack of quoted market
prices and the inability to estimate fair value without incurring excessive costs.
Each of the aforementioned methods and assumptions are unchanged from December 31, 2008 to
September 30, 2009.
11. Reclassifications
During the period, Columbia reclassified amounts from other non-interest income and non-interest
expense into payment systems revenue. Payment systems revenue includes interchange income from
credit and debit cards, annual fees, and other transaction and account management fees.
Interchange income is a fee paid by a merchant bank to the card-issuing bank through the
interchange network. Interchange fees are set by the credit card associations and are based on
cardholder purchase volumes. Columbia records interchange income as transactions occur.
Transaction and account management fees are recognized as transactions occur or services are
provided. Volume-related payments to partners and credit card associations and expenses for
rewards programs are also recorded within payment systems revenue. Payments to partners and
expenses related to rewards programs are recorded when earned by the partner or customer.
12. Recent Accounting Pronouncements
In April 2009, the FASB issued the following three FASB Staff Positions (FSP) to provide
additional guidance and enhance disclosures regarding fair value measurements and impairment of
securities:
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides
additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and
level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is not orderly. The
provisions of FSP FAS 157-4 are effective for Columbias current interim period. Adoption of FSP
FAS 157-4 did not have a material impact on Columbias consolidated financial statements.
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,
requires disclosures about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in annual financial
statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for Columbias current
interim period and the required disclosures have been added to the notes to the interim financial
statements.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments,
amends current other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This FSP does not amend
existing recognition and measurement guidance related to other-than-temporary impairments of equity
securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for Columbias current
interim period. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on
Columbias consolidated financial statements.
19
Table of Contents
In May 2009, FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 established general
standards of accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. It should not result in
significant changes in the subsequent events that an entity reports, either through recognition or
disclosure in its financial statements. The statement requires disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be issued. This
disclosure should alert all users of financial statements that an entity has not evaluated
subsequent events after that date in the set of financial statements being presented. We adopted
the provisions of SFAS No. 165 for the interim period ended June 30, 2009, and the impact of
adoption did not have a material impact on Columbias consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. Under this FSP EITF 03-6-1,
unvested share-based payment awards that contain non-forfeitable rights to dividends will be
considered to be a separate class of common stock and will be included in the basic EPS calculation
using the two-class method that is described in FASB Statement No. 128, Earnings per Share. FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods
within those years. The adoption of FSB EITF 03-6-1 did not have a material impact on Columbias
consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162,.
SFAS 168 establishes the FASB Accounting Standards Codification (Codification) as the source of
authoritative GAAP for nongovernmental entities. The Codification does not change GAAP. Instead,
it takes the thousands of individual pronouncements that previously comprised GAAP and reorganizes
them into approximately 90 accounting Topics, and displays all Topics using a consistent structure.
Contents in each Topic are further organized first by Subtopic, then Section and finally
Paragraph. The Paragraph level is the only level that contains substantive content. Citing
particular content in the
Codification involves specifying the unique numeric path to the content through the Topic,
Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with FASB ASC,
where ASC stands for Accounting Standards Codification. Changes to the ASC subsequent to June 30,
2009 are referred to as Accounting Standards Updates (ASU).
In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards
Update No. 2009-1, Topic 105 Generally Accepted Accounting Principles which includes SFAS 168
in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual
periods ending after September 15, 2009 and will not have an impact on Columbias consolidated
financial statements but will change the referencing system for accounting standards. Certain of
the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs.
For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section
are provided where applicable in addition to the original standard type and number.
The FASB issued ASU 200905, Fair Value Measurements and Disclosures (Topic 820) Measuring
Liabilities at Fair Value in August, 2009 to provide guidance when estimating the fair value of a
liability. When a quoted price in an active market for the identical liability is not available,
fair value should be measured using (a) the quoted price of an identical liability when traded as
an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets;
or (c) another valuation technique consistent with the principles of Topic 820 such as an income
approach or a market approach. If a restriction exists that prevents the transfer of the
liability, a separate adjustment related to the restriction is not required when estimating fair
value. The ASU was effective October 1, 2009 for Columbia and will have no impact on financial
position or operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting
bodies are not expected to have a material impact on Columbias consolidated financial statements.
20
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains various forward-looking statements that are intended to
be covered by the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). These statements include statements about our present plans and
intentions, about our strategy, growth, and deployment of resources, and about our expectations for
future financial performance. Forward-looking statements sometimes are accompanied by prospective
language, including words like may, will, should, expect, anticipate, estimate,
continue, plans, intends, or other similar terminology.
Because forward-looking statements are, in part, an attempt to project future events and explain
current plans, they are subject to various risks and uncertainties, which could cause our actions
and our financial and operational results to differ materially from those projected in
forward-looking statements. These risks and uncertainties include, without limitation, the factors
discussed in Part II Section 1A Risk Factors.
Information presented in this report is accurate as of the date the report is filed with the SEC.
We do not undertake any duty to update our forward-looking statements or the factors that may cause
us to deviate from them, except as required by law.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as
disclosures included elsewhere in this Form 10-Q, are based upon consolidated financial statements
which have been prepared in accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. On an ongoing basis, management evaluates the estimates used, including the adequacy of
the allowance for loan losses, impairment of intangible assets, contingencies and litigation.
Estimates are based upon historical experience, current economic conditions and other factors that
management considers reasonable under the circumstances. These estimates result in judgments
regarding the carrying values of assets and liabilities when these values are not readily available
from other sources as well as assessing and identifying the accounting treatments of commitments
and contingencies. Actual results may differ from these estimates under different assumptions or
conditions. The following critical accounting policies involve the more significant judgments and
assumptions used in the preparation of the consolidated financial statements.
Allowance for Loan Losses
Our allowance for loan losses represents our estimate of probable losses associated with our loan
portfolio and deposit account overdrafts as of the reporting date. Management evaluates the amount
of our allowance each quarter in a manner consistent with the Interagency Policy Statement issued
by the Federal Financial Institutions Examination Council (FFIEC) and with GAAP. In determining
the level of the allowance, we estimate losses inherent in all loans and evaluate individual
classified and non-performing loans to determine the amount, if any, necessary for a specific
reserve. Certain loans have been stress tested for potential impairment whether or not currently
performing according to terms; these loans may require a specific allocation based on historical
loss rates and other subjective factors, to the extent that impairment is not identified. Loans
not evaluated for impairment and not requiring a specific allocation because the loan is determined
not to be impaired are subject to a general allocation based on historical loss rates and other
subjective factors. An important element in determining the adequacy of the allowance is an
analysis of loans by loan risk rating categories. We regularly review our loan portfolio to
evaluate the accuracy of risk ratings throughout the life of loans.
21
Table of Contents
Our methodology for estimating inherent losses in the portfolio takes into consideration all loans
in our portfolio, segmented by industry type and risk rating, and utilizes a number of subjective
factors in addition to historical loss rates. Subjective factors include: the economic outlook on
both a national and regional level; the volume and severity of non-performing loans; the nature,
value and estimated liquidity of collateral securing the loans; trends in loan growth;
concentrations with individual and interrelated borrowers, industries and geographic regions; and
competitive issues that impact loan underwriting.
Increases to the allowance occur when we expense amounts to the provision for loan losses or when
we recover previously charged-off loans or overdrafts. We reduce the allowance when we charge-off
loans or overdrafts that are deemed uncollectible, although we do not necessarily cease collection
activities when a loan is charged-off. We determine the appropriateness and amount of these
charges by assessing the risk potential in our portfolio on an ongoing basis. Loan charge-offs do
not result in the recognition of additional expense, unless the amount of a loan charge-off exceeds
the loss amount previously provided for in the allowance for loan losses.
On loans of either a larger size or troubled industry classification, we also may perform an
individual risk analysis on specific performing loans. This individual analysis may include
factors such as an updated review of the value of the collateral securing the loan, the geographic
location of the loan, the expected or potential cash flows from the borrowers operations, the
relative strength and liquidity of the guarantors and the past payment performance on the loan. If
existing, collateral appraisals or evaluations are, in our opinion, dated or stale, we will
typically obtain new appraisals or evaluations and these new values will be used to evaluate the
risk of the loan and resulting provision for loan losses. Furthermore, in cases where the cash
flow or liquidity of the borrower has been eliminated or there is an absence of guarantor strength,
we may deem the loan to be totally collateral dependent. In such cases, if the analysis of the net
realizable value of the loan collateral is determined to be deficient, that deficiency is
charged-off.
The liability for off-balance-sheet financial instruments represents our best estimate of probable
losses associated with off-balance-sheet financial instruments, which consist of commitments to
extend credit, commitments under credit card arrangements, and commercial and standby letters of
credit. The liability is included as a component of Accrued interest payable and other
liabilities on our balance sheet.
We evaluate the adequacy of the liability for credit losses from off-balance-sheet financial
instruments based upon reviews of individual credit facilities, current economic conditions, the
risk characteristics of the various categories of commitments and other relevant factors. The
liability is based on estimates, which are evaluated on a regular basis, and, as adjustments become
necessary, they are reported in earnings in the periods in which they become known.
Approximately 72%, or $531.85 million, of our loan portfolio is secured by real estate collateral.
Within the total balance of loans secured by real estate, certain loans are designated as
construction credits. Of these, $59.10 million is secured by commercial property under
construction (office buildings, warehouse, commercial lot pads, etc.) and $122.45 million is
secured by residential property under construction (residential subdivisions, 1-4 family dwellings,
homes under construction by developers, etc.). We are actively monitoring residential and
commercial real estate values in all of our markets. The residential markets have declined
significantly in our Central Oregon and Portland-Vancouver metropolitan markets. Some of our more
rural eastern Oregon and Washington markets have remained stable or experienced only minor
declines. Although commercial real estate markets are also softening, only Central Oregon has
demonstrated significant distress at this time. In addition, due to the downturn in national and
regional real estate sales, a number of our residential real estate construction and acquisition
and development customers have been unable to sell existing inventories in the normal course of
business and the repayment of these loans is now solely dependent on the liquidation of the
collateral. Many of the loans of this nature were written down to their estimated fair market
value less estimated costs to sell, resulting in significant charge-offs during the year ended
December 31, 2008 and nine months ended September 30, 2009. For example, during the nine months
ended September 30, 2009, we wrote down $32.63 million of residential construction loans based on
appraisal declines or other factors. Write downs of commercial construction projects were less
significant, totaling $635,750 during the nine months ended September 30, 2009.
22
Table of Contents
Income Taxes
We estimate tax expense based on the amount of taxes we expect to owe various taxing authorities in
the current and future periods for transactions arising during the current period. Accrued and/or
refundable income tax represents the net estimated amount due or to be received from taxing
authorities. In estimating accrued taxes and refundable taxes, we assess the relative merits and
risks of the appropriate tax treatment of transactions taking into account statutory, judicial and
regulatory guidance in the context of our tax position.
The determination of our ability to fully utilize our deferred tax assets requires significant
judgment, the use of estimates and the interpretation of complex tax laws. During the three month
period ended June 30, 2009, we determined that it is not, more likely than not, that we would be
able to fully recognize a portion of our deferred tax assets. That evaluation is unchanged as of
September 30, 2009; therefore, we maintained a valuation allowance to reduce our net deferred tax
assets to zero.
OVERVIEW
Columbia Bancorp (Columbia) is a bank holding company organized in 1996 under Oregon Law.
Columbias common stock is traded on the Nasdaq Global Select Market under the symbol CBBO.
Columbias wholly-owned subsidiary, Columbia River Bank (CRB or the Bank), is an Oregon
state-chartered bank, headquartered in The Dalles, Oregon, through which substantially all business
is conducted. CRB offers a broad range of services to its customers, primarily small and medium
sized businesses and individuals.
We have a network of 21 full-service branches throughout Oregon and Washington. In Oregon, we
operate 14 branches. These branches serve the northern and eastern Oregon communities of The
Dalles, Hood River, Pendleton and Hermiston, the central Oregon communities of Madras, Redmond, and
Bend, and the Willamette Valley communities of McMinnville, Canby and Newberg. In Washington, we
operate seven branches. These branches serve the communities of Goldendale, White Salmon, Pasco,
Yakima, Sunnyside, Richland and Vancouver.
Strategic Initiatives:
A primary business strategy has been a continuing focus on improving credit quality and resolving
non-performing assets. During the third quarter of 2009, we were able to resolve eight of our
previously reported properties maintained in other real estate owned, totaling approximately $3.43
million. Over half of these properties were located in the Central Oregon region and the majority
of the other properties were located in the Portland/Vancouver metro area. In addition, we have
executed contracts for the sale of ten additional properties, representing approximately $3.04
million of our recorded other real estate owned, which are expected to close in the fourth quarter
of 2009. While we continued to have additional loans progress to foreclosure during the quarter
ended September 30, 2009, we were pleased with increased sales activity, a benefit from a second
quarter strategic decision to re-align our Special Asset Team and to engage a dedicated real estate
broker responsible for coordinating the marketing efforts of our other real estate owned.
To aid our continued momentum in credit resolution, during the quarter ended September 30, 2009, we
added three additional senior Special Asset Team members. This brings our total special asset team
to a level of 7 officers and 4 support staff. All of these individuals are seasoned experts in
working problem credits to maximize the repayment and recovery of funds. In addition, to improve
our efficiency while stemming costs, we have engaged in-house legal counsel to aid in these
collection and resolution efforts.
23
Table of Contents
As we reduce our concentrations of real estate construction and development loans, we plan to
diversify our lending into other loan categories in both the commercial and consumer sectors. We
plan to expand our commercial and industrial lending activity, especially in our core market areas,
with a focus on asset-based lending and equipment financing. We also plan to put more emphasis on
agricultural lending activities, including production and equipment financing. In addition, we plan
to expand lending to professional service firms, including medical professionals, accountants and
attorneys. Our lending will continue to be directed towards small to medium-sized businesses
located within the regions in which we do business. We believe this lending strategy will help
return the company to a sustainable level of growth and earnings.
During the three months ended September 30, 2009, our liquidity ratios continued to improve as we
were successful in opening 1,320 new retail deposit accounts and maintaining our retail and
wholesale deposit balances, while allowing $31.00 million of brokered certificates of deposit to
mature without renewal. As of September 30, 2009, the ratio of liquid assets to total assets
improved to 22% from 17% and 16% as of June 30, 2009 and December 31, 2008, respectively. As a
result of our improved liquidity position, we began a strategic initiative to deploy excess cash
balances into investment securities and investment certificates of deposit at correspondent banks
purchased through internet-based listing services.
Financial Overview:
The following table presents an overview of our key financial performance indicators:
Key Financial Performance Indicators:
(dollars in thousands except per share data)
(dollars in thousands except per share data)
As of and for the | As of and for the | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
Return on average assets |
-8.15 | % | -5.01 | % | -6.55 | % | 1.63 | % | ||||||||||||||||
Return on average equity |
-221.61 | % | -59.62 | % | -119.81 | % | -17.47 | % | ||||||||||||||||
Average equity to average assets |
3.68 | % | 8.40 | % | 5.47 | % | 9.33 | % | ||||||||||||||||
Net interest margin, tax equivalent basis |
2.71 | % | 3.86 | % | 2.71 | % | 4.51 | % | ||||||||||||||||
Efficiency ratio |
118.88 | % | 83.42 | % | 119.70 | % | 71.59 | % | ||||||||||||||||
Net loss |
$ | (21,908 | ) | $ | (14,091 | ) | 55 | % | $ | (52,091 | ) | $ | (13,078 | ) | 298 | % | ||||||||
Loss per diluted common share |
$ | (2.18 | ) | $ | (1.41 | ) | 55 | % | $ | (5.18 | ) | $ | (1.31 | ) | 295 | % | ||||||||
Total gross loans (1) |
$ | 736,213 | $ | 924,181 | -20 | % | ||||||||||||||||||
Total assets |
$ | 1,057,717 | $ | 1,150,026 | -8 | % | ||||||||||||||||||
Deposits |
$ | 1,009,991 | $ | 1,015,068 | -1 | % | ||||||||||||||||||
Book value per common share |
$ | 2.31 | $ | 8.75 | -74 | % | ||||||||||||||||||
Tangible book value per common share |
$ | 2.31 | $ | 8.02 | -71 | % |
(1) | Includes loan portfolio and loans held-for-sale and excludes allowance for loan losses and unearned loan fees. |
The decrease noted in earnings per diluted share for the three and nine months ended September
30, 2009 was primarily due to an increase in the provision for loan losses, the valuation allowance
recorded against deferred tax assets, the effect of net interest margin compression and increases
in non-interest expenses related to the increase in FDIC premiums.
24
Table of Contents
Significant items as of and for the three months ended September 30, 2009 were as follows:
| Rebalanced assets and liabilities. As a part of our strategic plan to re-balance our assets and liabilities and focus closely upon our asset quality, gross loans decreased by $127.79 million from December 31, 2008. This decline was accomplished in several ways. First we decided to exit certain market sectors and customer relationships. Secondly, loan totals have dropped due to the migration of troubled loans to other real estate owned (OREO). Finally, loans have decreased due to charge-offs against our allowance for loan loss. Gross loans as of September 30, 2009 decreased $63.35 million, or 8%, from June 30, 2009 for the same reasons. | ||
| Non-performing assets (NPAs) of $123.18 million, or 12% of total assets. As of September 30, 2009, non-accrual loans, excluding troubled debt restructures, comprised $103.22 million, or 84%, of NPAs. Troubled debt restructures, which are also on non-accrual status, totaled $4.70 million, or 4%, of NPAs as of September 30, 2009. The remaining balance of NPAs as of September 30, 2009 of $15.25 million, or 12%, was comprised of properties held as OREO. Of the non-accrual loans as of September 30, 2009, $67.95 million, or 66%, of the total are loans secured by real estate construction properties, $8.67 million, or 8%, are loans secured by residential home loans, $9.28 million, or 9%, are loans secured by commercial real estate, $4.53 million, or 4%, are loans secured by agricultural farmland, and the remaining $12.80 million, or 13%, are loans secured by other miscellaneous asset types. | ||
| Loan loss provision of $20.25 million. Our third quarter 2009 loan loss provision decreased $5.15 million, or 20%, compared to the third quarter of 2008. Loan loss provision for the third quarter of 2009 increased $10.55 million and $5.85 million, respectively, compared to the first and second quarters of 2009. The increases from earlier quarters in 2009 was primarily due to losses related to a large agricultural credit where collateral values had declined, continued losses from other collateral-dependent loans and the application of higher estimated loss rates in our allowance methodology. | ||
| Repaid $40.96 million of brokered deposits and borrowings. We paid off higher-cost wholesale borrowings and deposits using available liquid assets and retail deposits gathered over the last several months, and have concentrated heavily on maintaining retail deposits. Compared to June 30, 2009, total deposits increased $17.30 million including a $9.10 million increase in non-interest bearing demand deposits and a $6.86 million increase in money market and NOW deposits. | ||
| Regulatory capital ratios. As of September 30, 2009, Columbia River Bank is classified as significantly under-capitalized based on the following regulatory capital ratios: Tier 1 leverage ratio 2.08%, Tier 1 risk-based capital ratio 2.78% and total risk-based capital ratio 4.05%. | ||
| FDIC premiums increased $4.10 million, or 720%, year over year. FDIC premiums and state assessments totaled $1.32 million for the three months ended September 30, 2009, an increase of $1.12 million, in comparison to the same period in 2008. The increase is a result of increases in premium assessments imposed by the FDIC and the FDICs rates applicable to institutions with our capital ratios. For the nine months ended September 30, 2009, our FDIC premiums and state assessments totaled $4.66 million, an increase of $4.10 million, in comparison to the same period in 2008. In addition to the FDIC rate changes, premiums increased due to a special assessment assessed on all financial institutions during the second quarter of 2009 totaling 0.05% of total assets, or approximately $496,000. |
25
Table of Contents
| Reduced salaries and employee benefits expense. Salaries and employee benefits decreased 24%, or $1.35 million, for the three months ended September 30, 2009 in comparison to the same period in 2008. Contributing to the decrease was the cost cutting measure to discontinue the 401(k) match along with the overall reduction in full-time employee equivalents (FTE). FTEs have decreased by 43, or 12%, from 365 FTEs as of September 30, 2008 to 322 FTEs as of September 30, 2009. We have reduced our salary and benefit expense, while maintaining high quality customer service; as such many of the employee reductions were made in areas not affecting our service delivery. In some circumstances resources have been re-aligned to better serve our customer base, or to assist in non-performing loan management. As we continue to actively manage our non-performing asset portfolio, we expect to hire additional employees and experts to assist where necessary. These additional resources may offset a portion of our previously expected savings. | ||
| Net interest margin lower due to interest rate cuts and higher levels of non-accrual loans. Net interest margin decreased for the three and nine months ended September 30, 2009 compared to the same periods in 2008. During the three and nine months ended September 30, 2009, approximately $2.60 million and $11.90 million, respectively, of interest income was not recognized for loans on non-accrual status. This resulted in a 103 and 159 basis point reduction in our net interest margin for the three and nine months ended September 30, 2009, respectively. Lower deposit rates and repayment of higher cost brokered deposits partially offset the decrease in the net interest margin. |
RESULTS OF OPERATIONS
Net Loss
Net loss for the three months ended September 30, 2009 totaled $21.91 million, or $2.18 per diluted
share, which represents an increase of $7.82 million from a net loss of $14.09 million, or $1.41
per diluted share, for the three months ended September 30, 2008.
For the nine months ended September 30, 2009, net loss totaled $52.09 million, or $5.18 per diluted
share, which represents an increase of $39.01 million from net loss of $13.08 million, or $1.31 per
diluted share, for the same period in 2008.
Net Interest Income
Net interest income, our primary source of operating income, is the difference between interest
income and interest expense. Interest income is earned primarily from our loan and investment
security portfolios. Interest expense results primarily from customer deposits and borrowings from
other sources, including Federal Home Loan Bank advances and wholesale deposits. Like most
financial institutions, our net interest income increases when we are able to charge higher
interest rates on loans while paying relatively lower interest rates on deposits and other
borrowings.
26
Table of Contents
The following table presents a comparison of average balances and interest rates:
Net Interest Income Average Balances and Rates:
(dollars in thousands)
(dollars in thousands)
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
Average Balances | Average Yields/Costs Tax Equivalent | |||||||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
Taxable securities |
$ | 34,467 | $ | 14,505 | $ | 19,962 | 2.88 | % | 4.41 | % | -1.53 | % | ||||||||||||
Nontaxable securities (1) |
4,284 | 8,567 | (4,283 | ) | 6.42 | % | 6.95 | % | -0.53 | % | ||||||||||||||
Interest bearing deposits |
188,240 | 27,944 | 160,296 | 0.28 | % | 2.18 | % | -1.90 | % | |||||||||||||||
Federal funds sold |
326 | 54,371 | (54,045 | ) | 1.53 | % | 1.77 | % | -0.24 | % | ||||||||||||||
Loans (2) (3) |
772,716 | 948,689 | (175,973 | ) | 5.88 | % | 6.51 | % | -0.63 | % | ||||||||||||||
Interest earning assets |
1,000,033 | 1,054,076 | (54,043 | ) | 4.72 | % | 6.13 | % | -1.41 | % | ||||||||||||||
Non-earning assets |
66,462 | 65,624 | 838 | |||||||||||||||||||||
Total assets |
$ | 1,066,495 | $ | 1,119,700 | $ | (53,205 | ) | |||||||||||||||||
Savings & interest bearing deposits |
$ | 313,937 | $ | 347,087 | $ | (33,150 | ) | 1.21 | % | 1.75 | % | -0.54 | % | |||||||||||
Time certificates |
498,443 | 400,027 | 98,416 | 3.17 | % | 4.03 | % | -0.86 | % | |||||||||||||||
Borrowed funds |
19,223 | 58,470 | (39,247 | ) | 2.90 | % | 2.84 | % | 0.06 | % | ||||||||||||||
Interest bearing liabilities |
831,603 | 805,584 | 26,019 | 2.42 | % | 2.96 | % | -0.54 | % | |||||||||||||||
Non-interest bearing demand deposits |
189,569 | 211,394 | (21,825 | ) | ||||||||||||||||||||
Other liabilities |
6,103 | 8,693 | (2,590 | ) | ||||||||||||||||||||
Shareholders equity |
39,220 | 94,029 | (54,809 | ) | ||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 1,066,495 | $ | 1,119,700 | $ | (53,205 | ) | |||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
Average Balances | Average Yields/Costs Tax Equivalent | |||||||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
Taxable securities |
$ | 33,626 | $ | 19,510 | $ | 14,116 | 2.63 | % | 4.62 | % | -1.99 | % | ||||||||||||
Nontaxable securities (1) |
5,651 | 8,781 | (3,130 | ) | 6.59 | % | 6.99 | % | -0.40 | % | ||||||||||||||
Interest bearing deposits |
91,279 | 22,025 | 69,254 | 0.24 | % | 2.55 | % | -2.31 | % | |||||||||||||||
Federal funds sold |
52,914 | 34,358 | 18,556 | 0.18 | % | 2.17 | % | -1.99 | % | |||||||||||||||
Loans (2) (3) |
817,336 | 920,606 | (103,270 | ) | 5.85 | % | 7.16 | % | -1.31 | % | ||||||||||||||
Interest earning assets |
1,000,806 | 1,005,280 | (4,474 | ) | 4.93 | % | 6.84 | % | -1.91 | % | ||||||||||||||
Nonearning assets |
67,761 | 66,210 | 1,551 | |||||||||||||||||||||
Total assets |
$ | 1,068,567 | $ | 1,071,490 | $ | (2,923 | ) | |||||||||||||||||
Savings & interest bearing deposits |
$ | 310,138 | $ | 353,958 | $ | (43,820 | ) | 1.40 | % | 1.89 | % | -0.49 | % | |||||||||||
Time certificates |
479,535 | 361,751 | 117,784 | 3.59 | % | 4.33 | % | -0.74 | % | |||||||||||||||
Borrowed funds |
24,474 | 40,417 | (15,943 | ) | 2.94 | % | 2.81 | % | 0.13 | % | ||||||||||||||
Interest bearing liabilities |
814,147 | 756,126 | 58,021 | 2.74 | % | 3.10 | % | -0.36 | % | |||||||||||||||
Non-interest bearing demand deposits |
188,902 | 208,283 | (19,381 | ) | ||||||||||||||||||||
Other liabilities |
7,390 | 7,096 | 294 | |||||||||||||||||||||
Shareholders equity |
58,128 | 99,985 | (41,857 | ) | ||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 1,068,567 | $ | 1,071,490 | $ | (2,923 | ) | |||||||||||||||||
(1) | In calculation of average yield, tax-exempt income has been adjusted to a tax-equivelant basis at a rate of 35%. | |
(2) | Non-accrual loans and loans held-for-sale are included in the average balance. | |
(3) | Loan fee income is included in interest income and in calculation of average yield, three months and nine months ended September 30; 2009, $147, $274; 2008, $349, $1,184. |
27
Table of Contents
Net interest margin (net interest income as a percentage of average earning assets) measures how
well a bank manages its asset and liability pricing and duration, but is also subject to
fluctuations in the volume of earning assets, particularly during economic times in which loan
performance deteriorates on a widespread basis. Our tax equivalent net interest margin measured
2.71% for the three and nine months ended September 30, 2009, compared to 3.86% and 4.51% for the
same periods in 2008. The decrease in our tax equivalent net interest margin is primarily due to
three factors:
| Loan yields decreased as our variable rate loans tied to the prime rate charged by major financial institutions re-priced, following cuts in the Federal Funds rate. The prime rate has historically followed changes in the Federal Funds rate. | ||
| During the three and nine months ended September 30, 2009, approximately $1.18 million, and $3.28 million of interest income, respectively, was reversed as loans were placed on non-accrual status. When a loan is placed on non-accrual status, all interest recognized as income, but not yet paid, is reversed. Including this amount of reversed interest, we were unable to recognize additional interest income of approximately $2.60 million and $11.90 million relating to loans currently on non-accrual status for the three and nine months ended September 30, 2009, respectively. This foregone interest would have contributed approximately 103 and 159 basis points to the net interest margin for the three and nine months ended September 30, 2009, respectively. | ||
| As part of our strategic initiative to maintain and improve liquidity, we shifted our earning asset mix from overall higher yielding loans to lower yielding cash and liquid investments. |
Compared to the same periods in 2008, our cost of funds for the three and nine months ended
September 30, 2009 was lower primarily due to lower rates paid on retail deposits and the repayment
of higher-cost brokered deposits.
Unlike prior periods, our balance sheet is currently liability sensitive, meaning that interest
bearing liabilities mature or re-price more frequently than interest earning assets in a given
period. The sensitivity fluctuation resulted from the 175 basis point decrease in the Federal
Funds rate from September 30, 2008 to September 30, 2009. This decrease has greatly affected our
sensitivity because the majority of our loans are variable rate loans based on the prime rate. To
mitigate the potential effect of decreases in the Federal Funds rate, we have incorporated interest
rate floors into $454.97 million, or 62% of our loans. With the decrease in the Federal Funds rate
from 2.00% as of September 30, 2008 to a target rate of 0.00% to 0.25% as of September 30, 2009,
$392.14 million, or 53% of our loans are earning interest at their floor rate and are behaving
similar to fixed rate loans, which has resulted in our balance sheet being liability sensitive.
One factor that would contribute to our return to an asset sensitive balance sheet is the increase
of the Federal Funds rate by more than 200 basis points.
28
Table of Contents
The following table presents decreases in net interest income attributable to volume changes
versus rate changes:
Volume
vs. Rate Changes:
(dollars in thousands)
(dollars in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2009 over 2008 | 2009 over 2008 | |||||||||||||||||||||||
Increase (Decrease) due to | Increase (Decrease) due to | |||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||
Volume | Rate | Change | Volume | Rate | Change | |||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Loans |
$ | (2,946 | ) | $ | (1,133 | ) | $ | (4,079 | ) | $ | (5,488 | ) | $ | (8,138 | ) | $ | (13,626 | ) | ||||||
Investment
securities | ||||||||||||||||||||||||
Taxable securities |
218 | (130 | ) | 88 | 490 | (505 | ) | (15 | ) | |||||||||||||||
Nontaxable securities |
(49 | ) | (3 | ) | (52 | ) | (105 | ) | (12 | ) | (117 | ) | ||||||||||||
Balances due from banks |
870 | (925 | ) | (55 | ) | 1,424 | (1,680 | ) | (256 | ) | ||||||||||||||
Federal funds sold |
(241 | ) | | (241 | ) | 303 | (789 | ) | (486 | ) | ||||||||||||||
Total |
(2,148 | ) | (2,191 | ) | (4,339 | ) | (3,376 | ) | (11,124 | ) | (14,500 | ) | ||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Interest bearing checking
and savings accounts |
(151 | ) | (417 | ) | (568 | ) | (611 | ) | (1,151 | ) | (1,762 | ) | ||||||||||||
Time deposits |
974 | (1,045 | ) | (71 | ) | 3,859 | (2,693 | ) | 1,166 | |||||||||||||||
Borrowed funds |
(280 | ) | 4 | (276 | ) | (334 | ) | 23 | (311 | ) | ||||||||||||||
Total |
543 | (1,458 | ) | (915 | ) | 2,914 | (3,821 | ) | (907 | ) | ||||||||||||||
Net decrease in net
interest income |
$ | (2,691 | ) | $ | (733 | ) | $ | (3,424 | ) | $ | (6,290 | ) | $ | (7,303 | ) | $ | (13,593 | ) | ||||||
Net interest income before provision for loan losses decreased 34% and 40% for the three and
nine months ended September 30, 2009, respectively, compared to the same periods in 2008. The
decrease is primarily attributable to lower yields on loans following a series of Federal Funds
rate cuts since September 2008, increases in non-performing loans and a shift from higher yielding
loans to lower yielding cash and liquid investments. Decreases in net interest income for the
three and nine months ended September 30, 2009 were partially offset by lower rates paid on
interest bearing liabilities. Due to the competitive deposit environment, decreases in interest
rates paid on deposits have lagged decreases in interest rates on interest earning assets.
During the nine months ended September 30, 2009, $90.39 million in brokered certificates of deposit
matured without replacement, which had a weighted average rate of 4.36%. We expect to mature an
additional $35.03 million in higher rate brokered certificates of deposit without replacement,
which have a weighted average rate of 4.32%, by the end of 2009. To mitigate the liquidity effect
of these maturing brokered certificates of deposit, we continue in our efforts to re-balance our
loans and deposits by increasing retail deposits and allowing loan balances to stay stable or
decrease.
29
Table of Contents
Non-Interest Income
Non-interest income is comprised of service charges and fees, mortgage banking revenue, payment
system revenue, financial services revenue, credit card discounts and gains and losses from the
sale of loans, securities and other assets. Mortgage banking revenue includes service release
premiums and revenue from the origination and sale of mortgage loans. Mortgage origination
activities were discontinued in September 2008. Financial services income is derived from the sale
of investments and financial planning services to our customers.
Service charges on deposits decreased 4% for the three months ended September 30, 2009, compared to
the same period in 2008. The decrease is primarily a result of a reduction in NSF/overdraft fees
due to a change in the volume of overdraft occurrences. Despite decreases in the third quarter of
2009, for the nine months ended September 30, 2009 service charges on deposit increased 1% compared
to the same period in 2008. The increase is primarily attributable to an increase in the volume of
deposit accounts in the current period compared to the similar period in 2008.
The decrease in non-interest income is attributable in part to the disbanding of the CRB Mortgage
Team, which occurred during the third quarter of 2008. Associated mortgage banking revenue has
decreased approximately $836,000 and $2.93 million for the three and nine months ended September
30, 2009, respectively, compared to the same periods in 2008. The net loss derived from the CRB
Mortgage Team for the three months ended September 30, 2008 was negligible and net income derived
from the CRB Mortgage Team for the nine months ended September 30, 2008 totaled approximately
$433,000. The CRB Mortgage Team originated mortgage loans to be sold on the secondary market. The
discontinuation of these activities reduces total operational costs and risk exposure associated
with that business.
Provision for Loan Losses
Our provision for loan losses represents an expense against current period income that allows us to
establish an appropriate allowance for loan losses and deposit account overdraft exposure. Charges
to the provision for loan losses result from our ongoing analysis of probable losses in our loan
portfolio and probable losses from deposit account overdrafts.
For the three and nine months ended September 30, 2009 provision for loan losses totaled $20.25
million and $44.35 million, respectively, compared to $25.40 million and $34.10 million,
respectively, for the same periods in 2008. The increase in year to date provisions is primarily
due to the continued economic environment impacts affecting our residential real estate portfolio,
the write-downs of certain agricultural related credits during 2009 and the application of higher
estimated loss rates in our allowance methodology during the third quarter. Risks contributing to
the provision are discussed in more detail in the section entitled Allowance for Loan Losses
below.
Non-Interest Expense
Non-interest expense consists of salaries and benefits, FDIC premiums and state assessments,
occupancy costs, other real estate owned impairment charges and various other non-interest
expenses.
Total non-interest expense has decreased 14% for the three months ended September 30, 2009,
compared to the same period in 2008. The decrease is primarily attributable to decreases in salary
and employee benefit expense and other real estate owned impairments, which are partially offset by
the increase experienced in the FDIC premium and state assessments. Total non-interest expense
decreased 1% for the nine months ended September 30, 2009 compared to the nine months ended
September 30, 2008 for the same reasons.
30
Table of Contents
Expense decreases were driven by lower salary and benefit expense, which decreased by $1.35
million, or 24%, for the three months ended September 30, 2009, and $3.41 million, or 21% for the
nine months ended September 30, 2009, in comparison to the same periods in 2008. The decrease is
the result of the discontinued 401(k) match for employees and the overall reduction in full-time
equivalents (FTE), with a reduction of approximately 43 FTEs from September 30, 2008 to
September 30, 2009, including the elimination of two executive positions. We have made strategic
efforts to reduce our salary and benefit expense, while maintaining high quality customer service;
as such, many of the FTE reductions were made in areas not affecting our customer service delivery.
As we continue to actively manage our growing non-performing asset portfolio, we expect to hire
additional employees and experts to assist where necessary. These additional resources may offset
a portion of our previously expected savings.
FDIC insurance premiums and state assessments increased $1.12 million, or 541%, from $206,235 for
the three months ended September 30, 2008 to $1.32 million for the three months ended September 30,
2009. FDIC insurance premiums and state assessments increased $4.10 million, or 720%, from
$568,492 for the nine months ended September 30, 2008 to $4.66 million for the nine months ended
September 30, 2009. The increase is a result of the increases in premium assessments imposed by
the FDIC and the FDICs rates applicable to institutions with our capital ratio levels. In
addition for the nine months ended September 30, 2009, premiums have increased due to losses
incurred by the FDIC and their one-time special assessment.
Occupancy expense increased $140,467, or 10%, for the three months ended September 30, 2009, and
$615,619 or 15% for the nine months ended September 30, 2009, in comparison to the same periods in
2008. This increase is primarily due to increases in depreciation expense, contributing 34% of the
increase and resulting from the completion of our Sunnyside and Yakima, Washington permanent branch
locations. Increases in lease expense contributed 59% of the increase, which is associated with
the administrative and operations offices opened in Vancouver, Washington during the second and
third quarters of 2008. We have identified excess office space in our existing owned property
locations, which we are actively marketing for lease. During the third quarter of 2009, we were
successful in finding a substitute lessor for 4,600 square foot of rentable space in Vancouver,
Washington and have executed contracts that are effective October 1, 2009 to lease an additional
2,313 square foot of space in Bend, Oregon.
The efficiency ratio, which measures overhead costs as a percentage of total revenues, is an
important measure of productivity in the banking industry. Primarily due to lower interest income
caused by interest rate cuts and higher levels of non-accrual loans, our efficiency ratio increased
to 118.88% and 119.70% for the three and nine months ended September 30, 2009, compared to 83.42%
and 71.59%, respectively, for the same periods in 2008.
Provision for Income Taxes
The following table presents the provision for income taxes and effective tax rates:
Provision
for (Benefit from) Income Taxes:
(dollars in thousands)
(dollars in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Provision for (benefit from) income taxes |
$ | | $ | (9,274 | ) | $ | 2,517 | $ | (9,094 | ) | ||||||
Income (loss) before provision for (benefit from) income taxes |
(21,908 | ) | (23,365 | ) | (49,574 | ) | (22,172 | ) | ||||||||
Effective tax rate |
0.00 | % | 39.69 | % | -5.08 | % | 41.02 | % |
31
Table of Contents
Our statutory tax rate is 38.84%, representing a blend of the statutory federal income tax
rate of 35.00% and apportioned effect of the Oregon income tax rate of 6.60%. During the third
quarter of 2009, we recorded a deferred tax valuation allowance of $10.34 million against our
deferred tax assets, for a total valuation allowance of $22.34 million for the nine months ended
September 30, 2009 which had the effect of increasing our provision for income taxes for the nine
months ended September 30, 2009.
Pursuant to GAAP, concluding that a deferred tax asset valuation allowance is not required is
difficult when there is significant negative evidence which is objective and verifiable, such as
the lack of recoverable taxes, excess of reversing deductible differences over reversing taxable
differences and cumulative losses in recent years. After consideration of these factors as well as
potential tax planning strategies, we recorded a deferred tax asset valuation allowance against our
net deferred tax assets during the second quarter of 2009 primarily due to the result of
significant losses in 2008 and for the six month period ended June 30, 2009. If, in the future, we
generate taxable income on a sustained basis, managements conclusion regarding the need for a
deferred tax asset valuation allowance could change, resulting in the reversal of a portion or all
of such deferred tax asset valuation allowance. Our position, as of September 30, 2009, is
unchanged.
In November 2009, the U.S. Congress passed, and the President signed into law, a bill that would
extend the allowable period of carry-back for net operating losses from two years to five years for
losses incurred in either 2008 or 2009 (H.R. 3548). As a result and based on net losses for the
nine months ended September 30, 2009, we expect to recognize approximately $5.00 million of income
tax benefit during the three months ended December 31, 2009. The tax benefit would be recorded as
income thereby increasing capital by an equal amount. The amount of additional income tax benefit
will vary based on the final amount of net operating loss for 2009.
MATERIAL CHANGES IN FINANCIAL CONDITION
ASSETS
Our assets are comprised primarily of loans for which we receive interest and principal repayments
from our customers, as well as cash and investment securities.
Loans
Loan products include construction, land development, real estate, commercial and agriculture. We
are not in the practice of making or investing in sub-prime or Alt.-A mortgages and have not made
or invested in those types of loans to any material extent in the past.
32
Table of Contents
The following table presents our loan portfolio by loan type:
Loans:
(dollars in thousands)
(dollars in thousands)
September 30, 2009 | December 31, 2008 | September 30, 2008 | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Dollar Amount | Total | Dollar Amount | Percent of Total | Dollar Amount | Total | |||||||||||||||||||
Real estate secured loans: |
||||||||||||||||||||||||
Commercial property |
$ | 238,086 | 33 | % | $ | 250,888 | 30 | % | $ | 265,031 | 29 | % | ||||||||||||
Farmland |
46,163 | 6 | % | 65,474 | 8 | % | 67,450 | 7 | % | |||||||||||||||
Construction |
181,553 | 25 | % | 253,683 | 30 | % | 274,617 | 32 | % | |||||||||||||||
Residential |
40,154 | 6 | % | 44,208 | 5 | % | 41,186 | 4 | % | |||||||||||||||
Home equity lines |
25,894 | 4 | % | 29,231 | 3 | % | 29,090 | 2 | % | |||||||||||||||
531,850 | 74 | % | 643,484 | 76 | % | 677,374 | 74 | % | ||||||||||||||||
Commercial loans |
109,510 | 15 | % | 127,598 | 15 | % | 144,643 | 16 | % | |||||||||||||||
Agricultural loans |
77,178 | 11 | % | 74,630 | 9 | % | 82,150 | 9 | % | |||||||||||||||
Consumer loans |
13,556 | 2 | % | 14,414 | 3 | % | 13,945 | 2 | % | |||||||||||||||
Other loans |
4,119 | 1 | % | 3,878 | | 4,320 | 1 | % | ||||||||||||||||
736,213 | 864,004 | 922,432 | ||||||||||||||||||||||
Allowance for loan losses |
(19,607 | ) | -3 | % | (24,492 | ) | -3 | % | (20,927 | ) | -2 | % | ||||||||||||
Unearned loan fees |
(583 | ) | | (562 | ) | | (855 | ) | | |||||||||||||||
Loans, net of allowance
for loan losses and
unearned loan fees |
$ | 716,023 | 100 | % | $ | 838,950 | 100 | % | $ | 900,650 | 100 | % | ||||||||||||
Gross loans as of September 30, 2009 decreased 15% as compared to December 31, 2008 due to planned
attrition of certain lending relationships, charge-offs of certain loans, and transfers to other
real estate owned.
As of September 30, 2009, our loan portfolio continues to have a concentration of loans secured by
real estate. This includes $122.45 million of construction loans secured by residential properties
and $59.10 million of construction loans secured by commercial properties as of September 30, 2009.
Although this general real estate concentration is consistent with our Pacific Northwest community
bank peers, we could be subject to further losses resulting from declines in real estate values and
the related effects on our borrowers. It should be noted that some loans that are designated as
being real estate secured were granted for consumer and business purposes other than the
acquisition of real estate. Given the current economic environment and the volatility in the
residential real estate market, we recognize additional risk in real estate loans in our allowance
for loan losses. See Allowance for Loan Losses below.
The following table presents the expected source of repayment for loans classified as real estate
loans:
Sources of Repayment for Real Estate Secured Loans
(dollars in thousands)
(dollars in thousands)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Liquidation of real estate |
$ | 181,467 | $ | 253,683 | ||||
Agricultural production |
45,760 | 65,474 | ||||||
Business operations |
237,668 | 254,740 | ||||||
Rental income |
28,294 | 35,239 | ||||||
Consumer household income |
38,661 | 34,348 | ||||||
$ | 531,850 | $ | 643,484 | |||||
Agricultural production and business operation loans classified as real estate secured are also
collateralized by accounts receivable, inventory, agricultural crops, equipment and other business
property.
33
Table of Contents
The following table presents our construction and land development loans by region:
Construction and Land Development Loans by Region:
(dollars in thousands)
(dollars in thousands)
September 30, 2009 | ||||||||||||
Residential | Commercial | Total | ||||||||||
Columbia River Gorge |
$ | 13,032 | $ | 1,008 | $ | 14,040 | ||||||
Columbia Basin Eastern Washington |
50,297 | 33,001 | 83,298 | |||||||||
Columbia Basin Northeastern Oregon |
5,905 | 2,197 | 8,102 | |||||||||
Central Oregon |
5,047 | 12,118 | 17,165 | |||||||||
Willamette Valley (1) |
48,170 | 10,778 | 58,948 | |||||||||
$ | 122,451 | $ | 59,102 | $ | 181,553 | |||||||
(1) | Includes Portland, Oregon and Vancouver, Washington metropolitan area |
We participate in non-real estate agricultural lending, which comprises approximately 11% of
our net loan portfolio as of September 30, 2009. Agricultural lending has unique challenges that
require special expertise. We employ experienced agriculture consultants and loan officers with
experience in underwriting and monitoring agricultural loans. In addition, we diversify our
agricultural loan portfolio across numerous commodity types. We participate in Farm Loan
Government Guarantee Programs, which provide guarantees of up to 90% on qualified loans. As of
September 30, 2009, approximately 12% of our agricultural loans are guaranteed through this
program; however, these guarantees are limited and loans under this program are not without credit
risk.
Allowance for Loan Losses
During the three and nine months ended September 30, 2009, we recognized $20.25 million and $44.35
million of provision for loan losses, respectively. As of September 30, 2009, our allowance for
credit losses totaled $20.16 million, including the liability for off-balance-sheet financial
instruments. The increase in the provision, in comparison to the nine months ended September 30,
2008, is due to a number of factors. During the first half of 2009, we continued to experience
significant write downs of both residential subdivision projects and finished homes as a result of
new appraisals obtained during that time frame. Appraisals obtained during the later part of the
third quarter began to show a more modest pace of decline, but additional write-downs were still
necessary as a result of these updated values. Also during 2009, we recognized losses in three
large agricultural related borrowers where real estate and other collateral values had
significantly declined from prior valuations. Finally, during the third quarter we increased
certain risk factors in our allowance methodology to reflect the trends experienced in the first
half of 2009. As of September 30, 2009, we have 139 collateral-dependent real estate loans on
non-accrual status. Most of these loans have independent appraisals less than nine months old.
Our policy is to obtain updated appraisals on problem credits at least annually, while recognizing
discounts between appraisal dates for market trends. The new appraisals obtained in 2009 showed a
continued and significant decline in the fair values of properties that secure these loans,
centered primarily in our Central Oregon and Portland-Vancouver metropolitan markets. In many
cases, the refreshed appraisals showed significant declines in fair values from previous appraisals
obtained. While the pace of declining values appeared to lessen during the later portion of the
third quarter of 2009, the overall decline in residential collateral values directly influenced the
large loan loss provisions taken during the nine months ended September 30, 2009.
34
Table of Contents
The following table presents activity in the allowance for loan and credit losses:
Allowance for Loan and Credit Losses:
(dollars in thousands)
(dollars in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Allowance for loan losses, beginning of period |
$ | 22,743 | $ | 17,099 | $ | 24,492 | $ | 11,174 | ||||||||
Charge-offs: |
||||||||||||||||
Commercial |
(2,655 | ) | (1,735 | ) | (4,106 | ) | (3,342 | ) | ||||||||
Real estate (1) |
(19,782 | ) | (19,520 | ) | (43,827 | ) | (20,564 | ) | ||||||||
Agriculture |
(831 | ) | | (831 | ) | | ||||||||||
Consumer loans |
(172 | ) | (3 | ) | (670 | ) | (19 | ) | ||||||||
Credit card and related accounts |
| (59 | ) | | (149 | ) | ||||||||||
Demand deposit overdrafts |
(59 | ) | (107 | ) | (184 | ) | (294 | ) | ||||||||
Total charge-offs |
(23,499 | ) | (21,424 | ) | (49,618 | ) | (24,368 | ) | ||||||||
Recoveries: |
||||||||||||||||
Commercial |
4 | 7 | 6 | 9 | ||||||||||||
Real estate |
75 | | 218 | | ||||||||||||
Agriculture |
3 | | 17 | 3 | ||||||||||||
Consumer loans |
| | 3 | 8 | ||||||||||||
Credit card and related accounts |
1 | 2 | 3 | 10 | ||||||||||||
Demand deposit overdrafts |
30 | 62 | 136 | 210 | ||||||||||||
Total recoveries |
113 | 71 | 383 | 240 | ||||||||||||
Provision for loan losses |
20,250 | 25,400 | 44,350 | 34,100 | ||||||||||||
Adjustment for credit card portfolio sales |
| (219 | ) | | (219 | ) | ||||||||||
Allowance for loan losses, end of period |
$ | 19,607 | $ | 20,927 | $ | 19,607 | $ | 20,927 | ||||||||
Liability for off-balance-sheet financial instruments,
beginning of period |
$ | 590 | $ | 889 | $ | 681 | $ | 848 | ||||||||
Increase (decrease) charged to other non-interest expense |
(35 | ) | 92 | (126 | ) | 133 | ||||||||||
Liability for off-balance-sheet financial instruments,
end of period |
$ | 555 | $ | 981 | $ | 555 | $ | 981 | ||||||||
Total allowance for credit losses (2) |
$ | 20,162 | $ | 21,908 | $ | 20,162 | $ | 21,908 | ||||||||
Ratio of net loans charged-off to
average loans outstanding for the period |
3.02 | % | 2.25 | % | 6.02 | % | 2.62 | % | ||||||||
Ratio of allowance for loan losses to
gross loans at end of period |
2.66 | % | 2.26 | % | ||||||||||||
Ratio of
allowance for credit losses to gross loans at end of period |
2.74 | % | 2.37 | % |
(1) | Includes real estate loans secured by residential, commercial and agricultural farmland property. | |
(2) | Includes allowance for loan losses and liability for off-balance-sheet financial instruments |
For the three and nine months ended September 30, 2009, we recognized $23.49 and $49.62 million in
loan charge-offs, respectively. The large increase in charge-offs during the three months ended
September 30, 2009 were primarily the result of partially charged-off construction land development
loans which were considered to be collateral dependent loans. However, approximately one third of
the charge offs taken in the third quarter of 2009 was due to a large agricultural relationship
where real estate and other collateral values had dramatically declined from our prior estimates.
That relationship has now been written down to a minimal level of exposure secured by the remaining
real estate. A collateral dependent loan is one for which the primary source of repayment is
considered to be the liquidation of the underlying collateral.
35
Table of Contents
During 2008, as actual loan losses increased, we began a granular examination of our loan portfolio
as part of the allocation method; a practice that we continue as of September 30, 2009. We believe
this process allows us to more clearly identify certain risks and attribute those risks to specific
loans or classes of loans. This enhancement resulted in the unallocated allowance for loan losses
decreasing relative to the allocated portion.
As part of this granular examination, our credit administration and risk management teams have
examined loan relationships within the residential construction portfolio for indications of credit
weakness. This is an ongoing and dynamic process and concentrated efforts were put forth to
accelerate the examination of credits to ensure substantially all real estate construction credits
were examined. This examination process includes the review of new or updated appraisals and
resulting real estate collateral values. All appraisals are reviewed by our Real Estate Risk
Management Team, which includes three licensed appraisers and support staff.
The Reserve Adequacy Committee that was established during the second quarter of 2008 is an active
component of our heightened loan management. On a quarterly basis, all problem loan reports are
formally updated for all our lending units and formal action plans are either developed or reviewed
for effectiveness. Even though threshold guidelines for reporting to the committee exist, it does
not preclude discussion of other credits or concerns that are present in the geographic areas that
we service. The committee includes the Chief Credit Officer and other key members of executive
management, including the Chief Executive Officer, as well as a designated member of the Board of
Directors. As a result of this action, we were able to pull together previous lending unit
processes and identify the underlying risks inherent in our loan portfolio. In addition, specific
allocations to the allowance for loan losses and the adequacy of our current loan loss allowance
were appropriately adjusted based on the review of affected loans. The Reserve Adequacy Committee
will continue meeting on a quarterly basis. The resulting action plans will be dynamic and
followed closely by our lending, credit administration, risk management and special assets teams.
This will ensure appropriate risk identification, timely meetings with customers and achievement of
these plans.
On a bi-weekly basis, the updates on action plans on selected problem loans are reviewed during a
meeting conducted by the Chief Credit Officer and other members of the Executive Team. This
meeting allows for timely decisions on these action plans.
While we have been reserving for these weakened credits as a result of our internal risk ratings,
as new appraisals are received and if land values continue to decline, more allocations to the
allowance for loan losses are possible, as are further impairment write downs. When such write
downs or charge-offs are necessary, the allowance for loan losses will be impacted accordingly.
Non-Performing Assets
Non-performing assets (NPA) consist of loans on non-accrual status, delinquent loans past due
greater than 90 days, troubled debt restructured loans and other real estate owned (OREO). We do
not accrue interest on loans for which full payment of principal and interest is not expected, or
for which payment of principal or interest has been in default 90 days or more, unless the loan is
well-secured and in the process of collection. In some circumstances we may place loans on
non-accrual before they reach 90 days past due, specifically if there are other loans to the same
borrower, with the same repayment source that have reached 90 days past due. Troubled debt
restructured loans are those for which the interest rate, principal balance, collateral support or
payment schedules were modified from original terms, beyond what is ordinarily available in the
marketplace, to accommodate a borrowers weakened financial condition. OREO represents real estate
assets held through loan foreclosure (either voluntary or involuntary) or recovery activities.
36
Table of Contents
The following table presents information about our NPAs:
Non-Performing Assets:
(dollars in thousands)
(dollars in thousands)
September 30, 2009 | December 31, 2008 | September 30, 2008 | ||||||||||
Loans on non-accrual status |
$ | 103,224 | $ | 92,350 | $ | 63,230 | ||||||
Delinquent loans past due > 90 days
on accrual status |
| | | |||||||||
Troubled debt restructured loans |
4,706 | 57 | 60 | |||||||||
Total non-performing loans |
107,930 | 92,407 | 63,290 | |||||||||
Other real estate owned |
15,246 | 9,622 | 5,621 | |||||||||
Total non-performing assets |
$ | 123,176 | $ | 102,029 | $ | 68,911 | ||||||
Allowance for loan losses |
$ | 19,607 | $ | 24,492 | $ | 20,927 | ||||||
Ratio of total non-performing
assets to total assets |
11.65 | % | 9.09 | % | 5.99 | % | ||||||
Ratio of total non-performing
loans to total gross loans |
16.73 | % | 10.70 | % | 6.85 | % | ||||||
Ratio of allowance for loan losses
to total non-performing loans |
18.17 | % | 26.50 | % | 30.07 | % |
Non-Accrual Loans:
The following table provides expanded detail of our non-accrual loans:
Non-Accrual Loans by Type:
(dollars in thousands)
(dollars in thousands)
September 30, 2009 | December 31, 2008 | September 30, 2008 | ||||||||||||||||||||||
Number | Dollar | Number | Dollar | Number | Dollar | |||||||||||||||||||
of Loans | Amount | of Loans | Amount | of Loans | Amount | |||||||||||||||||||
Real estate secured loans: |
||||||||||||||||||||||||
Real estate construction |
78 | $ | 67,952 | 54 | $ | 63,119 | 49 | $ | 49,959 | |||||||||||||||
Residential |
34 | 8,667 | 9 | 3,454 | 7 | 2,597 | ||||||||||||||||||
Commercial real estate |
14 | 9,278 | 6 | 5,290 | 6 | 5,306 | ||||||||||||||||||
Agricultural farmland (1) |
10 | 4,528 | 6 | 15,094 | | | ||||||||||||||||||
Commercial and industrial |
15 | 4,683 | 12 | 3,072 | 11 | 3,335 | ||||||||||||||||||
Agricultural production |
5 | 4,975 | 7 | 2,173 | 2 | 1,994 | ||||||||||||||||||
Consumer |
4 | 3,141 | 7 | 148 | 3 | 39 | ||||||||||||||||||
160 | $ | 103,224 | 101 | $ | 92,350 | 78 | $ | 63,230 | ||||||||||||||||
(1) | Real estate-secured agricultural loans may be used for agricultural production purposes. |
Non-accrual loans have increased $10.87 million from December 31, 2008 to $103.22 million as
of September 30, 2009. Troubled debt restructurings as of September 30, 2009 totaled $4.71
million, all of which are currently on non-accrual status. Assuming these restructurings perform
over time, it is likely some of these will be returned to accrual status. We also anticipate
troubled debt restructurings will increase over time as we enter into additional restructurings
with clients able to perform under lower interest rates or longer amortizations. Most of these
work-out arrangements will likely come from our existing non-accrual loans.
37
Table of Contents
For Columbia, the vast majority of the increase in non-accrual totals during 2008 and 2009
continues to be directly related to our concentration in residential construction lending,
particularly in the Central Oregon and Portland Vancouver metropolitan markets. While we have
also seen additional stress placed on commercial real estate in the Central Oregon Market, the
addition of new non-accruals in this sector of the portfolio has been much more modest compared to
the residential sector. During the third quarter of 2009, we saw the overall pace of new
non-accruals decline from that of the second quarter of 2009. While both our Central Oregon and
Portland Vancouver metropolitan areas have been hit especially hard by the economic recession,
our other market areas have not experienced the same level of economic turmoil.
As of September 30, 2009 the majority of our non-accrual loans are centered in residential
construction lending primarily located in our Central Oregon and Portland-Vancouver metropolitan
markets. Approximately 54% of our non-accrual loans are related to residential construction
projects broken into lot development credits at 41% and 13% for residential home construction. The
remaining 46% of our non-accrual totals are from other sectors of the portfolio including 13% in
commercial construction projects, 9% in finished commercial real estate and 8% in finished
residential homes. From a geographic standpoint, 53% of our non-accrual totals are from the
Central Oregon area, 32% are from the Portland and Vancouver area and the remaining 15% are from
all other markets combined.
As of September 30, 2009, our overall exposure to commercial real estate totaled $238.09 million,
or 33%, of our loan portfolio. Non-accrual loans secured by commercial real estate increased $3.99
million from $5.29 million as of December 31, 2008 to $9.28 million as of September 30, 2009. The
increase was primarily due to the effects of the national economy and its impact on the markets we
serve. Non-accrual loans secured by commercial real estate were 4% of the overall commercial real
estate exposure as of September 30, 2009.
Between September 30, 2008 and September 30, 2009, non-accrual loans increased $39.99 million while
net loan charge-offs totaled $54.68 million. Because most of these charge-offs and write-downs
relate to loans that would be on non-accrual status, the gross increase in non-accrual loans was
significantly higher, primarily due to declining values on residential real estate collateral
securing a significant portion of non-accrual loans. Charge-offs related to agricultural accounts
in both agricultural production and farm real estate categories were also significant, totaling
approximately $15.74 million over the past 12 months.
As of November 16, 2009, approximately $26.06 million of our September 30, 2009 non-accrual totals
were scheduled to be resolved, re-categorized or paid down with little, if any, additional
write-downs or charge-offs. These include the following:
| $9.51 million of loans for which clients have provided documentation that payoffs will occur prior to December 2009. | ||
| $6.54 million in subdivision properties have signed sales offers (with the Banks permission) that would result in no further loss to the bank. These sales agreements span up to a 3 year period for full payback. | ||
| $6.19 million of loans scheduled to be re-written into performing loans by the end of November 2009. | ||
| $3.37 million of non-accrual loans scheduled to be converted into troubled debt restructures. | ||
| $446,005 was paid off in October of 2009. |
While it is likely some of these work-outs will experience time delays or may prove not to take
place, this is the first quarter in over a year where we have this type of major improvement in our
non-accrual totals expected to take place.
38
Table of Contents
Other Real Estate Owned:
As of September 30, 2009, our total other real estate owned (OREO) totaled $15.25 million or 12%
of total non-performing assets. Five of the 33 OREO properties totaled $8.02 million, or 53% of
the OREO balance as of September 30, 2009.
The balance of OREO has fluctuated during the quarter ended September 30, 2009, as illustrated in
the following table:
Other Real Estate Owned
(dollars in thousands)
(dollars in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Other real estate owned, beginning of period |
$ | 11,302 | $ | 7,290 | $ | 9,622 | $ | 516 | ||||||||
Transfers from outstanding loans |
8,057 | 304 | 11,031 | 7,046 | ||||||||||||
Improvements and other additions |
| | | 389 | ||||||||||||
Disposition, sales and losses on sale |
(3,587 | ) | | (4,333 | ) | (357 | ) | |||||||||
Impairment charges |
(526 | ) | (1,973 | ) | (1,074 | ) | (1,973 | ) | ||||||||
Other real estate owned, end of period |
$ | 15,246 | $ | 5,621 | $ | 15,246 | $ | 5,621 | ||||||||
To facilitate the management and timely liquidation of OREO properties, we formed an OREO committee
in the second quarter of 2008 comprised of senior members of our real estate risk management,
credit administration and risk management teams. The OREO committee updates disposition (sales)
progress on all of the properties on a bi-monthly basis. The committee reviews current sales
offers as well as strategies for counter offers. The committee also monitors the current
conditions of OREO properties. During the meetings any up keep or maintenance items are presented,
evaluated for return on investment, and discussed for resolution. The committee considers market
conditions in each region in which OREO properties are located in an attempt to manage and
liquidate the OREO assets in the most efficient and profitable manner. The Special Assets Team
participates in these meetings to update the committee on properties that may be coming moving to
the OREO portfolio within the next quarter. The OREO committee assists in establishing the
appropriate value for the asset when it is moved from special assets to the OREO portfolio.
In July 2009, we finalized an agreement with an experienced broker as part of a strategic decision
to engage a dedicated real estate broker to manage and coordinate the marketing efforts for all
OREO properties.
LIABILITIES
Our liabilities consist primarily of retail and wholesale deposits, interest accrued on deposits
and notes payable. Retail deposits include all deposits obtained within our branch network and
represent our primary source for funding loans. Wholesale liabilities include deposits obtained
outside of our branch network, correspondent bank borrowings, borrowings from the Federal Home Loan
Bank (FHLB) and federal funds purchased. We utilize wholesale liabilities to manage interest
rate and liquidity risk. These funding sources support loan growth at times when loan growth
outpaces retail deposit growth.
Deposits
We offer various deposit accounts, including non-interest bearing checking and interest bearing
checking, savings, money market and certificates of deposit. The accounts vary as to terms, with
principal differences being minimum balances required, length of time the funds must remain on
deposit, interest rate and deposit or withdrawal options. Our goal remains to maximize our
non-interest bearing demand deposits relative to other deposits and borrowings, to minimize our
interest expense.
39
Table of Contents
The following table presents the composition of our deposits:
Deposits:
(dollars in thousands)
(dollars in thousands)
September 30, 2009 | December 31, 2008 | September 30, 2008 | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Dollar Amount | Total | Dollar Amount | Percent of Total | Dollar Amount | Total | |||||||||||||||||||
Non-interest bearing demand
deposits |
$ | 198,307 | 20 | % | $ | 215,922 | 22 | % | $ | 215,852 | 21 | % | ||||||||||||
Money market and now accounts |
290,123 | 29 | % | 271,244 | 27 | % | 293,427 | 29 | % | |||||||||||||||
Savings deposits |
30,759 | 3 | % | 30,873 | 3 | % | 34,421 | 3 | % | |||||||||||||||
Time certificates |
490,802 | 48 | % | 486,157 | 48 | % | 471,369 | 47 | % | |||||||||||||||
Total deposits |
$ | 1,009,991 | 100 | % | $ | 1,004,196 | 100 | % | $ | 1,015,069 | 100 | % | ||||||||||||
Total deposits as of September 30, 2009 increased $5.79 million as compared to December 31, 2008.
Time certificates increased as a result of increased involvement in non-branch deposit gathering,
to supplement the continued exit from the brokered deposits. Money market and NOW deposits
increased from December 31, 2008, however it is consistent with the balance as of September 30,
2008, a result of seasonality. Non-interest bearing demand deposits decreased primarily due to
economic conditions both locally and nationally. See additional information on the brokered
certificates of deposit in the following table entitled Wholesale Deposits.
The following table presents the maturities of all time certificates of deposit, including retail
and wholesale time certificates of deposit, as of September 30, 2009:
Time Certificates Maturities:
(dollars in thousands)
(dollars in thousands)
Time Certificates | Time Certificates | |||||||||||
less than $100,000 | greater than $100,000 | Total | ||||||||||
Three months or less |
$ | 81,702 | $ | 95,002 | $ | 176,704 | ||||||
Over three through six months |
31,149 | 36,040 | 67,189 | |||||||||
Over six months through twelve months |
72,744 | 58,822 | 131,566 | |||||||||
Over twelve months through five years |
81,098 | 34,245 | 115,343 | |||||||||
$ | 266,693 | $ | 224,109 | $ | 490,802 | |||||||
Approximately 76% of the Banks certificates of deposit are maturing in less than twelve months.
This concentration of short term maturities is due in part to the current low interest rate
environment driving customers to stay short on their investments, concerns earlier in the year over
the potential discontinuation of expanded FDIC insurance coverage to $250,000, as well as the
continued reduction without replacement of longer maturity brokered certificates of deposit.
The following table presents a comparison of wholesale deposit balances, which are included in
total deposits and maturity tables shown above:
Wholesale Deposits:
(dollars in thousands)
(dollars in thousands)
September 30, | December 31, | September 30, | ||||||||||
2009 | 2008 | 2008 | ||||||||||
Brokered certificates of deposit |
$ | 123,376 | $ | 213,455 | $ | 234,382 | ||||||
Direct certificates of deposit |
130,079 | 198 | 2,813 | |||||||||
Mutual fund money market deposits |
| | 36,339 | |||||||||
Out-of-market public funds |
| | 1,372 | |||||||||
Certificate of deposit account
registry system deposits |
317 | 21,894 | 52,008 | |||||||||
$ | 253,772 | $ | 235,547 | $ | 326,914 | |||||||
40
Table of Contents
Brokered certificates of deposit are obtained through intermediary brokers that sell the
certificates on the open market. Direct certificates of deposit are obtained through an
internet-based rate listing service that solicits deposits from other financial institutions or
from public entities. Mutual fund money market deposits are obtained from an intermediary that
provides cash sweep services to broker-dealers and clearing firms. Out-of-market public fund
depositors typically expect higher interest rates consistent with other wholesale borrowings.
Certificate of deposit account registry system (CDARS) deposits are obtained through a broker and
represent certificates of deposits in other financial institutions for which we assume a portion,
not to exceed $100,000 per certificate holder.
Brokered, direct certificates of deposit and CDARS deposits are classified as Time certificates
on our balance sheet. Mutual fund money market deposits and out-of-market public funds are
classified as Money market and NOW accounts on our balance sheet.
As of September 30, 2009, maturities of brokered certificates of deposit ranged between one month
and 48 months, including $35.03 million maturing during the remainder of 2009.
See the Liquidity Analysis below for further discussion regarding the availability of brokered
deposits and our planned liquidity strategies.
Federal Home Loan Bank Advances and Federal Funds Purchased
As of September 30, 2009, FHLB borrowings totaled $18.40 million, a decrease of $18.21 million from
the December 31, 2008 balance of $36.61 million and a decrease of $22.38 million compared to the
$40.78 million balance as of September 30, 2008. Since December 31, 2008, FHLB borrowings
decreased primarily due to maturities of long-term borrowings that were not renewed.
The following table presents year-to-date FHLB balances and interest rates:
FHLB Borrowings:
(dollars in thousands)
(dollars in thousands)
September 30, | December 31, | September 30, | ||||||||||
2009 | 2008 | 2008 | ||||||||||
Amount outstanding at end of period |
$ | 18,400 | $ | 36,613 | $ | 40,782 | ||||||
Weighted average interest rate at end of
period |
2.86 | % | 2.91 | % | 2.85 | % | ||||||
Maximum amount outstanding at any
month-end and during the period |
$ | 36,556 | $ | 51,978 | $ | 51,978 | ||||||
Average amount outstanding during the
period |
$ | 24,471 | $ | 33,237 | $ | 31,952 | ||||||
Weighted average interest rate during
the period |
2.94 | % | 2.89 | % | 2.86 | % |
The Bank does not presently maintain any federal funds lines of credit; see further discussion in
Note 5 of the consolidated interim financial statements and the Liquidity Analysis section below.
Off-Balance Sheet Items Commitments/Letters of Credit
In the normal course of business to meet the financing needs of our customers, we are party to
financial instruments with off-balance-sheet risk. These financial instruments include commitments
to extend credit and the issuance of letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts recognized on our
balance sheet.
Our potential exposure to credit loss for commitments to extend credit and for letters of credit is
limited to the contractual amount of those instruments. A credit loss would be triggered in the
event of nonperformance by the other party. When extending off-balance sheet commitments and
conditional obligations, we follow the same credit policies established for our on-balance-sheet
instruments.
41
Table of Contents
We may or may not require collateral or other security to support financial instruments with credit
risk, depending on our loan underwriting guidelines. The following table presents a comparison of
contract commitment amounts:
Commitments:
(dollars in thousands)
(dollars in thousands)
September 30, | December 31, | September 30, | ||||||||||
2009 | 2008 | 2008 | ||||||||||
Financial instruments whose contract amounts contain credit risk: |
||||||||||||
Commitments to extend credit(1) |
$ | 90,258 | $ | 145,814 | $ | 188,522 | ||||||
Commitments to originate loans held-for-sale |
| | 621 | |||||||||
Commercial and standby letters of credit |
1,315 | 2,045 | 3,464 | |||||||||
$ | 91,573 | $ | 147,859 | $ | 192,607 | |||||||
(1) | Excludes commitments with active letters of credit. |
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments may be cancelled or voided in
the event of a violation of the loan covenants or material adverse change in the financial
condition of the borrower. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are expected to expire
without being drawn, total commitment amounts do not necessarily represent future cash
requirements.
In part, the decrease in commitments since September 30, 2008 reflects our efforts to reduce
activity in residential real estate development and construction loans. Commitments to originate
loans held-for-sale decreased due to our closure of the CRB Mortgage Team during the third quarter
of 2008.
The amount of collateral obtained to secure a loan or commitment, if deemed necessary, is based on
our credit evaluation of the borrower. The majority of commitments are secured by real estate or
other types of qualifying collateral. Types of collateral vary, but may include accounts
receivable, inventory, property and equipment and income-producing properties. Less than 10% of
our commitments are unsecured.
Letters of credit are conditional commitments that we issue to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit parallels the risk involved in extending loans to
customers. When considered necessary, we hold deposits, marketable securities, real estate or
other assets as collateral for letters of credit.
The following table presents the distribution of commitments to extend credit classified by loan
type as of September 30, 2009:
Commitments to Extend Credit:
(dollars in thousands)
(dollars in thousands)
Dollar | Percent of | |||||||
Amount | Total | |||||||
Real estate secured loans: |
||||||||
Commercial property |
$ | 1,736 | 2 | % | ||||
Farmland |
1,854 | 2 | % | |||||
Construction |
2,679 | 3 | % | |||||
Residential |
717 | 1 | % | |||||
Home equity lines |
14,197 | 16 | % | |||||
21,183 | 24 | % | ||||||
Commercial loans |
38,951 | 43 | % | |||||
Agricultural loans |
19,334 | 21 | % | |||||
Consumer loans |
10,740 | 12 | % | |||||
Other loans |
50 | | ||||||
$ | 90,258 | 100 | % | |||||
42
Table of Contents
Although not a contractual commitment, we offer an overdraft protection product that allows certain
deposit accounts to be overdrawn up to a set dollar limit before checks will be returned. As of
September 30, 2009, commitments to extend credit for overdrafts totaled $12.60 million, which
represents our estimated total exposure if every customer utilized the full amount of this
protection at the same time. Year-to-date average usage outstanding was approximately 2% of the
total exposure as of each of the periods ending September 30, 2009, December 31, 2008 and September
30, 2008.
Commitments and Contingencies
During the normal course of its business, Columbia is a party to various debtor-creditor legal
actions, which individually or in the aggregate, could be material to Columbias business,
operations or financial condition. These include cases filed as a plaintiff in collection and
foreclosure cases, and the enforcement of creditors rights in bankruptcy proceedings.
From time to time we are also parties to various inter-creditor disputes, in which one or more
creditors of a particular borrower assert claims to a limited repayment stream or collateral
support. In certain of these instances, we may be subject to senior liens, such as construction or
material-mens liens, even if we have perfected a first-priority security interest in the
borrowers assets. Any such outcomes could impair our recourse to repayment, could require us to
compromise claims that we would otherwise pursue aggressively, or otherwise adversely affect our
assets and revenues as related to the affected loan or loans.
Columbia River Bank was named as a defendant in the District Court for Crook County, Oregon in a
case captioned Hooker Creek Companies, LLC v. Remington Ranch, LLC, Columbia River Bank, United
Pipe & Supply Co., Inc., Integrity Golf, Inc. et. al., Case No. 08CV0023, filed June 3, 2008, in
which monetary relief is sought against Remington Ranch, LLC. If the case is decided against the
defendant it may have a negative impact on the priority of the Banks security interest in the real
property at issue.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Analysis
We have adopted policies to address our liquidity requirements, particularly with respect to
customer needs for borrowing and deposit withdrawals. Our main sources of liquidity are customer
deposits; sales of loans; sales and maturities of investment securities; advances from the Federal
Home Loan Bank (FHLB) of Seattle; short-term borrowings from the Federal Reserve Discount Window;
direct certificates of deposit; and net cash provided by operating activities. Scheduled loan
repayments are traditionally a relatively stable source of funds, whereas deposit inflows and
unscheduled loan prepayments are variable and are often influenced by general interest rate levels,
competing interest rates available on alternative investments, market competition, economic
conditions and other factors.
Measurable liquid assets include: cash due from banks, excluding vault cash; money market and NOW
accounts with other banks; federal funds sold; held-to-maturity securities maturing within three
months that are not pledged; and available-for-sale securities not pledged. Measurable liquid
assets totaled $229.62 million, or 22% of total assets, as of September 30, 2009, compared to
$174.40 million, or 16% of total assets, as of December 31, 2008.
We have credit arrangements with the FHLB providing short-term and long-term borrowings
collateralized by our FHLB stock and other instruments we may pledge. As of September 30, 2009,
our maximum borrowing capacity totaled approximately $41.12 million with approximately $22.72
million available based on outstanding borrowings. We have credit arrangements with the Federal
Reserve Bank of San Francisco (FRB) providing short-term and long-term borrowings collateralized by financial
instruments pledged. As of September 30, 2009, our maximum borrowing capacity totaled
approximately $63.35 million, all of which is available based on outstanding borrowings. The FRB
may adjust, limit or impose additional conditions and collateral requirements on these credit lines
from time to time in its discretion. As of September 30, 2009, we did not maintain other lines of
credit with correspondent banks.
43
Table of Contents
To manage liquidity and comply with regulatory restrictions, we continue to reduce our level of
brokered deposits, which are obtained through third parties, such as brokered certificates of
deposits and certificate of deposit account registry system deposits. As a result, maturing
brokered deposits have been replaced with retail deposits gathered in our branches and through
non-brokered wholesale deposits, which are raised outside of our branch network using
internet-based rate listing services. Overall, we expect to decrease our level of brokered
deposits. In that light, we continue to reposition our balance sheet to decrease the ratio of
loans to deposits. We continue to sell and participate loans to other financial institutions as
opportunities arise. In addition, we are selective in the renewal of loans at maturity and will
likely decline loan renewals for borrowers who have violated loan terms, have poor repayment
history or have other risk factors that we find unacceptable going forward. We are continuing in
our efforts to maintain high quality borrowers as clients and attract new retail deposits and
retain existing retail depositors, through superior customer service, products and delivery.
During the quarter ended September 30, 2009, in an effort to improve our net interest margin, we
began to re-deploy cash balances obtained through the growth in retail deposits and non-brokered
wholesale deposits, into highly liquid available-for-sale securities and short-term certificates of
deposits at other financial institutions.
During 2008 and 2009, we recognized that the credit and financial crisis affecting financial
institutions across the country was becoming acute and we expected this to cause significant
liquidity shortages. In response, we accumulated a higher than normal level of liquid assets and
pledged additional assets to FHLB and the Federal Reserve to increase our borrowing capacity. In
addition, we voluntarily elected to participate in government programs that provided FDIC coverage
to all non-interest bearing demand transaction deposits and nominal-interest bearing transaction
accounts which increases our overall insured deposit balances.
Our statement of cash flows reports the net changes in our cash and cash equivalents by operating,
investing and financing activities. Net cash (used in) provided by operating activities decreased
$19.33 million for the nine months ended September 30, 2009 compared to the same period in 2008.
This was primarily the result of lower collections of interest income, offset by elimination of
funding for mortgage loans held-for-sale.
Net cash provided by (used in) investing activities increased $143.38 million for the nine months
ended September 30, 2009 compared to the same period in 2008. The increase was primarily the
result of a slowed loan growth and loan balance decreases during the nine months ended September
30, 2009, compared to the same period in 2008, partially offset by net purchases of investment
securities.
Net cash (used in) provided by financing activities decreased $132.52 million for the nine months
ended September 30, 2009 compared to the same period in 2008. The decrease was primarily due to
decreases in long-term borrowings combined with decreases in deposits growth.
Shareholders Equity
As of September 30, 2009 and December 31, 2008, shareholders equity totaled $23.23 million and
$75.05 million, respectively. The decrease is primarily attributable to net losses totaling $55.09
million during the first nine months of 2009, including a valuation allowance on deferred tax
assets. Shareholders equity totaled $88.25 million as of September 30, 2008.
Capital Requirements and Ratios
The Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) have
established minimum requirements for capital adequacy for bank holding companies and member banks.
The requirements address both risk-based capital and leveraged capital. The regulatory agencies
may establish higher minimum requirements if, for example, a bank has previously received special
attention or has a high susceptibility to interest rate risk. Pursuant to the regulatory order
entered into between the FDIC, the Oregon Department of Consumer and Business Services, Division of
Finance and Corporate Securities (DFCS) and the Bank, (the Order) the Bank is required to
maintain above-normal capital levels, including an above normal Tier 1 leverage ratio, which is
typically set at 5% for an institution to be well capitalized. This threshold has been set at
10% for the Bank to be considered well capitalized. As of September 30, 2009, the Banks Tier 1
leverage ratio was 1.80%. The Bank had not achieved the
44
Table of Contents
required 10% threshold for the Tier 1 leverage ratio as the date of this report. It is unclear
what, if any, actions will be taken by the FDIC as a result of not meeting this requirement of the
order. Efforts to raise capital are ongoing, but the current economic environment is not conducive
to capital raising for troubled institutions such as ourselves and, as a result, the Bank has not
obtained a well-capitalized regulatory capital classification.
As part of our overall strategic plan, specific actions undertaken to address the Orders
requirements during the third quarter of 2009 were as follows:
| We continued rebalancing of loans and deposits by reducing gross loans $63.35 million and repaying $40.96 million of brokered deposits and borrowings. As a result our year-to-date ratio of average gross loans to average retail deposits has improved to 98% as of September 30, 2009, from 112% and 127% as of December 31, 2008 and September 30, 2008, respectively. This is the first time in several years that our ratio of gross loans to retail deposits has fallen below 100%, representing the successful achievement of one of our strategic initiatives. | ||
| We continued to actively manage non-performing assets by obtaining and evaluating updated appraisals, charging-off identified impairments and pursuing opportunities to dispose of troubled loans and foreclosed real estate. During the quarter we marketed foreclosed real estate through multiple channels, including online listings and an in-house broker. | ||
| Invested excess liquidity in higher yielding assets while balancing against anticipated liquidity demands. | ||
| Improved net interest margin through the retirement of high cost brokered deposits. $30.90 million of brokered certificates of deposit, with a weighted average cost of 4.43%, matured without replacement in the quarter ended September 30, 2009. | ||
| Achieved lower levels of discretionary spending, total non-interest expense reduced $1.75 million or 14% for the three months ended September 30, 2009, compared to the same period in 2008. |
Going forward, we expect to undertake the following, which, if successful, would improve the Banks
regulatory capital levels:
| Continue to realign the balance sheet, with strategic reductions in total assets. | ||
| Continue efforts to resolve non-performing assets, including adding staff or other expert resources to expedite recovery, and the use of multiple channels to actively market non-performing assets including other real estate owned and non-performing loans. | ||
| Continue to improve the net interest margin through the retirement of remaining high cost brokered deposits at maturity, while deploying excess funds into liquid investment grade securities. | ||
| Continue to evaluate other expense reduction strategies to maintain low level of discretionary expenses. | ||
| Continue to pursue capital investment from third party investor(s). |
45
Table of Contents
The following table presents regulatory capital categories and the required minimum values for each
category:
Significantly | Critically | |||||||||||||||||||
Well- | Adequately- | Under- | Under- | Under- | ||||||||||||||||
Capitalized | Capitalized | Capitalized | Capitalized | Capitalized(1) | ||||||||||||||||
Total risk-based capital |
||||||||||||||||||||
Bank holding companies |
N/A | 8.00 | % | N/A | N/A | N/A | ||||||||||||||
Banks |
10.00 | % | 8.00 | % | 6.00 | % | <6.00 | % | N/A | |||||||||||
Tier 1 risk-based capital |
||||||||||||||||||||
Bank holding companies |
N/A | 4.00 | % | N/A | N/A | N/A | ||||||||||||||
Banks |
6.00 | % | 4.00 | % | 3.00 | % | <3.00 | % | N/A | |||||||||||
Leverage ratio |
||||||||||||||||||||
Bank holding companies |
N/A | 4.00 | % | N/A | N/A | N/A | ||||||||||||||
Banks(2) |
5.00 | %(2) | 4.00 | %(2) | 3.00 | % | <3.00 | % | N/A |
(1) | Pursuant to the regulations, tangible equity does not exceed 2.00% | |
(2) | Pursuant to the regulatory order issued by the FDIC and DFCS, the Bank must maintain Tier 1 leverage ratio of at least 10.00% |
The following table presents our capital ratios:
Capital Ratios:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Total risk-based capital |
||||||||
Columbia Bancorp |
4.14 | % | 8.90 | % | ||||
Columbia River Bank |
4.05 | % | 8.75 | % | ||||
Tier 1 risk-based capital |
||||||||
Columbia Bancorp |
2.87 | % | 7.64 | % | ||||
Columbia River Bank |
2.78 | % | 7.49 | % | ||||
Leverage ratio |
||||||||
Columbia Bancorp |
2.14 | % | 6.41 | % | ||||
Columbia River Bank |
2.08 | % | 6.29 | % |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
In the banking industry, a major risk involves changing interest rates, which can have a
significant impact on our profitability. We manage exposure to changes in interest rates through
asset and liability management activities within the guidelines established by our Asset Liability
Committees (ALCO). We have two levels of ALCO oversight and management: Management ALCO, which
currently meets twice monthly, and Board ALCO, which meets quarterly. Our Board ALCO has
responsibility for establishing the tolerances and monitoring compliance with asset-liability
management policies, including interest rate risk exposure, capital position, liquidity management
and the investment portfolio. Our Management ALCO has responsibility to manage the daily
activities necessary to ensure compliance with asset-liability
management policies and tolerances. Management and Board ALCO minutes are provided to the Board of
Directors for review and approval.
46
Table of Contents
Asset-liability management simulation models are used to measure interest rate risk. The models
quantify interest rate risk through simulating forecasted net interest income and the economic
value of equity over a 12-month forward-looking time line under various rate scenarios. The
economic value of equity is defined as the difference between the market value of current assets
less the market value of liabilities. By measuring the change in the present value of equity under
different rate scenarios, we identify interest rate risk that may not be evident in simulating
changes in the forecasted net interest income.
The table below shows the simulated percentage change in forecasted net interest income and the
economic value of equity based on changes in the interest rate environment as of September 30,
2009. The change in interest rates assumes an immediate, parallel and sustained shift in the base
interest rate forecast. Through these simulations, we estimate the impact on net interest income
and present value of equity based on a 100 and 200 basis point upward and downward gradual change
of market interest rates over a one-year period. The analysis did not allow rates to fall below
zero.
Percent | Percent Change | |||||||
Change in Net Interest | in Present Value | |||||||
Change in Interest Rates | Income | of Equity | ||||||
-200 |
3.30 | % | 9.96 | % | ||||
-100 |
2.54 | % | -0.30 | % | ||||
+100 |
0.98 | % | -3.12 | % | ||||
+200 |
2.89 | % | -3.19 | % |
As illustrated in the above table, our balance sheet is currently liability sensitive, meaning that
interest earning liabilities mature or re-price more frequently than interest bearing assets in a
given period. In recent prior periods, our balance sheet was asset sensitive. The fluctuation
resulted from the decrease in the Federal Funds rate, which caused many of our variable rate loans
to be at their interest rate floors and behave similar to fixed rate loans. Therefore, according
to our simulation model, net interest income should increase once our variable rate loans increase
over the floor rate, which is expected to occur when the Federal Funds rate increases by
approximately 200 basis points.
The simulation model does not take into account future management actions that could be undertaken,
should a change occur in actual market interest rates. Also, assumptions underlying the modeling
simulation may have significant impact on the results. These include assumptions regarding the
level of interest rates and balance changes of deposit products that do not have stated maturities.
These assumptions have been developed through a combination of industry standards and historical
pricing behavior and modeled for future expectations. The model also includes assumptions about
changes in the composition or mix of the balance sheet. Results derived from the simulation model
could vary significantly due to external factors such as changes in prepayment assumptions, early
withdrawals of deposits and unforeseen competitive factors.
ITEM 4. CONTROLS AND PROCEDURES
Columbias management, including the Chief Executive Officer and Chief Financial Officer, conducted
an evaluation of the effectiveness of disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as
of the end of the period covered by this quarterly report, the disclosure controls and procedures
are effective in ensuring all
material information required to be filed in this quarterly report has been made known to them in a
timely fashion.
There were no changes in Columbias internal control over financial reporting that occurred during
the period covered by this report that have materially affected, or are likely to materially
affect, Columbias internal control over financial reporting.
47
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of December 31, 2008, the Company was subject to joint regulatory enforcement proceedings by the
FDIC and the DFCS, involving allegations that the Companys wholly owned subsidiary, Columbia River
Bank, had operated in violation of certain banking laws and regulations and had been operated in an
unsafe and unsound manner. The preliminary findings were made known to the Company and the Bank on
September 18, 2008, at the conclusion of a routine regulatory examination using financial and
lending data measured as of June 30, 2008. On February 9, 2009, the Bank entered into a
stipulation and consent agreement pursuant to which it consented to the entry of an Order to cease
and desist from certain allegedly unsafe and unsound banking practices (the Order). The Order
did not contain an admission of guilt or other wrongdoing on the part of Columbia River Bank,
Columbia Bancorp, or their respective officers, directors or affiliates.
Columbia River Bank was named as a defendant in the District Court for Crook County, Oregon in a
case captioned Hooker Creek Companies, LLC v. Remington Ranch, LLC, Columbia River Bank, United
Pipe & Supply Co., Inc., Integrity Golf, Inc. et. al., Case No. 08CV0023, filed June 3, 2008, in
which monetary relief is sought against Remington Ranch, LLC. If the case is decided against the
defendants it may have a negative impact on the priority of the Banks security interest in the
real property at issue.
During the normal course of its business, Columbia is a party to various debtor-creditor legal
actions, which, individually or in the aggregate, could be material to Columbias business,
operations or financial condition. These include cases filed as a plaintiff in collection and
foreclosure cases, and the enforcement of creditors rights in bankruptcy proceedings.
From time to time we are also parties to various inter-creditor disputes, in which one or more
creditors of a particular borrower assert claims to a limited repayment stream or collateral
support. In certain of these instances, we may be subject to senior liens, such as construction or
material-mens liens, even if we have perfected a first-priority security interest in the
borrowers assets. Any such outcomes could impair our recourse to repayment, could require us to
compromise claims that we would otherwise pursue aggressively, or otherwise adversely affect our
assets and revenues as related to the affected loan or loans.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Form 10-Q, the following risk factors should
be considered carefully in evaluating our business. Our business, revenues, liquidity, financial
condition, and results of operations may be materially adversely affected by any of these risks.
Please note that additional risks not presently known to us or that we currently deem immaterial
may also impair our business, revenues, financial condition, and results of operations.
Risks Relating to our Company
In February 2009, the Bank was issued a cease and desist order from the FDIC and the State of
Oregon which limits the Banks ability to pay dividends to Columbia and places other limitations
and obligations on the bank.
On February 9, 2009, the Bank consented to the issuance by the FDIC and the State of Oregon of a
cease and desist order (the Order) based on certain findings from an examination of the Bank
concluded in September 2008 based upon financial and lending data measured as of June 30, 2008. The
Order alleges charges of unsafe or unsound banking practices and violation of federal and state law
and/or regulations. By consenting to the Order, the Bank neither admitted nor denied the alleged
charges. The Order requires the Bank cease and desist from the following unsafe and unsound banking
practices: (i) operating with management whose policies and practices are detrimental to the Bank
and jeopardize the safety of its deposits; (ii) operating with a board of directors which has
failed to provide adequate supervision over and direction to the active management of the Bank;
(iii) operating with inadequate capital in relation to the kind and quality of the Banks assets;
(iv) operating with an inadequate loan
48
Table of Contents
valuation reserve and a large volume of poor loan quality
loans; (v) operating in such a manner as to produce operating losses; (vi) operating with
inadequate provision for liquidity; and (vii) operating in violation of certain laws and/or
regulations.
The Order further requires the Bank to take certain corrective measure to ensure safe and sound
banking practices, and compliance with federal and state laws and regulations in the future. Among
other provisions, the Order requires the Bank to maintain above-normal capital levels;
specifically, the Bank was to maintain a Tier 1 leverage ratio of at least 10% not later than May
9, 2009. The Bank must also develop and adopt a plan to meet and maintain the minimum risk-based
capital requirements for a well capitalized bank, including a total risk-based capital ratio of
at least 10%. In addition to bolstering its capital, the Order requires that the Bank retain
qualified management and must notify the FDIC and the DFCS in writing when it proposes to add any
individual to its board of directors or to employ any new senior executive officer. Under the
corrective program the Banks board of directors must also increase its participation in the
affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives
for the supervision of all the Banks activities.
The Order further requires the Bank to eliminate certain classified assets and must develop a plan
for the reduction, collection and/or disposition of delinquent loans, as well as reducing loans to
borrowers in the troubled commercial real estate market sector. The Order also requires the Bank to
develop a written three-year strategic plan and a plan to preserve liquidity.
The Bank was required to implement these measures under various time frames, all of which have
expired. While the Bank successfully completed several of the measures, it was unable to implement
certain measures in the time frame provided, particularly those related to raising capital levels.
We can offer no assurance that the Bank will be able to implement such measures in the future, or
at all. Failure to implement the measure in the time frame provided, or at all, could result in
additional orders or penalties from the FDIC and the DFCS, which could include further restrictions
on the Banks business, assessment of civil money penalties on the Bank, as well as its directors,
officers and other affiliated parties, termination of deposit insurance, removal of one or more
officers and/or directors, and/or the liquidation or other closure of the Bank.
In addition, management will be required to devote a great deal of time to the implementation of
these measures. This pressure on management resources may result in unforeseen operating
difficulties or expenditures.
We are not in compliance with certain provisions of our regulatory order.
The Order to which the Bank is subject requires, among other obligations described elsewhere in
this report, that we increase our regulatory capital and reduce our troubled assets. Our obligation
to increase regulatory capital was subject to a deadline of May 9, 2009. As of the date of this
report, we had been unable to raise capital or achieve this goal by other means. As of September
30, 2009 our Tier 1 risk based capital ratio was 2.78%, whereas the Order required the Bank to
reach and maintain at least 6%; our Tier 1 leverage capital ratio was 1.80%, whereas the Order
required the Bank to reach and maintain at least 10%; and our total risk-based capital ratio was
4.05% compared to the 10% required to meet applicable prompt corrective action standards under
applicable banking regulations. We do not anticipate being able to raise additional capital in the
foreseeable future given the present condition of financial markets. If we fail to raise additional
capital or take other measures that will cause our regulatory capital levels to increase,
regulators may take more draconian measures that could include receivership or a forced divestiture
of our assets and deposits. Any such measures, if taken, may have a material adverse effect upon
the value of our common stock.
Further, the Order requires us to reduce the percentage of our assets classified as substandard or
doubtful, and to take certain other measures to improve credit quality. As of February 8, 2009, the
date on
which the Order was entered, our total assets were $1,090.78 million and our non-performing assets
were $106.04 million. As of September 30, 2009 our total assets were $1,057.72 million and our
non-performing assets were $123.18 million. While the Order does not impose an objective standard
for compliance with our obligation to improve asset quality, a continuing decline in collectability
of our loans, a continuing decline in collateral values, or both, will require that we recognize
additional provision
49
Table of Contents
expense in order to maintain an adequate loan loss reserve, and continuing or
increasing provision expense will indirectly reduce our capital.
The Bank is nearing critically undercapitalized status, which may prompt additional regulatory
actions.
Our stockholders equity and our regulatory capital have declined in each of the past six fiscal
quarters as a result of increasing loan loss provision expenses, which have driven consecutive
operating losses. As of September 30, 2009, our Tier 1 leverage capital ratio was 2.08%, which is
nearing critically undercapitalized status within the meaning of applicable banking laws and
regulations. A bank is required to maintain certain predetermined regulatory capital levels as a
means to protect against financial risk associated with losses that are, or become, inherent to the
banks loan portfolio. In circumstances where a banks capital is seriously depleted, its capital
may be inadequate to protect against such risks, and continuing or exacerbated losses may lead to
insolvency. Further, such circumstances may cause federal and state banking regulators to take
actions to protect against potential deposit losses. Were the Bank to experience significant
additional losses, regulators may determine that such actions may be required with respect to the
Bank, and our ability to contest such a determination would be very limited. These actions may
include the appointment of a receiver, a forced acquisition by another institution, or similar
actions, any one or more of which could materially and adversely affect the value of our common
stock.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial
condition.
FDIC insurance premiums have increased substantially in 2009 and we may have to pay significantly
higher FDIC premiums in the future and prepay insurance premiums. Market developments have
significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured
deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule on February
27, 2009, which raised regular deposit insurance premiums. On May 22, 2009, the FDIC also
implemented a five basis point special assessment of each insured depository institutions total
assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the
institutions assessment base for the second quarter of 2009, collected by the FDIC on September
30, 2009. The special assessment totaled approximately $496,000 for the Bank. Additional special
assessments may be imposed by the FDIC for future quarters at the same or higher levels.
In addition, the FDIC recently announced a proposed rule that would require insured financial
institutions, including the Bank, to prepay their estimated quarterly risk-based assessments for
the fourth quarter of 2009 and for all of 2010, 2011 and 2012. If the proposed rule is adopted, the
prepaid assessments would be collected on December 30, 2009. We have estimated that the total
prepaid assessments would be approximately $13.00 million, which would be recorded as a prepaid
expense (asset) as of December 30, 2009. For the fourth quarter of 2009 and each quarter
thereafter, we would record an expense for our regular deposit assessment for the quarter and an
offsetting credit to the prepaid assessment until the asset is exhausted. The prepayment of our
FDIC assessments may temporarily reduce our liquidity.
The Banks capital may not be sufficient to support the risk inherent in its loan portfolio.
Since June 30, 2008, we have incurred an aggregate net operating loss of $79.46 million, which has
had the effect of reducing our total stockholder equity from $102.24 million to $23.23 million
(measured as of September 30, 2009). As of September 30, 2009, we were significantly under
capitalized by regulatory definition. This designation affects us in a variety of ways, including
our eligibility to obtain a streamlined review process for acquisition proposals as well as our
ability to accept brokered deposits without the prior approval of the FDIC, our ability to make
capital distributions, and our ability to grow. More importantly, we maintain capital as a means to
serve as a cushion against the risk of operating losses and, under ordinary circumstances, to
grow our business. As we incur operating losses, which has
occurred in each of the past four fiscal quarters, we necessarily reduce our capital, which
diminishes our ability to withstand future losses. The same is true of Columbias sole operating
subsidiary, Columbia River Bank, whose operations, assets and liabilities represent substantially
all of Columbias operations, assets and liabilities. Bank regulators focus closely upon certain
aspects of capital and risk profile, and in the event the regulators determine that a bank has
inadequate capital to support the risk inherent in its
50
Table of Contents
asset and liability profile, the regulators
may seize the bank. Because the Bank is the only material asset of Columbia Bancorp, a seizure of
the Bank would render Columbia Bancorp insolvent and would render investments in the Company
substantially worthless.
We may not be able to improve our asset quality.
One of the most critical aspects of our continued viability is our undertaking to improve our asset
quality. In addition to being required by the Order to develop a plan to identify and collect or
dispose of delinquent loans, we must meet capital and liquidity requirements that are imposed by
the Order and by generally applicable banking laws and regulations, as well as those dictated by
prudent business practices. During the third quarter of 2009 we recognized additional loan loss
provision expense of $20.25 million, compared to $14.40 and $9.70 million in the second and first
quarter of 2009, respectively, $9.00 million in the fourth quarter of 2008, $25.40 million during
the third quarter of 2008 and $5.65 million during the second quarter of 2008. The aggregate
provision expense over the past six quarters has totaled $84.40 million, which has had a
substantial adverse effect on our capital and makes it more difficult for us to withstand a
continuing or exacerbated downturn in our markets. As our single most substantial expense item in
recent periods, it also directly impacts our ability to meet the terms of the Order. If we
experience continuing declines in asset quality, we will suffer corresponding adverse effects on
our financial condition and results of operations, and we will face additional challenges in
satisfying the terms of the Order. We are operating under certain regulatory restrictions that may
further impair our revenues, financial condition, and results of operations.
Failure to meet capital requirements imposed by certain regulatory restrictions may have a material
adverse effect on our financial conditions, liquidity and results of operations.
We are subject to regulatory capital guidelines, which are used to evaluate our capital adequacy
based primarily on the regulatory weighting for credit risk associated with certain balance sheet
assets and certain off-balance sheet exposures such as unfunded loan commitments and letters of
credit. To be adequately capitalized we must have a Tier 1 capital ratio of at least 4%, a
combined Tier 1 and Tier 2 risk-based capital ratio of at least 8%, and a leverage ratio of at
least 4%. Generally, to be well-capitalized a bank must have a Tier 1 ratio of at least 6%, a
combined Tier 1 and Tier 2 risk-based capital ratio of at least 10%, and a leverage ratio of at
least 5%, and not be subject to a directive, order, or written agreement to meet and maintain
specific capital levels. As of September 30, 2009, we were deemed significantly under capitalized
by regulatory definition. However, pursuant to the Order, we must maintain above-normal capital
levels; specifically, the Bank must maintain a Tier 1 leverage ratio of at least 10% not later than
May 9, 2009. The Bank must also develop and adopt a plan to meet and maintain the minimum
risk-based capital requirements for a well capitalized bank, including a total risk-based capital
ratio of at least 10%. Our inability to meet these capital and other regulatory requirements may
have a material adverse effect on our financial condition, liquidity, and results of operations.
Federal banking regulators are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements, including a leverage limit, a
risk-based capital requirement, and any other measure of capital deemed appropriate by the federal
banking regulator for measuring the capital adequacy of an insured depository institution. Our
inability to meet the required capital ratios would result in numerous mandatory supervisory
actions and additional regulatory restrictions, including restrictions on our ability to make
capital distributions, our ability to grow, and our ability to raise deposits (particularly in the
wholesale market), and could negatively impact the manner in which we are regulated by state and
federal banking regulators.
Liquidity risk may impair our ability to fund operations and may have a material adverse effect on
our financial condition and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings,
the sale of loans and other sources could have a material negative effect on our liquidity. Our
access to funding
sources in amounts adequate to finance our activities or on terms that are acceptable to us could
be impaired by factors that affect us specifically or the financial services industry or economy in
general. These factors include a decrease in the level of our business activity as a result of the
downturn in the Washington or Oregon markets in which our loans are concentrated or adverse
regulatory action against us. Our ability to borrow could also be impaired by factors not specific
to us, such as a disruption in the
51
Table of Contents
financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil faced by banking
organizations and the continued deterioration in credit markets. As of September 30, 2009 our
primary sources for liquidity are from retail deposits and available borrowings at the Federal Home
Loan Bank (FHLB) and the Federal Reserve Board (FRB).
Our liquidity may be impaired due to sharp declines in retail deposit balances or inability to
access wholesale liability sources.
Liquidity measures our ability to meet loan demand and deposit withdrawals and to service
liabilities as they come due. Our liquidity is primarily dependent on retail deposits gathered from
our branch network and wholesale liability sources. During 2007 and the first three quarters of
2008, retail deposit growth slowed due to the general economic downturn and competition from other
financial institutions. As a result, during 2008 we relied on wholesale liabilities for liquidity
management. Wholesale liability sources include correspondent banks, the FHLB, deposit brokers and
other institutional depositors. This could force us to borrow heavily from the FHLB and FRB, or if
more pronounced, may require us to seek protection from the FDIC. If we are unable to meet minimum
capital requirements, FRB or FHLB could restrict or limit our access to secured borrowings. Such
actions could have the effect of reducing secured borrowing capacity. Further reduction in our
liquidity could have a material adverse effect on our financial condition and results of
operations.
Recent and continuing adverse developments in the financial industry and the domestic and
international credit markets may further affect our operations and results and the value of our
common stock.
The national and global economic downturn has recently resulted in unprecedented levels of
financial market volatility which has depressed overall the market value of financial institutions,
limited access to capital, and has had a material adverse effect on the financial condition or
results of operations of banking companies in general and Columbia in particular. As a result of
this credit crunch, commercial as well as consumer loan portfolio performances have deteriorated
at many institutions and the competition for deposits and quality loans has increased
significantly. In addition, the values of real estate collateral supporting many commercial loans
and home mortgages have declined and may continue to decline. Bank and bank holding company stock
prices have been negatively affected, as has the ability of banks and bank holding companies to
raise capital or borrow in the debt markets. As a result, there is a potential for new federal or
state laws and regulations regarding lending and funding practices and liquidity standards, and
bank regulatory agencies have been very aggressive in responding to concerns and trends identified
in examinations, including the expected issuance of many formal enforcement orders. Negative
developments in the financial industry and the domestic and international credit markets, and the
impact of new legislation in response to such developments, may negatively impact our operations by
restricting our business operations, including our ability to originate or sell loans, and may
adversely impact our financial performance and the value of our common stock. In addition, the
possible duration and severity of the adverse economic cycle is unknown and may exacerbate the
Companys exposure to credit risk. Treasury and FDIC programs have been initiated to address
economic stabilization, however the efficacy of these programs in stabilizing the economy and the
banking system at large are uncertain. Details as to our participation or access to such programs
and their subsequent impact on us also remain uncertain and there can be no assurance that such
programs will be available to us.
Our allowance for loan losses is based on significant estimates and may be inadequate to cover
actual losses.
There is a risk that our customers will be unable to repay their loans in a timely fashion and that
collateral securing the payment of loans may be insufficient to ensure timely repayment. Borrowers
inability to timely repay their loans could erode the Banks earnings and capital. Our allowance
for loan losses represents our best estimate of probable losses inherent in our loan portfolio.
Estimation of the allowance
requires us to make various assumptions and judgments about the collectability of loans in our
portfolio. These assumptions and judgments include historical loan loss experience, current credit
profiles of our borrowers, adverse situations that have occurred that may affect a borrowers
ability to meet his financial obligations, the estimated value of underlying collateral and general
economic conditions. Determining the appropriateness of the allowance is complex and requires
judgment by management about the effect
52
Table of Contents
of matters that are inherently uncertain. The amount of
future loan losses is susceptible to changes in economic, operating, and other conditions that may
be beyond our control. Because our assumptions and judgments may not adequately predict future loan
losses, actual loan losses may be significantly higher than provided for in the allowance. In these
cases, we would be required to recognize higher provisions for loan losses, which would decrease
our net income and have a material negative effect on our financial condition and results of
operations.
Regulators may require us to recognize additional loan losses based on their examination and review
of our business.
Representatives of the FRB, the FDIC, and the DFCS, our principal regulators, have publicly
expressed concerns about the banking industrys lending practices and have particularly noted
concerns about real estate-secured lending. Further, state and federal regulatory agencies, as an
integral part of their examination process, review our loans and our allowance for loan losses. As
a result of examination, we might be required to recognize additional provisions for loan losses or
charge-off selected loans. Any additional provision for loan losses or charge-off of loans may have
a material adverse effect on our results of operations and financial condition.
Our loan portfolio is heavily concentrated in real estate lending and much of that portfolio is
collateralized only by real estate. As a result of this concentration and an overall decline in
real estate markets generally, and particularly in our geographic markets, we may face greater than
average exposure to loan losses.
In the past, we have focused a substantial portion of our lending business on residential and
commercial construction lending and in commercial leased or owner-occupied real property. A
substantial majority of our loan portfolio is secured by mortgages on real property. Real estate
lending is accompanied by two specific risks: the risk that real estate developers and builders (in
the case of construction real estate) and business owners (in the case of leased and owner-occupied
commercial real estate) cannot generate cash flows sufficient to repay their loans in a timely
manner, and the risk that the underlying collateral may decline in value, increasing the risk that
we may be unable to recover the full value of any defaulted loans by foreclosing on the real estate
that secures the loans.
In the last half of 2008 and the first nine months of 2009, we experienced significant increases in
non-performing assets relating to our real estate lending, primarily in residential sub-division
projects. We could see an increase in non-performing assets if more borrowers fail to perform
according to loan terms and if we take possession of real estate properties. If these effects
continue or become more pronounced, loan losses may increase more than we expect, which may have a
material adverse effect on our results of operations and financial condition.
Our earnings may be impacted negatively by changes in market interest rates.
Our profitability depends in large part on our net interest income, which is the difference between
interest income from interest earning assets, such as loans and securities, and interest expense on
interest bearing liabilities, such as deposits and borrowings. Changes in market interest rates
affect the demand for new loans, the credit profile of existing loans, rates received on loans and
securities, and rates paid on deposits and borrowings. Based on our current volume and mix of
interest bearing liabilities and interest earning assets, net interest spread could generally be
expected to increase during times when interest rates rise and, conversely, to decline during times
of falling interest rates. Our net interest income will be adversely affected if the market
interest rate changes such that the interest we earn on loans and investments decreases faster than
the interest we pay on deposits and borrowings. We manage our interest rate risk exposure by
monitoring the re-pricing frequency of our rate-sensitive assets and rate-sensitive liabilities
over any given period.
Because of the differences in maturities and re-pricing 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 net interest
income and, in turn, our profitability. In addition, loan volumes are affected by market interest
rates on loans. Interest rates also affect how much money we can lend. When interest rates rise,
the cost of borrowing increases, accordingly, changes in market
53
Table of Contents
interest rates could materially and
adversely affect our net interest income, asset quality, and loan origination volume, which may
have a material adverse effect on our results of operations and financial condition.
If conditions in non-real estate sectors of the economy worsen, we may experience an increase in
loan delinquencies and losses in other parts of our portfolio.
During 2008 and 2009, loan losses have been centered in real estate construction and development
loans. Ongoing weakness in the residential real estate market or other unexpected events may cause
other areas of the economy to falter. In particular, the effects of higher unemployment, declining
consumer confidence and difficulties in other non-real estate sectors of the economy may stress
other parts of our loan portfolio not currently experiencing problems. This may result in a higher
level of non-accrual loans and loan losses in these parts of the portfolio, which may have a
material adverse effect on our results of operations and financial condition.
We are subject to federal and state regulations which undergo frequent and often significant
changes.
Federal and state regulation of financial institutions is designed primarily to protect depositors,
borrowers and shareholders. These regulations can sometimes impose significant limitations on our
operations. Moreover, federal and state banking laws and regulations undergo frequent and often
significant changes and have been subject to significant change in recent years, sometimes
retroactively applied, and may change significantly in the future. Changes in laws and regulations
may affect our cost of doing business, limit our permissible activities (including insurance and
securities activities), or our competitive position in relation to credit unions, savings
associations and other financial institutions. These changes could also reduce federal deposit
insurance coverage, broaden the powers or geographic range of financial holding companies, alter
the taxation of financial institutions and change the structure and jurisdiction of various
regulatory agencies.
Federal monetary policy, particularly as implemented through the Federal Reserve System, can
significantly affect credit availability. Other federal legislation such as the Sarbanes-Oxley Act
can dramatically shift resources and costs to ensure adequate compliance. The effect of laws and
regulations may have a material adverse effect on our business, financial condition and results of
operations.
The weakened housing market may result in a decline in fair value of Other Real Estate Owned
(OREO).
In recent months we have foreclosed on certain real estate development loans and have taken
possession of several residential subdivision properties. OREO is initially recorded at its
estimated fair value less costs to sell. Because of the weak housing market and declining land
values, we may incur losses to write-down OREO to new fair values or losses from the final sale of
properties. Moreover, our ability to sell OREO properties is affected by public perception that
banks are inclined to accept large discounts from market value to quickly liquidate properties.
Write-downs on OREO or an inability to sell OREO properties will have a material adverse effect on
our results of operations and financial condition.
We are a holding company and depend on our subsidiary for dividends, distributions and other
payments.
We are a separate and distinct legal entity from our banking subsidiary, Columbia River Bank, and
depend on dividends, distributions and other payments from the Bank to fund any cash dividend
payments on our common stock and to fund payments on our other obligations. The Bank is subject to
laws and regulations that restrict, or authorize regulatory bodies to restrict or reduce, the flow
of funds
from the Bank to us. Restrictions of that kind could impede access to funds we need to make
dividend payments on our common stock, or payments on our other obligations. Furthermore, our right
to participate in a distribution of assets upon a subsidiarys liquidation or reorganization is
subject to the prior claims of the subsidiarys creditors.
54
Table of Contents
There are regulatory and contractual limitations that may limit or prevent us from paying dividends
on the common stock and we may limit or eliminate our dividends to shareholders.
As a bank holding company, our ability to declare and pay dividends is dependent on certain federal
regulatory considerations. We are an entity separate and distinct from our subsidiary, Columbia
River Bank, and derive substantially all of our revenue in the form of dividends from the Bank.
Accordingly, we are dependent upon dividends from the Bank to satisfy its cash needs and to pay
dividends on its common stock. The Banks ability to pay dividends is subject to its ability to
earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay
dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on
our common stock. In addition, our right to participate in a distribution of assets upon the Banks
liquidation or reorganization is subject to the prior claims of the Banks creditors.
Our board of directors regularly reviews our dividend policy in light of current economic
conditions for financial institutions as well as our capital needs. No assurance can be given
concerning dividend payments in future periods. We have no plans to pay cash dividends for the
foreseeable future.
Our business operations are geographically concentrated in Oregon and Washington and our business
is sensitive to the economic conditions of those areas.
Substantially all of our business is derived from a twelvecounty area in northern and central
Oregon and southern and central Washington. The communities we serve typically have population
bases of 20,000 to 250,000, and have traditionally created employment opportunities in the areas of
agriculture, timber, electrical power generation, light manufacturing, construction and
transportation. While we have built our expansion strategy around these growing and diverse
geographic markets, our business is and will remain sensitive to economic factors that relate to
these industries and local and regional business conditions. As a result, local or regional
economic downturns, or downturns that disproportionately affect one or more of the key industries
in regions we serve, may have a more pronounced effect upon our business than they might on an
institution that is more geographically diversified. The extent of the future impact of these
events on economic and business conditions cannot be predicted; however, prolonged or acute
fluctuations may have a material adverse effect on our results of operation and financial
condition.
The financial services business is intensely competitive and our success will depend on our ability
to compete effectively.
The financial services business has become increasingly competitive due to changes in regulation,
technological advances, and the accelerating pace of consolidation among financial services
providers. We face competition both in attracting deposits and in originating loans. We compete for
loans principally based on the efficiency and quality of our service and also based on pricing of
interest rates and loan fees. Some of the financial services organizations with which we compete
are not subject to the same degree of regulation as is imposed on bank holding companies and
federally insured state-chartered banks, national banks and federal savings institutions. As a
result, these non-bank competitors have certain advantages over us in accessing funding and in
providing various services. Some of these competitors are subject to similar regulation but have
the advantages of larger established client bases, higher lending limits, no federal income or
state franchise taxation, extensive branch networks, numerous ATMs, greater advertising-marketing
budgets and other factors. Increasing levels of competition in the banking and financial services
industries may limit our ability to attract new customers, reduce our market share or cause the
prices charged for our services to fall. Our future growth and success will depend on our ability
to compete effectively in this highly competitive financial services environment.
We rely heavily on our management team and the unexpected loss of any of those personnel could
adversely affect our operations; we depend on our ability to attract and retain key personnel.
We are a client-focused and relationship-driven organization. We expect our future success to be
driven in large part by the relationships maintained with our clients by our executives and senior
lending officers. We have entered into employment agreements with several members of senior
management. The existence of such agreements, however, does not necessarily ensure that we will be
able to continue to
55
Table of Contents
retain their services. The unexpected loss of key employees may have a material adverse effect on
our business, results of operations and financial condition.
Our future success will also require us to continue to attract, hire, motivate and retain skilled
personnel to develop new client relationships as well as new financial products and services. Many
experienced banking professionals employed by our competitors are covered by agreements not to
compete or solicit their existing clients if they were to leave their current employment. These
agreements make the recruitment of these professionals more difficult. The market for these
resources is competitive, and we cannot assure you that we will be successful in attracting,
hiring, motivating or retaining them.
Our ability to operate profitably may depend on our ability to implement various technologies into
our operations.
The market for financial services, including banking services and consumer finance services is
increasingly affected by advances in technology, including developments in telecommunications, data
processing, computers, automation, and internet-based banking. Our ability to compete successfully
in our markets may depend on the extent to which we are able to exploit such technological changes.
Our inability to afford such technologies, properly or timely anticipate or implement such
technologies, or properly train our staff to use such technologies, may have a material adverse
effect on our business, results of operations, and financial condition.
FDIC closure of local banks and related publicity could create a liquidity risk.
Due to the economic conditions facing the nation and the banking industry, the number of bank
failures has dramatically increased starting in late 2008 and will likely continue to increase
throughout 2009. The publicity surrounding these failures could result in a run on the deposits of
other banks located in the same communities or market areas which would adversely affect the
liquidity profile of such banks.
The failure of the FHLB or the national Federal Home Loan Bank System may have a material negative
impact on our earnings and liquidity.
Recently, the FHLB of Seattle announced that it did not meet minimum regulatory capital
requirements for the quarter ended December 31, 2008, due to the deterioration in the market value
of their mortgage-backed securities portfolio. As a result, the FHLB of Seattle cannot pay a
dividend on their common stock and it cannot repurchase or redeem common stock. While the FHLB of
Seattle has announced it does not anticipate that additional capital is immediately necessary, nor
does it believe that its capital level is inadequate to support realized losses in the future, the
FHLB of Seattle could require its members, including the Bank, to contribute additional capital to
return the FHLB of Seattle to compliance with capital guidelines.
As of September 30, 2009, we held $3.05 million of common stock in the FHLB of Seattle. If the FHLB
of Seattle fails, our investment in the FHLBs common stock may be other-than-temporarily
impaired and may have no value.
As of September 30, 2009, we held $3.01 million of cash on deposit with the FHLB of Seattle. At
that date, all other cash and cash equivalents were held on deposit at the Federal Reserve Bank of
San Francisco, or on hand in branch office vaults.
As of September 30, 2009, we maintained a line of credit with the FHLB of Seattle totaling $41.12
million, which is available to the extent the Bank provides qualifying collateral and holds
sufficient FHLB stock. As of September 30, 2009, we were in compliance with collateral requirements
and $22.72 million of the line of credit was available for additional borrowings. We are highly
dependent on the FHLB of Seattle to provide a primary source of wholesale funding for immediate
liquidity and borrowing needs. The failure of the FHLB of Seattle or the FHLB system in general,
may materially impair our ability to meet short and long term liquidity demands.
56
Table of Contents
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Maximum Dollar | ||||||||||||||||
Total Number of | Value of Shares | |||||||||||||||
Total Number of | Shares Purchased | Remaining to be | ||||||||||||||
Shares | Average Price | as Part of Publicly | Purchased Under | |||||||||||||
Purchased(1) | Paid per Share | Announced Plans | the Plans | |||||||||||||
July 2009 |
| $ | | | $ | | ||||||||||
August 2009 |
248 | 1.88 | | | ||||||||||||
September 2009 |
| | | | ||||||||||||
Three months ended
September 30, 2009 |
248 | $ | 1.88 | | $ | | ||||||||||
(1) | Purchase of shares was pursuant to 2009 vesting of stock awards to satsify employee payroll tax obligations. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits | ||
3.1.1
|
Articles of Incorporation of Columbia Bancorp (Incorporated herein by reference to Exhibit 3(i) to Columbias Form 10-Q for the period ended June 30, 1999). | |
3.1.2
|
Bylaws of Columbia Bancorp (Incorporated herein by reference to Exhibit 3.1.2 to Columbias Form 10-K for the year ended December 31, 2007). | |
31.1
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
31.2
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
32.1
|
Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |
32.2
|
Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
57
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
COLUMBIA BANCORP
Dated: November 16, 2009 | /s/ Terry Cochran | |||
Terry L. Cochran | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Dated: November 16, 2009 | /s/ Staci L. Coburn | |||
Staci L. Coburn | ||||
Chief Financial Officer (Principal Financial and Chief Accounting Officer) |
||||
58