b10q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

 
FORM 10-Q

 

 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2009.
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                     to                    .
 
Commission File Number 0-20288
 
 
COLUMBIA BANKING SYSTEM, INC.
(Exact name of issuer as specified in its charter)
 

   
Washington
91-1422237
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
   
1301 “A” Street
Tacoma, Washington
98402-2156
(Address of principal executive offices)
(Zip Code)
 
(253) 305-1900
(Issuer’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

 

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o   Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ¨                                                      Accelerated filer  x                                           Non-accelerated filer  ¨                                           Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  ¨    No  x
 
The number of shares of common stock outstanding at April 30, 2009 was 18,262,854
 



TABLE OF CONTENTS
 
     
 
Page
   
 
     
Item 1.
 
     
 
        1
     
 
        2
     
 
        3
     
 
        4
     
 
        5
     
Item 2.
        13
     
Item 3.
        26
     
Item 4.
        26
   
 
     
Item 1.
        26
     
Item 1A.
        27
     
Item 2.
        30
     
Item 3.
        30
     
Item 4.
        30
     
Item 5.
        30
     
Item 6.
        31
     
 
        32
 

PART I - FINANCIAL INFORMATION
Item 1.               FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
   
Three Months Ended
 
   
March 31,
 
(in thousands except per share)
 
2009
   
2008
 
Interest Income
           
Loans
  $ 29,801     $ 41,303  
Taxable securities
    4,208       4,980  
Tax-exempt securities
    2,013       2,001  
Federal funds sold and deposits in banks
    7       149  
Total interest income
    36,029       48,433  
Interest Expense
               
Deposits
    6,892       14,835  
Federal Home Loan Bank and Federal Reserve Bank borrowings
    765       2,582  
Long-term obligations
    351       487  
Other borrowings
    118       202  
Total interest expense
    8,126       18,106  
Net Interest Income
    27,903       30,327  
Provision for loan and lease losses
    11,000       2,076  
Net interest income after provision for loan and lease losses
    16,903       28,251  
Noninterest Income
               
Service charges and other fees
    3,614       3,568  
Merchant services fees
    1,770       1,916  
Redemption of Visa and Mastercard shares
    - -       1,962  
Gain on sale of investment securities, net
    - -       882  
Bank owned life insurance ("BOLI")
    501       505  
Other
    1,089       1,324  
Total noninterest income
    6,974       10,157  
Noninterest Expense
               
Compensation and employee benefits
    11,852       13,396  
Occupancy
    3,045       3,259  
Merchant processing
    814       866  
Advertising and promotion
    692       581  
Data processing
    961       815  
Legal and professional fees
    967       (51 )
Taxes, licenses and fees
    796       751  
Regulatory premiums
    1,007       502  
Net cost of operation of other real estate
    47       (23 )
Other
    3,000       3,458  
Total noninterest expense
    23,181       23,554  
Income before income taxes
    696       14,854  
Provision (benefit) for income taxes
    (816 )     3,877  
Net Income
  $ 1,512     $ 10,977  
Net Income Applicable to Common Shareholders
  $ 419     $ 10,977  
Earnings per common share
               
Basic
  $ 0.02     $ 0.61  
Diluted
  $ 0.02     $ 0.61  
Dividends paid per common share
  $ 0.04     $ 0.17  
Weighted average number of common shares outstanding
    17,980       17,850  
Weighted average number of diluted common shares outstanding
    17,987       17,978  

See accompanying notes to unaudited consolidated condensed financial statements.

 
CONSOLIDATED CONDENSED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
               
March 31,
   
December 31,
 
(in thousands)
             
2009
   
2008
 
ASSETS
                       
Cash and due from banks
              $ 61,201     $ 84,787  
Interest-earning deposits with banks
                317       3,943  
Total cash and cash equivalents
                61,518       88,730  
Securities available for sale at fair value (amortized cost of $538,835 and $525,110, respectively)
                544,367       528,918  
Federal Home Loan Bank stock at cost
                11,607       11,607  
Loans held for sale
                3,747       1,964  
Loans, net of deferred loan fees of ($4,065) and ($4,033), respectively
            2,185,755       2,232,332  
Less: allowance for loan and lease losses
                44,249       42,747  
Loans, net
                2,141,506       2,189,585  
Interest receivable
                11,388       11,646  
Premises and equipment, net
                61,123       61,139  
Other real estate owned
                4,312       2,874  
Goodwill
                95,519       95,519  
Core deposit intangible, net
                5,638       5,908  
Other assets
                105,032       99,189  
Total Assets
              $ 3,045,757     $ 3,097,079  
LIABILITIES AND SHAREHOLDERS' EQUITY
                           
Deposits:
                           
Non-interest bearing
              $ 474,736     $ 466,078  
Interest-bearing
                1,869,670       1,916,073  
Total deposits
                2,344,406       2,382,151  
Federal Home Loan Bank and Federal Reserve Bank borrowings
                183,000       200,000  
Securities sold under agreements to repurchase
                25,000       25,000  
Other borrowings
                275       201  
Long-term subordinated debt
                25,620       25,603  
Other liabilities
                51,739       48,739  
Total liabilities
                2,630,040       2,681,694  
Commitments and contingent liabilities
                           
Shareholders' equity:
                           
   
March 31,
   
December 31,
                 
   
2009
   
2008
                 
Preferred stock (no par value, 76,898 aggregate liquidation preference)
                       
Authorized shares
    2,000       2,000                  
Issued and outstanding
    77       77       73,875       73,743  
Common Stock (no par value)
                               
Authorized shares
    63,033       63,033                  
Issued and outstanding
    18,254       18,151       233,704       233,192  
Retained earnings
                    102,753       103,061  
Accumulated other comprehensive income
                    5,385       5,389  
Total shareholders' equity
                    415,717       415,385  
Total Liabilities and Shareholders' Equity
                  $ 3,045,757     $ 3,097,079  
 
 
See accompanying notes to unaudited consolidated condensed financial statements.

 
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Columbia Banking System, Inc.
(Unaudited)
   
Preferred Stock
   
Common Stock
         
Accumulated
       
                                 
Other
   
Total
 
   
Number of
         
Number of
         
Retained
   
Comprehensive
   
Shareholders'
 
(in thousands)
 
Shares
   
Amount
   
Shares
   
Amount
   
Earnings
   
Income (Loss)
   
Equity
 
Balance at January 1, 2008
    - -     $ - -       17,953     $ 226,550     $ 110,169     $ 5,012     $ 341,731  
Cumulative effect of applying EITF 06-4 consensus
    - -       - -       - -       - -       (2,155 )     - -       (2,155 )
Adjusted balance
    - -       - -       17,953       226,550       108,014       5,012       339,576  
Comprehensive income:
                                                       
Net income
    - -       - -       - -       - -       10,977       - -       10,977  
Other comprehensive income, net of tax:
                                                       
Net unrealized gain from securities, net of reclassification
adjustments
    - -       - -       - -       - -       - -       1,904       1,904  
Net unrealized gain from cash flow hedging instruments
    - -       - -       - -       - -       - -       663       663  
Total comprehensive income
                                                    13,544  
Common stock issued - stock option and other plans
    - -       - -       67       1,084       - -       - -       1,084  
Common stock issued - restricted stock awards, net of cancelled awards
    - -       - -       64       - -       - -       - -       - -  
Share-based payment
    - -       - -       - -       384       - -       - -       384  
Tax benefit associated with share-based compensation
    - -       - -       - -       138       - -       - -       138  
Cash dividends paid on common stock
    - -       - -       - -       - -       (3,059 )     - -       (3,059 )
Balance at March 31, 2008
    - -     $ - -       18,084     $ 228,156     $ 115,932     $ 7,579     $ 351,667  
Balance at January 1, 2009
    77     $ 73,743       18,151     $ 233,192     $ 103,061     $ 5,389     $ 415,385  
Comprehensive income:
                                                       
Net income
    - -       - -       - -       - -       1,512       - -       1,512  
Other comprehensive loss, net of tax:
                                                       
Net unrealized gain from securities, net of reclassification
adjustments
    - -       - -       - -       - -       - -       1,113       1,113  
Net unrealized loss from cash flow hedging instruments
    - -       - -       - -       - -       - -       (428 )     (428 )
Net unrealized loss from unfunded defined benefit plan liability
    - -       - -       - -       - -       - -       (689 )     (689 )
Total comprehensive income
                                                    1,508  
Accretion of preferred stock discount
    - -       132       - -       - -       (132 )     - -       - -  
Common stock issued - stock option and other plans
    - -               20       242       - -       - -       242  
Common stock issued - restricted stock awards, net of cancelled awards
    - -       - -       83       - -       - -       - -       - -  
Share-based payment
    - -       - -       - -       302       - -       - -       302  
Tax benefit deficiency associated with share-based compensation
    - -       - -       - -       (32 )     - -       - -       (32 )
Preferred dividends accrued/paid
    - -       - -       - -       - -       (961 )     - -       (961 )
Cash dividends paid on common stock
    - -       - -       - -       - -       (727 )     - -       (727 )
Balance at March 31, 2009
    77     $ 73,875       18,254     $ 233,704     $ 102,753     $ 5,385     $ 415,717  
 
See accompanying notes to unaudited consolidated condensed financial statements


CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
   
Three Months Ended March 31,
 
(in thousands)
 
2009
   
2008
 
Cash Flows From Operating Activities
           
Net Income
  $ 1,512     $ 10,977  
Adjustments to reconcile net income to net cash provided by operating activities
         
Provision for loan and lease losses
    11,000       2,076  
Deferred income tax benefit
    (359 )     (220 )
Excess tax benefit from stock-based compensation
    - -       (138 )
Stock-based compensation expense
    302       384  
Depreciation, amortization and accretion
    1,673       1,708  
Net realized gain on sale of securities
    - -       (882 )
Net realized gain on sale of other assets
    (15 )     (46 )
Gain on termination of cash flow hedging instruments
    (663 )     - -  
Net change in:
               
Loans held for sale
    (1,783 )     (1,462 )
Interest receivable
    258       422  
Interest payable
    (1,199 )     1,204  
Other assets
    (5,717 )     (3,789 )
Other liabilities
    3,335       3,243  
Net cash provided by operating activities
    8,344       13,477  
Cash Flows From Investing Activities
               
Purchases of securities available for sale
    (27,117 )     (76,907 )
Proceeds from sales of securities available for sale
    - -       51,358  
Proceeds from principal repayments and maturities of securities available for sale
    13,218       8,545  
Loans originated and acquired, net of principal collected
    34,309       (19,489 )
Purchases of premises and equipment
    (1,178 )     (1,425 )
Proceeds from disposal of premises and equipment
    - -       12  
Purchase of FHLB stock
    - -       (4,834 )
Proceeds from termination of cash flow hedging instruments
    - -       8,093  
Proceeds from sales of other real estate and other personal property owned
    1,297       204  
Net cash provided by(used in) investing activities
    20,529       (34,443 )
Cash Flows From Financing Activities
               
Net increase(decrease) in deposits
    (37,745 )     28,453  
Proceeds from Federal Home Loan Bank and Federal Reserve Bank borrowings
    414,000       873,268  
Repayment from Federal Home Loan Bank and Federal Reserve Bank borrowings
    (431,000 )     (874,538 )
Proceeds from repurchase agreement borrowings
    - -       25,000  
Net increase in other borrowings
    74       260  
Cash dividends paid
    (1,624 )     (3,059 )
Proceeds from issuance of common stock
    210       1,084  
Excess tax benefit from stock-based compensation
    - -       138  
Net cash provided by(used in) financing activities
    (56,085 )     50,606  
Increase(decrease) in cash and cash equivalents
    (27,212 )     29,640  
Cash and cash equivalents at beginning of period
    88,730       93,975  
Cash and cash equivalents at end of period
  $ 61,518     $ 123,615  
Supplemental Information:
               
Cash paid for interest
  $ 9,325     $ 16,902  
Cash paid for income tax
  $ 500     $ 150  
Loans transferred to other real estate owned
  $ 2,738     $ - -  
 
 
See accompanying notes to unaudited consolidated condensed financial statements.

 
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
 
1. Basis of Presentation and Significant Accounting Policies
 
(a)
Basis of Presentation
 
The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiary Columbia Bank. All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included.  The results of operations for the three months ended March 31, 2009 are not necessarily indicative of results to be anticipated for the year ending December 31, 2009. The accompanying interim unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2008 Annual Report on Form 10-K.
 
(b)
Significant Accounting Policies
 
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2008 Annual Report on Form 10-K. There have not been any other changes in our significant accounting policies compared to those contained in our 2008 10-K disclosure for the year ended December 31, 2008.
 
2. Accounting Pronouncements Recently Issued or Adopted
 
Recently Issued Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.  This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make it more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities.  This FSP will be effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009.  The Company plans to adopt this FSP for its interim reporting period ending June 30, 2009. The Company is evaluating the effect on its financial condition and results of operations of applying the guidance in this FSP.
 
  In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about FairValue of Financial Instruments.  This FSP requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.  This FSP will be effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009.  The Company plans to adopt this FSP for its interim reporting period ending June 30, 2009.  Because FSP No 107-1 impacts the Company’s disclosure and not its accounting treatment for financial instruments, adoption of this FSP will not impact the Company’s financial condition or results of operations.
 
In April 2009, the FASB issued 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.  This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the transaction volume and level of market activity for the asset or liability have significantly decreased.  This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This FSP will be effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  Early adoption is permitted for periods ending after March 15, 2009.  The Company plans to adopt this FSP for its interim reporting period ending June 30, 2009.  The Company is evaluating the effect on its financial condition and results of operations of applying the guidance in this FSP.


In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.  This FSP amends and clarifies FASB Statement No. 141 (revised 2007), Business Combinations, to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
 
In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 111.  This SAB amends and replaces Topic 5.M. in the SAB series entitled Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities to exclude debt securities from its scope.  The SEC released SAB No. 111 in response to the FASB’s issuance of FSP FAS 115-2 and FAS 124-2, which provided guidance for assessing whether an impairment of a debt security is other than temporary.  The Company will continue to apply the guidance in SAB Topic 5.M in assessing whether an impairment of an equity security is other than temporary.
 
Recently Adopted Accounting Pronouncements
 
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Base Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”).  Under this FSP, unvested share-based payment awards that contain nonforfeitable rights to dividends will be considered to be a separate class of common stock and will be included in the basic EPS calculation using the two-class method that is described in FASB Statement No. 128, Earnings per Share.  This FSP became effective for the Company on January 1, 2009, and required retrospective adjustment of all prior periods presented (see Note 3).
 
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”).  This Statement amends and requires enhanced qualitative, quantitative and credit risk disclosures about an entity’s derivative and hedging activities, but does not change the scope or accounting principles of Statement No. 133.  SFAS 161 became effective for fiscal years and interim periods beginning after November 15, 2008.  Because SFAS 161 impacts the Company’s disclosure and not its accounting treatment for derivative financial instruments and related hedged items, adoption of SFAS 161 did not impact the Company’s financial condition or results of operations (See Note 10).
 
3. Earnings per Common Share
 
Basic EPS is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding for the period.  Common shares outstanding include common stock and vested restricted stock awards where recipients have satisfied the vesting terms.  Diluted EPS reflects the assumed conversion of all dilutive securities.  The Company calculates earnings per share using the two-class method as described in SFAS 128 (see Note 2).  Application of the two-class method had no impact on earnings per share.  The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2009 and 2008:

 
   
Three Months Ended
March 31,
 
(in thousands except per share)  
2009
   
2008
 
Net income
  $ 1,512     $ 10,977  
Less: Preferred dividends
    (961 )     - -  
Less: Accretion of issuance discount for preferred stock
    (132 )     - -  
Net income applicable to common shareholders
  $ 419     $ 10,977  
Basic weighted average common shares outstanding
    17,980       17,850  
Dilutive effect of potential common shares from:
               
Awards granted under equity incentive program
    7       128  
Diluted weighted average common shares outstanding
    17,987       17,978  
Earnings per common share:
               
Basic
  $ 0.02     $ 0.61  
Diluted
  $ 0.02     $ 0.61  
 
Options under the equity compensation plan to purchase an additional 186,674 and 36,981 shares of common stock were outstanding at March 31, 2009 and 2008, respectively and were not included in the above computations of diluted earnings per share because their inclusion would have had an antidilutive effect.  Also outstanding at March 31, 2009 and excluded from the above computations of diluted earnings per share because of its antidilutive effect was a warrant to acquire an additional 796,046 shares of common stock that was issued to the U.S. Department of Treasury as part of the Capital Purchase Program.
 
4. Dividends
 
Subsequent to quarter end, on April 22, 2009, the Company declared a quarterly cash dividend of $0.01 per share, payable on May 20, 2009, to shareholders of record at the close of business May 6, 2009.  The decision to reduce the quarterly dividend as compared to recent quarters was based upon the Board of Directors’ review of the Company’s dividend payout ratio and dividend yield balanced with the Company’s desire to retain capital.  On January 29, 2009, the Company declared a quarterly cash dividend of $0.04 per share, payable on February 25, 2009 to shareholders of record as of the close of business on February 11, 2009.  The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both Federal and State regulatory requirements.
 
5. Business Segment Information
 
The Company is managed along two major lines of business: commercial banking and retail banking. The treasury function of the Company, included in the “Other” category, although not considered a line of business, is responsible for the management of investments and interest rate risk.
 
The Company generates segment results that include balances directly attributable to business line activities. The financial results of each segment are derived from the Company’s general ledger system. Overhead, including sales and back office support functions and other indirect expenses are not allocated to the major lines of business. Goodwill resulting from business combinations is included in the Retail Banking segment. Since the Company is not specifically organized around lines of business, most reportable segments comprise more than one operating activity.
 
The principal activities conducted by commercial banking are the origination of commercial business relationships, private banking services and real estate lending. Retail banking includes all deposit products, with their related fee income, and all consumer loan products as well as commercial loan products offered in the Company’s branch offices.
 
Effective January 1, 2009 the Company began allocating the provision for loan and lease losses to the reportable segments.  Prior to 2009, the provision for loan and lease losses was included in the “Other” category.  Segment net interest income after provision for loan and lease losses for the prior period has been restated to be comparable to the same line item for the current period.

 
The organizational structure of the Company and its business line financial results are not necessarily comparable with information from other financial institutions. Financial highlights by lines of business are as follows:
 
   
Three Months Ended March 31, 2009
 
(in thousands)
 
Commercial Banking
   
Retail Banking
   
Other
   
Total
 
Net interest income
  $ 10,273     $ 12,317     $ 5,313     $ 27,903  
Provision for loan and lease losses
    (6,430 )     (4,570 )     - -       (11,000 )
Net interest income after provision for loan and lease losses
    3,843       7,747       5,313       16,903  
Noninterest income
    942       2,250       3,782       6,974  
Noninterest expense
    (4,396 )     (5,394 )     (13,391 )     (23,181 )
Income (loss) before income taxes
    389       4,603       (4,296 )     696  
Income tax benefit
                            816  
Net income
                          $ 1,512  
Total assets
  $ 1,474,383     $ 850,778     $ 720,596     $ 3,045,757  
                                 
   
Three Months Ended March 31, 2008
 
(in thousands)
 
Commercial Banking
   
Retail Banking
   
Other
   
Total
 
Net interest income
  $ 13,632     $ 16,051     $ 644     $ 30,327  
Provision for loan and lease losses
    (1,526 )     (550 )     - -       (2,076 )
Net interest income after provision for loan and lease losses
    12,106       15,501       644       28,251  
Noninterest income
    1,173       2,244       6,740       10,157  
Noninterest expense
    (2,696 )     (9,198 )     (11,660 )     (23,554 )
Income (loss) before income taxes
    10,583       8,547       (4,276 )     14,854  
Income tax provision
                            (3,877 )
Net income
                          $ 10,977  
Total assets
  $ 1,491,325     $ 995,845     $ 759,416     $ 3,246,586  
 
6. Fair Value Accounting and Measurement
 
SFAS 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value.  We hold fixed and variable rate interest bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value.  Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
 
The valuation techniques are based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions.  These two types of inputs create the following fair value hierarchy:
 
Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.
 
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
 
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

 
Fair values are determined as follows:

Certain preferred stock securities at fair value are priced using quoted prices for identical instruments in active markets and are classified within level 1 of the valuation hierarchy.

Other securities at fair value are priced using matrix pricing based on the securities’ relationship to other benchmark quoted prices, and under the provisions of SFAS 157 are considered a Level 2 input method.

Interest rate swap positions are valued in models, which use as their basis, readily observable market parameters and are classified within level 2 of the valuation hierarchy.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at March 31, 2009 by level within the fair value hierarchy.  As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
   
Fair value at
   
Fair Value Measurements at Reporting Date Using
 
(in thousands)
 
March 31, 2009
   
Level 1
   
Level 2
   
Level 3
 
Assets
                       
Securities available for sale
  $ 544,367     $ 480     $ 543,887     $  - -  
Other assets (Interest rate swap agreements)
  $ 14,558     $ - -     $ 14,558     $ - -  
Liabilities
                               
Other liabilities (Interest rate swap agreements)
  $ 14,558     $ - -     $ 14,558     $ - -  
 
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:
 
Impaired loans - A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured by the fair market value of the collateral less estimated costs to sell.
 
Other real estate owned - OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is recorded at the lower of the carrying amount of the loan or fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write-downs based on the property fair value less estimated cost to sell at the date of acquisition are charged to the allowance for loan and lease losses. Management periodically reviews OREO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell.  Any write-downs subsequent to acquisition are charged to earnings.
 
     The following table sets forth the Company’s financial assets that were accounted for at fair value on a nonrecurring basis at March 31, 2009:
 
   
Fair value at
   
Fair Value Measurements at Reporting Date Using
 
(in thousands)
 
March 31, 2009
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
  $ 24,459     $ - -     $ - -     $ 24,459  
Other real estate owned
    720       - -       - -       720  
    $ 25,179     $ - -     $ - -     $ 25,179  
 
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, impaired loans with carrying amounts of $32.7 million had specific valuation allowances totaling $8.3 million recorded during the period, which were included in the allowance for loan and lease losses.


Other real estate owned totaling $2.7 million was acquired during the quarter.  In accordance with Statement of Financial Accounting Standards No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, a portion of these long-lived assets held for sale with a carrying amount of $847,515 was written down to their fair value of $719,500, less cost to sell of $87,500 (or $632,000), resulting in a loss of $215,515, which was charged to the allowance for loan and lease losses during the period.

7. Comprehensive Income
 
The components of comprehensive income are as follows:

   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2009
   
2008
 
Net income as reported
  $ 1,512     $ 10,977  
Unrealized gain from securities:
               
Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($613) and $(1,385)
    1,113       2,475  
Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $0 and $311
    - -       (571 )
Net unrealized gain from securities, net of reclassification adjustment
    1,113       1,904  
Unrealized gain(loss) from cash flow hedging instruments:
               
Net unrealized gain from cash flow hedging instruments arising during the period, net of tax of $0 and $425
    - -       739  
Reclassification adjustment of net gain included in income, net of tax of $235 and $42
    (428 )     (76 )
Net unrealized gain(loss) from cash flow hedging instruments
    (428 )     663  
Net unrealized loss from unfunded defined benefit plan liability arising during the period, net of tax of $379 and $0
    (689 )     - -  
Total comprehensive income (loss)
  $ 1,508     $ 13,544  
 
 
8. Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit
 
The following table presents activity in the allowance for loan and lease losses for the three months ended March 31, 2009 and 2008:

   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2009
   
2008
 
Beginning balance
  $ 42,747     $ 26,599  
Provision charged to expense
    11,000       2,076  
Loans charged off
    (9,707 )     (1,215 )
Recoveries
    209       454  
Ending balance
  $ 44,249     $ 27,914  
 
Changes in the allowance for unfunded loan commitments and letters of credit are summarized as follows:
 
   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2009
   
2008
 
Beginning balance
  $ 500     $ 349  
Net changes in the allowance for unfunded commitments and letters of credit
    50       60  
Ending balance
  $ 550     $ 409  
 
9. Goodwill and Intangible Assets
 
At March 31, 2009 and December 31, 2008, the Company had $95.5 million in goodwill.  At March 31, 2009 and December 31, 2008, the Company had a core deposit intangible (“CDI”) asset of $5.6 million and $5.9 million, respectively. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level during the third quarter on an annual basis and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory, and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The CDI is evaluated for impairment if events and circumstances indicate a possible impairment. The CDI is amortized on an accelerated basis over an estimated life of approximately 10 years. Amortization expense related to the CDI was $270,000 and $296,000 for the three months ended March 31, 2009 and March 31, 2008, respectively. The Company estimates that aggregate amortization expense on the CDI will be $1.0 million for 2009, $963,000 for 2010, $893,000 for 2011 and $832,000 for 2012.  The CDI amortization expense is included in other noninterest expense on the consolidated condensed statements of income.

10.  Derivatives and Hedging Activities
 
The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates.  Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement.  This swap agreement effectively converts the customer’s variable rate loan into a fixed rate.  The Company then enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the customer agreement.  As the interest rate swap agreements with the customers and third parties are not designated as hedges under SFAS 133, the instruments are marked to market in earnings.

 
The following table presents the fair value of derivative instruments at March 31, 2009 and 2008:

 
Asset Derivatives
Liability Derivatives
As of March 31,
2009
2008
2009
2008
(in thousands)
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Derivatives not designated as hedging instruments under Statement 133
               
Interest rate contracts
Other assets
 $14,558
Other assets
 $4,768
Other liabilities
 $14,558
Other liabilities
 $4,768



Item 2.               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
 
This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2008 audited consolidated financial statements and its accompanying notes included in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 
This quarterly report on Form 10-Q may be deemed to contain forward-looking statements, which management believes to be a benefit to shareholders. These forward looking statements describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of our style of banking and the strength of the local economy. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in our filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities:
 
·  
local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets;
 
·  
the local housing/real estate market could continue to decline;
 
·  
credit markets could continue to tighten which may make it difficult to obtain adequate funding for loan growth, which could adversely affect our earnings;
 
·  
the financial services industry’s reputation could be damaged which could adversely affect our ability to access markets for funding and acquire and retain customers;
 
·  
interest rate changes could significantly reduce interest margins and negatively affect funding sources;
 
·  
credit quality deterioration that could, among other things, increase defaults and delinquency risks in the Bank’s loan portfolio;
 
·  
projected business increases following strategic expansion or opening and acquiring new branches could be lower than expected;
 
·  
competitive pressure among financial institutions could increase significantly;
 
·  
the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;
 
·  
legislation or changes in regulatory requirements could adversely affect the businesses in which we are engaged; and
 
·  
the efficiencies we expect to receive from our investments in personnel, acquisitions and infrastructure could not realized.
 
Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
CRITICAL ACCOUNTING POLICIES
 
Management has identified the accounting policies related to the allowance for loan and lease losses and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation” under the headings “Allowance for Loan and Lease Losses” and “Valuation and Recoverability of Goodwill” in our 2008 Annual


 
Report on Form 10-K. There have not been any material changes in our critical accounting policies relating to the allowance for loan and lease losses or the valuation and recoverability of goodwill as compared to those disclosed in our 2008 Annual Report on Form 10-K.
 
OVERVIEW
 
Earnings Summary
 
    The Company reported net income for the first quarter of $1.5 million and $419,000 net income applicable to common shareholders or $0.02 per diluted common share, compared to net income of $11.0 million or $0.61 per diluted share for the first quarter of 2008.  Net income applicable to common shareholders for 2009 excludes the preferred stock dividend of $961,000 and the accretion of the preferred stock discount totaling $132,000.  The decline in net income from the prior year was primarily attributable to the large increase in the provision for loan losses in the first quarter of 2009 reflective of the level of net charge-offs and the continued deterioration in credit quality.  Return on average assets and return on average equity were 0.20% and 0.49%, respectively, for the first quarter of 2009, compared with returns of 1.39% and 12.60%, respectively for the same period of 2008.  The Company’s results for the first quarter of 2009 declined from the same period in 2008, as a result of a provision for loan and lease losses of $11.0 million.
 
    Revenue (net interest income plus noninterest income) for the three months ended March 31, 2009 was $34.9 million, 14% lower than the same period in 2008.  The decrease was primarily driven by lower interest earned on our loan portfolio due to the decline in interest rates from the first quarter 2008.
 
    Total noninterest expense in the quarter ended March 31, 2009 was $23.2 million, a 2% decrease from the first quarter of 2008.  Regulatory premiums and legal and professional fees increased $505,000 and $1.0 million respectively over the same period in 2008.  These increases were offset by a decline in compensation and employee benefits expense of $1.5 million.
 
    The provision for loan and lease losses for the first quarter of 2009 was $11.0 million compared with $2.1 million for the first quarter of 2008.  The additional provision is due to the continued weakness in the for-sale housing industry resulting from the slowing economic environment and non-accrual loans of $109.3 million at March 31, 2009 compared to $14.4 million at March 31, 2008.  The provision increased the Company’s total allowance for loan and lease losses to 2.02% of net loans at March 31, 2009 from 1.91% at year-end 2008 and 1.21% at the end of the first quarter 2008.  Net charge-offs for the current quarter were $9.5 million compared to $761,000 for the first quarter of 2008.
 
RESULTS OF OPERATIONS
 
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
 
Net Interest Income
 
For the three months ended March 31, 2009 we experienced a slight decrease in our net interest margin when compared to the same period in 2008.  This decrease resulted primarily from a decline in the yield on earning assets.  For the first quarter of 2009 interest income decreased 26% while interest expense decreased 55%, when compared to the same period in 2008.  The decrease in interest income and interest expense for the period is primarily due to rate decreases on both interest-earning assets and interest-bearing liabilities.  Finally, like most financial institutions, changes in the target Federal Funds rate may affect our net interest margin.


The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total net interest income and net interest margin.

   
Three months ending March 31,
   
Three months ending March 31,
 
   
2009
   
2008
 
       
Interest
       
 
   
Interest
   
 
 
(in thousands)
 
Average
Balances (1)
   
Earned / Paid
   
Average
Rate
   
Average
Balances (1)
   
Earned / Paid
   
Average
Rate
 
ASSETS
                                   
Loans, net (1) (2)
  $ 2,217,909     $ 29,908       5.47 %   $ 2,304,588     $ 41,303       7.21 %
Securities (2)
    543,403       7,341       5.48 %     582,056       8,300       5.74 %
Interest-earning deposits with banks and federal funds sold
    12,947       7       0.23 %     19,528       149       3.07 %
Total interest-earning assets
    2,774,259     $ 37,256       5.45 %     2,906,172     $ 49,752       6.89 %
Other earning assets
    48,748                       47,159                  
Noninterest-earning assets
    234,854                       232,682                  
     Total assets
  $ 3,057,861                     $ 3,186,013                  
LIABILITIES AND SHAREHOLDERS' EQUITY
                                               
Certificates of deposit
  $ 749,450     $ 4,901       2.65 %   $ 844,845     $ 9,087       4.33 %
Savings accounts
    126,916       114       0.36 %     114,868       115       0.40 %
Interest-bearing demand
    469,034       678       0.59 %     458,865       2,120       1.86 %
Money market accounts
    523,755       1,199       0.93 %     585,517       3,513       2.41 %
Total interest-bearing deposits
    1,869,155       6,892       1.50 %     2,004,095       14,835       2.98 %
Federal Home Loan Bank and Federal Reserve Bank borrowings
    215,033       765       1.44 %     284,054       2,582       3.66 %
Securities sold under agreements to repurchase
    25,000       118       1.91 %     19,231       142       2.98 %
Other borrowings and interest-bearing liabilities
    247       0       0.60 %     5,252       60       4.57 %
Long-term subordinated debt
    25,610       351       5.56 %     25,527       487       7.67 %
     Total interest-bearing liabilities
    2,135,045     $ 8,126       1.54 %     2,338,159     $ 18,106       3.11 %
Noninterest-bearing deposits
    455,698                       451,095                  
Other noninterest-bearing liabilities
    47,366                       46,488                  
Shareholders' equity
    419,752                       350,271                  
Total liabilities & shareholders' equity
  $ 3,057,861                     $ 3,186,013                  
Net interest income (2)
          $ 29,130                     $ 31,646          
Net interest margin
                    4.26 %                     4.38 %
 
(1)
Nonaccrual loans have been included in the tables as loans carrying a zero yield. Interest reversals for the first quarter ended March 31, 2009 related to nonaccrual loans totaled $625,000.  Excluding the impact of interest reversals, net interest margin for the quarter would have been 4.35%.  Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $623,000 and $1.1 million for the three months ended March 31, 2009 and 2008 respectively.
 
(2)
Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%.


Provision for Loan and Lease Losses
 
During the first quarter of 2009, the Company recorded $11 million to its provision for loan and lease losses, compared to $2.1 million for the same period in 2008.  The elevated provision is principally due to the weakness in the for-sale housing industry resulting from the slowing economic environment and an increase in non-accrual loans.  The additional provision increased the Company’s total allowance for loan losses to 2.02% of net loans at March 31, 2009.  Comparing first quarter 2009 to the fourth quarter of 2008, the provision for loan and lease losses decreased $2.3 million or 17%.  See the discussion under “Nonperforming Assets” for details related to the non-accrual loans.

Noninterest Income
 
Noninterest income for the first quarter of 2009 was $7.0 million, compared to noninterest income of $10.2 million during the same period last year.  The change was primarily a result of the $2.0 million gain on the redemption of Visa and Mastercard shares and the $882,000 gain on the sale of investment securities recorded in the first quarter of 2008.  Removing the impact of these non-recurring amounts, noninterest income for the first quarter of 2009 decreased $339,000 from the same period in 2008.  This decline in noninterest income was the result of a decrease of $146,000 in merchant card services driven primarily by reduced transaction volume.  In addition, decreases totaling $235,000 in other income items such as mortgage banking fees, interest rate swap income and miscellaneous loan fees contributed to the decline in noninterest income.  These declines were also driven primarily by reduced transaction volumes.  Comparing first quarter 2009 to the fourth quarter 2008, noninterest income increased 10% or $640,000.  The increase was attributed to an other-than-temporary impairment charge of $1.0 million for Federal National Mortgage Association and Federal Home Loan Mortgage Corporation equity securities recorded in the fourth quarter of 2008.  Eliminating the impact of the reduction in noninterest income in the fourth quarter for the impairment charge, noninterest income declined 5% or $384,000.  This decrease is due primarily to gains on disposal of assets recorded in the fourth quarter of 2008.
 
Noninterest Expense
 
Noninterest expense for the first quarter of 2009 was $23.2 million, a 2% decrease from $23.6 million a year earlier.  Despite the overall decrease in noninterest expense, regulatory premiums in the current quarter increased $505,000 from the same period one year ago.  This increase is due to significantly higher FDIC premium assessment rates for the Deposit Insurance Fund.  The increased assessment rate is the result of losses incurred by the Deposit Insurance Fund and not directly correlated to the Company’s performance.  Removing the impact of the increase in FDIC premiums noninterest expense declined 4% or $878,000 from the same period in 2008.  This decline was due primarily to reduced expenses related to compensation and benefits, occupancy and other expenses such as postage, supplies and employee-related costs.  These expense reductions were offset by an increase in legal and professional fees of $1.0 million compared to the same period in 2008. Legal and professional fees expense for the first quarter 2008 were unusually low due to a recovery of $889,200 related to our Visa litigation reserve recorded in a prior period.

    The following table presents selected items included in other noninterest expense and the associated change from period to period:
 
   
Three months ended
   
 Increase
 
   
March 31,
   
 (Decrease)
 
(in thousands)
 
2009
   
2008
   
 Amount
 
Core deposit intangible amortization ("CDI")
  $ 270     $ 296     $ (26 )
Software support & maintenance
    162       200       (38 )
Telephone & network communications
    359       399       (40 )
Federal Reserve Bank processing fees
    82       111       (29 )
Supplies
    189       263       (74 )
Postage
    311       362       (51 )
Investor relations
    83       51       32  
Travel
    89       94       (5 )
ATM Network
    142       199       (57 )
Sponsorships and charitable contributions
    145       159       (14 )
Directors fees
    108       135       (27 )
Employee expenses
    102       181       (79 )
Insurance
    116       120       (4 )
CRA partnership investment expense (1)
    87       128       (41 )
Miscellaneous
    755       760       (5 )
Total other noninterest expense
  $ 3,000     $ 3,458     $ (458 )
 

(1)
The amounts shown represent pass-through losses from our interests in certain low-income housing related limited partnerships. As a result of these interests we receive federal low-income housing tax credits available under the Internal Revenue Code. For the three months ended March 31, 2009, $127,800 of such credits was taken as a reduction in our current period income tax expense. In addition, our taxable income was decreased by $31,000 for the period ended March 31, 2009 as a result of the tax benefit associated with this investment expense.
 
In managing our business, we review the efficiency ratio, on a fully taxable-equivalent basis (see definition in table below), which is not defined in accounting principles generally accepted in the United States.  Our efficiency ratio [noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding any gains and losses arising from nonrecurring transactions] was 63.59% for the first quarter 2009, compared to 62.36% for the first quarter of 2008.  Due to the low interest rate environment revenues declined faster than expense resulting in an increase in the efficiency ratio.

 
The following table presents a reconciliation of the financial data utilized to calculate the efficiency ratio (a non-GAAP financial measure) to the same measures calculated and presented in accordance with GAAP:
 
Reconciliation of Financial Data to GAAP Financial Measures

   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2009
   
2008
 
Net interest income (1)
  $ 27,903     $ 30,327  
Tax equivalent adjustment for non-taxable loan and investment securities interest income (2)
    1,227       1,319  
Adjusted net interest income
  $ 29,130     $ 31,646  
Noninterest income
  $ 6,974     $ 10,157  
Gain on sale of investment securities, net
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