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 June 30, 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 July 20, 2009 was 18,291,927
 
 



 
 

 

TABLE OF CONTENTS
 
     
 
Page
   
 
     
Item 1.
 
     
 
        1
     
 
        2
     
 
        3
     
 
        4
     
 
        5
     
Item 2.
        17
     
Item 3.
        35
     
Item 4.
        35
   
 
     
Item 1.
        36
     
Item 1A.
        36
     
Item 2.
        39
     
Item 3.
        39
     
Item 4.
        39
     
Item 5.
        40
     
Item 6.
        41
     
 
        42
 
 
i

 

PART I - FINANCIAL INFORMATION
Item 1.                    FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in thousands except per share)
 
2009
   
2008
   
2009
   
2008
 
Interest Income
                       
Loans
  $ 29,250     $ 37,334     $ 59,051     $ 78,637  
Taxable securities
    4,195       4,895       8,403       9,875  
Tax-exempt securities
    2,076       1,999       4,089       4,000  
Federal funds sold and deposits in banks
    9       95       16       244  
Total interest income
    35,530       44,323       71,559       92,756  
Interest Expense
                               
Deposits
    5,874       11,461       12,766       26,296  
Federal Home Loan Bank and Federal Reserve Bank borrowings
    700       1,995       1,465       4,577  
Long-term obligations
    306       429       657       916  
Other borrowings
    119       164       237       366  
Total interest expense
    6,999       14,049       15,125       32,155  
Net Interest Income
    28,531       30,274       56,434       60,601  
Provision for loan and lease losses
    21,000       15,350       32,000       17,426  
Net interest income after provision for loan and lease losses
    7,531       14,924       24,434       43,175  
Noninterest Income
                               
Service charges and other fees
    3,562       3,738       7,176       7,306  
Merchant services fees
    1,880       2,162       3,650       4,078  
Redemption of Visa and Mastercard shares
    49       1,066       49       3,028  
Gain on sale of investment securities, net
    - -       - -       - -       882  
Bank owned life insurance ("BOLI")
    516       549       1,017       1,054  
Other
    993       1,790       2,082       3,114  
Total noninterest income
    7,000       9,305       13,974       19,462  
Noninterest Expense
                               
Compensation and employee benefits
    12,296       12,348       24,148       25,744  
Occupancy
    2,937       3,199       5,982       6,458  
Merchant processing
    879       904       1,693       1,770  
Advertising and promotion
    687       637       1,379       1,218  
Data processing
    1,003       783       1,964       1,598  
Legal and professional fees
    1,019       765       1,986       714  
Taxes, licenses and fees
    597       796       1,393       1,547  
Regulatory premiums
    2,492       394       3,499       836  
Net cost of operation of other real estate
    225       - -       272       (23 )
Other
    3,179       3,541       6,179       7,059  
Total noninterest expense
    25,314       23,367       48,495       46,921  
Income (loss) before income taxes
    (10,783 )     862       (10,087 )     15,716  
Provision (benefit) for income taxes
    (5,253 )     (1,074 )     (6,069 )     2,803  
Net Income (Loss)
  $ (5,530 )   $ 1,936     $ (4,018 )   $ 12,913  
Net Income (Loss) Applicable to Common Shareholders
  $ (6,634 )   $ 1,903     $ (6,222 )   $ 12,787  
Earnings (loss) per common share
                               
Basic
  $ (0.37 )   $ 0.11     $ (0.35 )   $ 0.72  
Diluted
  $ (0.37 )   $ 0.11     $ (0.35 )   $ 0.71  
Dividends paid per common share
  $ 0.01     $ 0.17     $ 0.05     $ 0.34  
Weighted average number of common shares outstanding
    18,002       17,898       17,991       17,874  
Weighted average number of diluted common shares outstanding
    18,002       18,021       17,991       17,998  
 
See accompanying notes to unaudited consolidated condensed financial statements.

 
1

 

CONSOLIDATED CONDENSED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)

               
June 30,
   
December 31,
 
(in thousands)
             
2009
   
2008
 
ASSETS
                       
Cash and due from banks
              $ 106,507     $ 84,787  
Interest-earning deposits with banks
                226       3,943  
Total cash and cash equivalents
                106,733       88,730  
Securities available for sale at fair value (amortized cost of $536,298 and $525,110, respectively)
                546,404       528,918  
Federal Home Loan Bank stock at cost
                11,607       11,607  
Loans held for sale
                2,272       1,964  
Loans, net of deferred loan fees of ($4,278) and ($4,033), respectively
            2,119,443       2,232,332  
Less: allowance for loan and lease losses
                48,880       42,747  
Loans, net
                2,070,563       2,189,585  
Interest receivable
                10,474       11,646  
Premises and equipment, net
                63,445       61,139  
Other real estate owned
                8,369       2,874  
Goodwill
                95,519       95,519  
Core deposit intangible, net
                5,368       5,908  
Other assets
                101,103       99,189  
Total Assets
              $ 3,021,857     $ 3,097,079  
LIABILITIES AND SHAREHOLDERS' EQUITY
                           
Deposits:
                           
Non-interest bearing
              $ 491,617     $ 466,078  
Interest-bearing
                1,861,709       1,916,073  
Total deposits
                2,353,326       2,382,151  
Federal Home Loan Bank and Federal Reserve Bank borrowings
                161,000       200,000  
Securities sold under agreements to repurchase
                25,000       25,000  
Other borrowings
                - -       201  
Long-term subordinated debt
                25,636       25,603  
Other liabilities
                45,024       48,739  
Total liabilities
                2,609,986       2,681,694  
Commitments and contingent liabilities
                           
Shareholders' equity:
                           
   
June 30,
   
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       74,015       73,743  
Common Stock (no par value)
                               
Authorized shares
    63,033       63,033                  
Issued and outstanding
    18,264       18,151       234,016       233,192  
Retained earnings
                    95,939       103,061  
Accumulated other comprehensive income
                    7,901       5,389  
Total shareholders' equity
                    411,871       415,385  
Total Liabilities and Shareholders' Equity
                  $ 3,021,857     $ 3,097,079  

 
See accompanying notes to unaudited consolidated condensed financial statements.

 
2

 

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
   
Equity
 
Balance at January 1, 2008
    - -     $ - -       17,953     $ 226,550     $ 110,169     $ 5,012     $ 341,731  
Cumulative effect of applying EITF 06-4 consensus
    - -       - -       - -       - -       (2,137 )     - -       (2,137 )
Adjusted balance
    - -       - -       17,953       226,550       108,032       5,012       339,594  
Comprehensive income
                                                       
Net income
    - -       - -       - -       - -       12,913       - -       12,913  
Other comprehensive loss, net of tax:
                                                       
Net unrealized loss from securities, net of reclassification adjustments
    - -       - -       - -       - -       - -       (4,816 )     (4,816 )
Net change in cash flow hedging instruments
    - -       - -       - -       - -       - -       438       438  
Other comprehensive loss
                                                    (4,378 )
Comprehensive income
                                                    8,535  
Common stock issued - stock option and other plans
    - -       - -       93       1,399       - -       - -       1,399  
Common stock issued - restricted stock awards, net of cancelled awards
    - -       - -       65       - -       - -       - -       - -  
Share-based payment
    - -       - -       - -       739       - -       - -       739  
Tax benefit associated with share-based compensation
    - -       - -       - -       138       - -       - -       138  
Cash dividends paid on common stock
     - -       - -       - -       - -       (6,135 )     - -       (6,135 )
Balance at June 30, 2008
    - -     $ - -       18,111     $ 228,826     $ 114,810     $ 634     $ 344,270  
                                                         
Balance at January 1, 2009
    77     $ 73,743       18,151     $ 233,192     $ 103,061     $ 5,389     $ 415,385  
Comprehensive loss:
                                                       
Net loss
    - -       - -       - -       - -       (4,018 )     - -       (4,018 )
Other comprehensive income, net of tax:
                                                       
Net unrealized gain from securities, net of reclassification adjustments
    - -       - -       - -       - -       - -       4,061       4,061  
Net change in cash flow hedging instruments
    - -       - -       - -       - -       - -       (879 )     (879 )
Pension plan plan liability adjustment, net
    - -       - -       - -       - -       - -       (670 )     (670 )
Other comprehensive income
                                                    2,512  
Comprehensive loss
                                                    (1,506 )
Accretion of preferred stock discount
    - -       272       - -       - -       (272 )     - -       - -  
Common stock issued - stock option and other plans
    - -               35       345       - -       - -       345  
Common stock issued - restricted stock awards, net of cancelled awards
    - -       - -       78       - -       - -       - -       - -  
Share-based payment
    - -       - -       - -       575       - -       - -       575  
Tax benefit deficiency associated with share-based compensation
    - -       - -       - -       (96 )     - -       - -       (96 )
Preferred dividends
    - -       - -       - -       - -       (1,922 )     - -       (1,922 )
Cash dividends paid on common stock
    - -       - -       - -       - -       (910 )     - -       (910 )
Balance at June 30, 2009
    77     $ 74,015       18,264     $ 234,016     $ 95,939     $ 7,901     $ 411,871  
 
 
See accompanying notes to unaudited consolidated condensed financial statements.
 
 
3

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
 
   
Six Months Ended June 30,
 
(in thousands)
 
2009
   
2008
 
Cash Flows From Operating Activities
           
Net Income (Loss)
  $ (4,018 )   $ 12,913  
Adjustments to reconcile net income to net cash provided by operating activities
         
Provision for loan and lease losses
    32,000       17,426  
Deferred income tax benefit
    (2,925 )     (429 )
Excess tax benefit from stock-based compensation
    - -       (138 )
Stock-based compensation expense
    575       739  
Depreciation, amortization and accretion
    3,435       3,664  
Net realized gain on sale of securities
    - -       (882 )
Net realized gain (loss) on sale of other assets
    154       (119 )
Gain on termination of cash flow hedging instruments
    (1,364 )     (467 )
Net change in:
               
Loans held for sale
    (308 )     1,159  
Interest receivable
    1,172       2,333  
Interest payable
    (1,558 )     (2,184 )
Other assets
    (857 )     (1,431 )
Other liabilities
    (2,559 )     (7,584 )
Net cash provided by operating activities
    23,747       25,000  
Cash Flows From Investing Activities
               
Purchases of securities available for sale
    (43,951 )     (76,907 )
Proceeds from sales of securities available for sale
    - -       51,358  
Proceeds from principal repayments and maturities of securities available for sale
    32,311       30,105  
Loans originated and acquired, net of principal collected
    77,529       3,717  
Purchases of premises and equipment
    (4,663 )     (7,019 )
Proceeds from disposal of premises and equipment
    10       114  
Purchase of FHLB stock
    - -       (5,653 )
Proceeds from termination of cash flow hedging instruments
    - -       8,093  
Improvements and other changes to other real estate owned
    (6 )     - -  
Proceeds from sales of other real estate and other personal property owned
    3,571       204  
Net cash provided by investing activities
    64,801       4,012  
Cash Flows From Financing Activities
               
Net decrease in deposits
    (28,825 )     (99,137 )
Proceeds from Federal Home Loan Bank and Federal Reserve Bank borrowings
    709,000       1,491,268  
Repayment from Federal Home Loan Bank and Federal Reserve Bank borrowings
    (748,000 )     (1,419,938 )
Proceeds from repurchase agreement borrowings
    - -       25,000  
Net increase (decrease) in other borrowings
    (201 )     46  
Cash dividends paid
    (2,768 )     (6,135 )
Proceeds from issuance of common stock
    249       1,399  
Excess tax benefit from stock-based compensation
    - -       138  
Net cash used in financing activities
    (70,545 )     (7,359 )
Increase in cash and cash equivalents
    18,003       21,653  
Cash and cash equivalents at beginning of period
    88,730       93,975  
Cash and cash equivalents at end of period
  $ 106,733     $ 115,628  
Supplemental Information:
               
Cash paid for interest
  $ 16,683     $ 34,339  
Cash paid for income tax
  $ 500     $ 8,652  
Loans transferred to other real estate owned
  $ 9,248     $ - -  

 
See accompanying notes to unaudited consolidated condensed financial statements.

 
4

 

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
 
1.     Basis of Presentation and Significant Accounting Policies
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 six months ended June 30, 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.
 
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 June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation 46(R) (“SFAS 167”).  SFAS No. 167 significantly changes the criteria for determining whether the consolidation of a variable interest entity is required. SFAS No. 167 also addresses the effect of changes required by SFAS No. 166 on FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities and concerns regarding the application of certain provisions of Interpretation No. 46(R), including concerns that the accounting and disclosures under the Interpretation do not always provide timely and useful information about an entity’s involvement in a variable interest entity. SFAS No. 167 is effective for interim and annual reporting periods that begin after November 15, 2009. The Company is currently assessing the impact of the adoption of SFAS No. 167 on its consolidated financial position and results of operations.

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 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, as revised, in SAB Topic 5.M in assessing whether an impairment of an equity security is other than temporary.
 
Recently Adopted Accounting Pronouncements
 
In May 2009, the FASB issued Statement of Financial Accounting Standard No. 165, Subsequent Events (“SFAS 165”).  This Statement sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity shall make about events or transactions that occurred after the balance

 
5

 

sheet date.  This Statement became effective for the Company at June 30, 2009 (see Note 13) and had no impact on the Company’s financial condition or results of operation.
 
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.  The Company adopted this FSP at June 30, 2009 and there was no effect on our financial condition and results of operations as a result of applying the guidance in this FSP.
 
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value 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.  The Company adopted this FSP at June 30, 2009 (see Note 12).
 
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.  The Company adopted this FSP at June 30, 2009 and there was no effect on our financial condition and results of operations as a result of applying the guidance in this FSP.
 
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 11).
 
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).    The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2009 and 2008:
 
 
6

 

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
(in thousands except per share)
 
2009
   
2008 (1)
   
2009
   
2008 (1)
 
Net income (loss)
  $ (5,530 )   $ 1,936     $ (4,018 )   $ 12,913  
Preferred dividends
    (961 )     - -       (1,922 )     - -  
Accretion of issuance discount for preferred stock
    (140 )     - -       (272 )     - -  
Dividends and undistributed earnings allocated to unvested share-based payment awards
    (3 )     (33 )     (10 )     (126 )
Net income (loss) applicable to common shareholders
  $ (6,634 )   $ 1,903     $ (6,222 )   $ 12,787  
Basic weighted average common shares outstanding
    18,002       17,898       17,991       17,874  
Dilutive effect of potential common shares from:
                               
Awards granted under equity incentive program
    - -       123       - -       124  
Diluted weighted average common shares outstanding (2)
    18,002       18,021       17,991       17,998  
Earnings (loss) per common share:
                               
Basic
  $ (0.37 )   $ 0.11     $ (0.35 )   $ 0.72  
Diluted (2)
  $ (0.37 )   $ 0.11     $ (0.35 )   $ 0.71  
Potentially dilutive securities that were not included in the computation of diluted EPS because to do so would be anti-dilutive.
    957       37       958       37  

(1)  
The Company adopted FSP EITF 03-6-1 on January 1, 2009.  All prior periods have been restated to the current period’s presentation.
 
(2)  
Due to the net loss applicable to common shareholders in the second quarter and first six months of 2009, basic shares were used to calculate diluted earnings per share.  Adding dilutive securities to the denominator would result in anti-dilution.
 
4.     Dividends
 
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.  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 on May 6, 2009.  Subsequent to quarter end, on July 22, 2009, the Company declared a quarterly cash dividend of $0.01 per share, payable on August 19, 2009, to shareholders of record at the close of business August 5, 2009.  The decision to continue with the reduced 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.    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.

 
7

 

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 June 30, 2009
 
(in thousands)
 
Commercial Banking
   
Retail
Banking
   
Other
   
Total
 
Net interest income
  $ 11,409     $ 11,930     $ 5,192     $ 28,531  
Provision for loan and lease losses
    (15,356 )     (5,644 )     - -       (21,000 )
Net interest income after provision for loan and lease losses
    (3,947 )     6,286       5,192       7,531  
Noninterest income
    642       2,213       4,145       7,000  
Noninterest expense
    (3,401 )     (6,309 )     (15,604 )     (25,314 )
Income (loss) before income taxes
    (6,706 )     2,190       (6,267 )     (10,783 )
Income tax benefit
                            5,253  
Net loss
                          $ (5,530 )
Total assets
  $ 1,411,255     $ 872,534     $ 738,068     $ 3,021,857  
                                 
   
Three Months Ended June 30, 2008
 
(in thousands)
 
Commercial Banking
   
Retail
Banking
   
Other
   
Total
 
Net interest income
  $ 11,391     $ 14,418     $ 4,465     $ 30,274  
Provision for loan and lease losses
    (10,240 )     (5,110 )     - -       (15,350 )
Net interest income after provision for loan and lease losses
    1,151       9,308       4,465       14,924  
Noninterest income
    1,140       5,399       2,766       9,305  
Noninterest expense
    (2,854 )     (10,028 )     (10,485 )     (23,367 )
Income (loss) before income taxes
    (563 )     4,679       (3,254 )     862  
Income tax benefit
                            1,074  
Net income
                          $ 1,936  
Total assets
  $ 1,388,252     $ 1,138,968     $ 642,387     $ 3,169,607  
 
 
8

 

   
Six Months Ended June 30, 2009
 
(in thousands)
 
Commercial Banking
   
Retail
Banking
   
Other
   
Total
 
Net interest income
  $ 21,682     $ 24,247     $ 10,505     $ 56,434  
Provision for loan and lease losses
    (21,786 )     (10,214 )     - -       (32,000 )
Net interest income after provision for loan and lease losses
    (104 )     14,033       10,505       24,434  
Noninterest income
    1,584       4,463       7,927       13,974  
Noninterest expense
    (7,797 )     (11,703 )     (28,995 )     (48,495 )
Income (loss) before income taxes
    (6,317 )     6,793       (10,563 )     (10,087 )
Income tax benefit
                            6,069  
Net loss
                          $ (4,018 )
Total assets
  $ 1,411,255     $ 872,534     $ 738,068     $ 3,021,857  
                                 
   
Six Months Ended June 30, 2008
 
(in thousands)
 
Commercial Banking
   
Retail
Banking
   
Other
   
Total
 
Net interest income
  $ 22,724     $ 29,843     $ 8,034     $ 60,601  
Provision for loan and lease losses
    (11,767 )     (5,659 )     - -       (17,426 )
Net interest income after provision for loan and lease losses
    10,957       24,184       8,034       43,175  
Noninterest income
    2,623       10,330       6,509       19,462  
Noninterest expense
    (5,834 )     (20,022 )     (21,065 )     (46,921 )
Income (loss) before income taxes
    7,746       14,492       (6,522 )     15,716  
Income tax provision
                            (2,803 )
Net income
                          $ 12,913  
Total assets
  $ 1,388,252     $ 1,138,968     $ 642,387     $ 3,169,607  

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.

 
9

 

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 June 30, 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)
 
June 30, 2009
   
Level 1
   
Level 2
   
Level 3
 
Assets
                       
Securities Available for Sale
                       
U.S. government-sponsored enterprise preferred stock
  $ 496     $ 496     $ - -     $ - -  
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
    346,344       - -       346,344       - -  
State and municipal debt securities
    198,602       - -       198,602       - -  
Other securities
    962       - -       962       - -  
Total securities available for sale
  $ 546,404     $ 496     $ 545,908     $ - -  
Other assets (Interest rate contracts)
  $ 9,489     $ - -     $ 9,489     $ - -  
Liabilities
                               
Other liabilities (Interest rate contracts)
  $ 9,489     $ - -     $ 9,489     $ - -  

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.

 
10

 

     The following table sets forth the Company’s financial assets that were accounted for at fair value on a nonrecurring basis at June 30, 2009:
 
   
Fair value at
   
Fair Value Measurements at Reporting Date Using
 
(in thousands)
 
June 30, 2009
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans (1)
  $ 29,743     $ - -     $ - -     $ 29,743  
Other real estate owned (2)
    1,690       - -       - -       1,690  
    $ 31,433     $ - -     $ - -     $ 31,433  

(1)
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, impaired loans totaling $44.2 million were subject to specific valuation allowances and/or partial charge-offs totaling $14.5 million during the quarter ended June 30, 2009.

(2)
Loans receivable transferred to other real estate owned during the quarter ended June 30, 2009 with a carrying amount of $1.9 million were written down to their fair value of $1.7 million, less cost to sell of $169 thousand (or $1.5 million), resulting in a loss of $399 thousand, which was charged to the allowance for loan and lease losses during the period.


 
11

 

7.     Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) are as follows:

   
Three Months Ended
 
   
June 30,
 
(in thousands)
 
2009
   
2008
 
Net unrealized gain(loss) from available for sale securities arising during the period, net of tax of ($1,625) and $3,712
  $ 2,949     (6,737 )
Net change in cash flow hedging instruments, net of tax of $249 and $124
    (452 )     (225 )
Pension plan liability adjustment, net of tax of ($10) and $0
    19       - -  
Other comprehensive income (loss)
  $ 2,516     $ (6,962 )
                 
   
Six Months Ended
 
   
June 30,
 
(in thousands)
 
2009
   
2008
 
Unrealized gain(loss) from securities:
               
Net unrealized holding gain(loss) from available for sale securities arising during the period, net of tax of $(2,237) and $2,345
  4,061     $ (4,245 )
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 (loss) from securities, net of reclassification adjustment
    4,061       (4,816 )
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 $485 and $166
    (879 )     (301 )
Net change in cash flow hedging instruments
    (879 )     438  
Pension plan liability adjustment:
               
Unrecognized net actuarial loss during period, net of tax of $379 and $0
    (689 )     - -  
Less: amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($10) and $0
    19       - -  
Pension plan liability adjustment, net
    (670 )     - -  
Other comprehensive income (loss)
  $ 2,512     $ (4,378 )
 
 
12

 

8.     Securities
 
The following tables summarize the amortized cost, gross unrealized gains and losses, and the resulting fair value of securities available for sale at June 30, 2009 and December 31, 2008:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
       
(in thousands)
 
Cost
   
Gains
   
Losses
   
Fair Value
 
June 30, 2009:
                       
U.S. government-sponsored enterprise preferred stock
  $ 488     $ 76     $ (68 )   $ 496  
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
    337,650       8,882       (188 )     346,344  
State and municipal securities
    197,160       5,064       (3,622 )     198,602  
Other securities
    1,000       - -       (38 )     962  
Total
  $ 536,298     $ 14,022     $ (3,916 )   $ 546,404  
December 31, 2008:
                               
U.S. government-sponsored enterprise
  $ 488      - -     $ - -     $ 488  
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
    335,207       6,889       (258 )     341,838  
State and municipal securities
    188,415       2,547       (5,309 )     185,653  
Other securities
    1,000       - -       (61 )     939  
Total
  $ 525,110     $ 9,436     $ (5,628 )   $ 528,918  
 
The fair value of temporarily impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed as of June 30, 2009 and December 31, 2008:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
(in thousands)
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
June 30, 2009: 
            &#