UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2004.
For the transition period from to .
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of issuer as specified in its charter)
1301 “A” Street
Tacoma, Washington
(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 issuer: (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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of the issuer’s Common Stock outstanding at October 31, 2004 was 15,563,326.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1.
Consolidated Condensed Statements of Operations - three months and nine months ended September 30, 2004 and 2003
Consolidated Condensed Balance Sheets – September 30, 2004 and December 31, 2003
Consolidated Condensed Statements of Cash Flows - nine months ended September 30, 2004 and 2003
Notes to Consolidated Condensed Financial Statements
Item 2.
Item 3.
Item 4.
PART II —OTHER INFORMATION
Item 6.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
(Unaudited)
(in thousands except per share)
Interest Income
Loans
Securities available for sale
Securities held to maturity
Deposits with banks
Total interest income
Interest Expense
Deposits
Federal Home Loan Bank advances
Long-term obligations
Total interest expense
Net Interest Income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Service charges and other fees
Mortgage banking
Merchant services fees
Loss on sale of investment securities, net
Bank owned life insurance (BOLI)
Other
Total noninterest income
Noninterest Expense
Compensation and employee benefits
Occupancy
Merchant processing
Advertising and promotion
Data processing
Legal and professional services
Taxes, licenses and fees
Net (gains) cost of other real estate owned
Total noninterest expense
Income before income taxes
Provision for income taxes
Net Income
Net income per common share:
Basic
Diluted
Dividends paid per common share
Average number of common shares outstanding
Average number of diluted common shares outstanding
See accompanying notes to consolidated condensed financial statements.
2
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
Assets
Cash and due from banks
Interest-earning deposits with banks
Total cash and cash equivalents
Securities available for sale at fair value (amortized cost of $590,310 and $509,989, respectively)
Securities held to maturity (fair value of $4,141 and $4,708, respectively)
Federal Home Loan Bank stock
Loans held for sale
Loans, net of unearned income of $2,456 and $2,437, respectively)
Less: allowance for loan losses
Loans, net
Interest receivable
Premises and equipment, net
Real estate owned
Other personal property owned
Bank owned life insurance
Deferred tax asset
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Other borrowings
Long-term subordinated debt
Finance lease obligation
Other liabilities
Total liabilities
Commitments and contingent liabilities
Shareholders’ equity:
Preferred stock (no par value)Authorized, 2 million shares; none outstanding
Common stock (no par value)
Authorized shares
Issued and outstanding
Retained earnings
Accumulated other comprehensive gain (loss) – Unrealized gains (losses) on securities available for sale, net of tax
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
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CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated
ComprehensiveIncome (Loss)
Total
Shareholders’Equity
Balance at January 1, 2003
Comprehensive income:
Net income
Reclassification of net gains on securities available for sale included in net income, net of tax of $78
Change in unrealized gains (losses) on securities available for sale, net of tax of $554
Total comprehensive income
Issuance of stock under stock option and other plans
Cash dividends paid on common stock
Balance at December 31, 2003
Reclassification of net losses on securities available for sale included in net income, net of tax of $2
Change in unrealized gains (losses) on securities available for sale, net of tax of $1,780
Issuance of shares of common stock – 5% stock dividend
Balance at September 30, 2004
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax (benefit) expense
Gains on sale of real estate owned and other personal property owned
Depreciation and amortization
Net realized loss (gain) on sale of assets
(Increase) decrease in loans held for sale
Increase in interest receivable
Decrease in interest payable
Stock dividends from Federal Home Loan Bank stock
Net changes in other assets and liabilities
Net cash provided by operating activities
Investing Activities
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from maturities of mortgage-backed securities available for sale
Purchases of mortgage-backed securities available for sale
Proceeds from maturities of securities held to maturity
Loans originated and acquired, net of principal collected
Purchases of premises and equipment
Proceeds from disposal of premises and equipment
Proceeds from sales of real estate and other personal property owned
Net cash used in investing activities
Financing Activities
Net increase in deposits
Proceeds from Federal Home Loan Bank advances
Repayment of FHLB advances
Proceeds from other borrowings
Proceeds from issuance of common stock, net
Other, net
Net cash provided by (used in) financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosures of noncash investing and financing activities:
Purchase of equipment under capital lease
Finance lease obligation related to buildings sale-leasebacks
Receivable of proceeds related to sale of buildings
Loans foreclosed and transferred to real estate owned or other personal property owned
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Columbia Banking System, Inc. (the “Company”) is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank (“Columbia Bank”), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through 34 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. The majority of the Company’s loans, loan commitments and core deposits are geographically concentrated in its service areas.
1. 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. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition and the results of operations for the interim periods included herein have been made. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of results to be anticipated for the year ending December 31, 2004. Certain reclassifications of prior year amounts have been made to conform to current classification. These reclassifications had no effect on net income. All significant intercompany transactions and accounts have been eliminated in consolidation. 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 2003 Annual Report on Form 10-K.
2. Earnings Per Share
Earnings per share (“EPS”) are computed using the weighted average number of common and diluted common shares outstanding during the period. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only reconciling item affecting the calculation of earnings per share are the inclusion of stock options and restricted stock awards increasing the shares outstanding in diluted earnings per share by 215,000 and 199,000 for the three months ended September 30, 2004 and 2003, respectively, and 221,000 and 161,000 for the nine months ended September 30, 2004 and 2003, respectively.
The Company has a stock option plan and applies APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for the Plan. The Company’s policy is to recognize compensation expense at the date the options are granted based on the difference, if any, between the then market value of the Company’s common stock and the stated option price. Had compensation cost for the Company’s Plan been determined based on the fair value at the option grant dates consistent with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company’s net income and earnings per share would have been reduced to the pro forma amounts listed below:
(dollars in thousands, except per share)
For The Three
Months Ended9/30/2004
Months Ended9/30/2003
For The Nine
Net income attributable to common stock:
As reported
Deduct: Total stock based employee compensation expense determined under fair value method for all options, net of tax
Pro forma net income
Basic:
Pro forma
Diluted:
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3. Business Segment Information
The Company is managed along three major lines of business: commercial banking, retail banking, and real estate lending. The treasury function of the Company, although not considered a line of business, is responsible for the management of investments and interest rate risk.
The principal activities conducted by commercial banking are the origination of commercial business loans and private banking services. 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. Real estate lending offers single-family residential, multi-family residential, and commercial real estate loans, with their associated loan servicing activities.
The Company generates segment results that include balances directly attributable to business line activities and may include asset and liability transfers among business lines. 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. Since the Company is not specifically organized around lines of business, most reportable segments comprise more than one operating activity.
The organizational structure of the Company and its business line financial results are not necessarily comparable across companies. As such, the Company’s business line performance may not be directly comparable with similar information from other financial institutions. Changes in net interest income and total assets for the three and nine month periods ended September 30, 2004, as compared to the same periods in 2003, are a result of internal funds transfer pricing, a decreased loan loss provision, higher investment security balances, loan growth and core deposit growth.
Financial highlights by lines of business are as follows:
Condensed Statements of Operations:
Real Estate
Lending
Net interest income after provision for loan lossess
Other income
Other expense
Contribution to overhead and profit
Income taxes
Total assets
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4. Subsequent Event
Subsequent to quarter-end, on October 1, 2004, the Company completed its acquisition of Bank of Astoria, an Oregon commercial bank in Astoria, Oregon. The acquisition was accomplished pursuant to a Plan and Agreement of Merger dated as of June 7, 2004 (the “Agreement”). Pursuant to the terms of the Agreement, shareholders of Astoria elected to receive shares of the Company’s common stock, cash, or a combination of stock and cash. The Company issued an aggregate of 1,277,750 shares of its common stock and paid a total of $18,180,586 to Astoria shareholders. The acquisition will be accounted for as a purchase with the results of Bank of Astoria being included in the Company’s consolidated results of operations from the date of acquisition.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of the Company and notes thereto presented elsewhere in this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.
This Form 10-Q may be deemed to include forward looking statements, which management believes are 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 Columbia’s 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 Columbia’s 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: (1) local, national and international economic conditions are less favorable than expected or have a more direct and pronounced effect on Columbia than expected and adversely affect Columbia’s ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which Columbia is engaged, and (7) the Company’s ability to realize the efficiencies it expects to receive from its investments in personnel and infrastructure.
General
The Company is a registered bank holding company whose wholly owned subsidiary, Columbia Bank, conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company’s loans, loan commitments and core deposits are geographically concentrated in its service areas. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the “FDIC”). Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions Division of Banks. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.
Business Overview
The Company’s goal is to be the leading community bank headquartered in the Pacific Northwest and to consistently increase earnings and shareholder value. The Company continues to build on its reputation for excellent customer service in order to be recognized in all markets it serves as the bank of choice for retail deposit customers, small to medium-sized businesses, and affluent households.
The Company has established a network of 34 branches as of September 30, 2004 from which it intends to grow market share. Twenty-one branches are located in Pierce County, eight in King County, three in Cowlitz County, and one each in Kitsap and Thurston Counties.
Business Strategy
The Company’s strategy to improve earnings and shareholder value is to leverage its branch network to grow market share by meeting the needs of current and prospective customers with its wide range of financial products and services and outstanding customer service. In addition, the Company will continue to focus on asset quality, expanding revenue, and expense control. The Company regularly evaluates its business processes to benefit customers, create cost efficiencies, and increase profitability.
Management believes consolidation among financial institutions in its market area has created significant gaps in the ability of large banks to serve certain customers, particularly the Company’s target customer base of small and medium-sized businesses, professionals and other individuals. The Company’s business strategy is to provide its customers with the financial sophistication and
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breadth of products of a regional banking company while retaining the appeal and service level of a community bank. Management believes that as a result of the Company’s strong commitment to highly personalized relationship-oriented customer service, its varied products, its strategic branch locations and the long-standing community presence of its managers, lending officers and branch personnel, it is well positioned to attract new customers and to increase its market share of loans, deposits, and other financial services in the markets it now serves.
The Company intends to achieve its growth strategy by continuing to develop existing branch offices and branch locations, and successfully completing strategic business combinations. New branches, markets and locations are reviewed continually. The Company will take advantage of these opportunities as they arise.
Products & Services
The Company continuously reviews new products and services to meet its customers’ financial services needs. New technologies and services are reviewed for business development and cost saving purposes. Some of the products and services Columbia offers include tailored loan and Equipment Finance products and Columbia OnLine™, Cash Management, International, Merchant Card and Investment Services.
Market Area
Over 75% of the Company’s market is centered in the South Puget Sound Region (“the South Sound”) of Washington state. Pierce County is located in the South Sound and Tacoma is the largest city in the County. The Company has 21 branch offices located in Pierce County and has the largest deposit market share as of June 30, 2004 according to the annual FDIC “Market Share Report”. The South Sound is benefiting from major construction projects currently underway, such as the new Narrows Bridge Project, which is halfway complete and the new 277,000 square foot Greater Tacoma Trade and Convention Center located in downtown Tacoma. Additionally, expansion of the Port of Tacoma scheduled to be completed in late 2004, will provide the South Sound with a container terminal capable of handling the largest volume of container traffic north of Los Angeles. With two large military installations (McChord Air Force and Fort Lewis Army bases), government related employment represents approximately 20% of the County’s total employment.
To the north of Tacoma, King County is Washington’s most populous at 1.8 million residents. In Seattle, located in King County, the Company has a banking office in the downtown business sector. East of Seattle, the Company has two banking offices, one in Bellevue and one in Redmond. A large portion of the economy within this area is linked to aerospace, construction, computer software and biotechnology industries.
The Company has five branches in south King County, an area of residential communities whose employment base is supported by light industrial, aerospace and forest products industries. With its close proximity to Tacoma, the south King County market area is considered an important natural extension of the Company’s Pierce County market area. The Weyerhaeuser Corporation maintains its world headquarters in Federal Way, which is located in south King County adjacent to the King/Pierce County line. The Auburn and Kent Valley areas located east of Federal Way are high residential and commercial growth markets.
The Company’s market area also includes the Longview and Woodland communities in southwest Washington, the State’s capital of Olympia, and Port Orchard in Kitsap County. Both Olympia and Port Orchard are located in the South Puget Sound Region.
CRITICAL ACCOUNTING POLICIES
Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s financial statements. These policies relate to the methodology for the determination of the allowance for loan losses, the valuation of real estate owned and the impairment of investments. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the results of operations or financial condition.
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HIGHLIGHTS
Net income for the third quarter of 2004 increased to $5.5 million, or $0.38 per diluted share from $4.9 million, or $0.34 per diluted share, for the third quarter of 2003. Net income for the first nine months ended September 30, 2004 was $16.0 million, or $1.11 per diluted share, compared to $14.1 million, or $0.99 per diluted share, for the same period in 2003.
Average core deposits increased 19% to $1.24 billion for the quarter ended September 30, 2004 as compared to the same period in 2003.
Total nonperforming assets decreased 53% from December 31, 2003 and the allowance for loan losses to nonperforming loans improved to 333% at September 30, 2004 from 153% at December 31, 2003.
Total assets reached $1.94 billion at September 30, 2004, an increase of 11% from December 31, 2003.
Total loans increased $87.0 million, or 8%, from December 31, 2003.
On October 1, 2004, the Company completed its acquisition of Bank of Astoria, an Oregon commercial bank in Astoria, Oregon. Bank of Astoria will operate as a separate subsidiary of the Company. Bank of Astoria operates five branches located in Astoria, Cannon Beach, Manzanita, Seaside, and Warrenton, Oregon. As a result of the acquisition, the Company’s pro forma total assets approximate $2.0 billion and total branches have increased to 39.
The Company has significantly expanded its King County commercial lending team through the addition of several experienced bankers formerly with the discontinued business banking operation at Washington Mutual.
The Company announced plans for a new branch in University Place, WA, a thriving community just southwest of Tacoma, WA. The branch is scheduled to open early in the first quarter of 2005.
RESULTS OF OPERATIONS
The results of operations of the Company are dependent to a large degree on the Company’s net interest income. The Company also generates noninterest income through service charges and fees, merchant services fees, and income from mortgage banking operations. The Company’s operating expenses consist primarily of compensation and employee benefits expense, and occupancy expense. Like most financial institutions, the Company’s 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 third quarter of 2004 increased 13% to $17.6 million, from $15.5 million in the third quarter of 2003. For the first nine months ended September 30, 2004, net interest income increased 8% to $51.4 million from $47.6 million for the same period in 2003. Although interest income on loans decreased, the Company was able to increase net interest income through increased interest income on available for sale investments and decreased funding costs from core deposit growth.
The Company’s net interest margin (net interest income divided by average interest-earning assets) decreased to 4.13% in the third quarter of 2004 from 4.16% in the third quarter of 2003. Average interest-earning assets grew to $1.74 billion, an increase of 15%, during the third quarter of 2004, compared with $1.51 billion during the same period in 2003. The yield on average interest-earning assets decreased 22 basis points (a basis point is 1/100th of 1 percent, alternatively 100 basis points equals 1.00%) to 5.13% during the third quarter of 2004 compared with 5.35% during the same period of 2003. The decline in yield on average interest-earning assets is primarily due to increased securities balances from core deposit growth and a low interest rate environment resulting in new loan originations and refinancing of existing loans at lower rates. Average interest-bearing liabilities increased to $1.36 billion, or 13%, during the third quarter of 2004 compared with $1.21 billion in the same period of 2003. The average cost of interest-bearing liabilities decreased 21 basis points to 1.28% during the third quarter of 2004, from 1.49% in the same period of 2003. The decrease in the Company’s cost of interest-bearing liabilities is due to continued growth in core deposits and declining deposit rates resulting in a $209,000 decrease in interest expense on deposits for the third quarter of 2004, as compared to the same period in 2003.
For the first nine months of 2004, the Company’s net interest margin decreased to 4.16% from 4.26% for the same period in 2003. Average interest-earning assets grew by 11% to $1.70 billion during the first nine months of 2004, compared with $1.53 billion during the same period in 2003. The yield on average-earning assets decreased 46 basis points to 5.17% during the first nine months of 2004 compared with 5.63% during the same period in 2003. The decreased yield on average interest-earning assets is due to lower average loan balances during the first nine months of 2004 compared to the same period in 2003, coupled with lower interest rates on loans.
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The decrease in yield on average loans was partially offset by improved yields on the Company’s average investment portfolio, which increased 30 basis points to 4.23% during the first nine months of 2004, from 3.93% during the same period in 2003. Average interest-bearing liabilities grew to $1.34 billion, or 8%, during the first nine months of 2004, compared with $1.24 billion in the same period of 2003. The cost of average interest-bearing liabilities decreased 40 basis points to 1.29% during the first nine months of 2004 compared to 1.69% for the same period in 2003. The decrease in the Company’s cost of interest-bearing liabilities is due to continued growth in core deposits, which resulted in a decrease in interest expense on deposits of $2.3 million for the first nine months of 2004 as compared to the same period in 2003.
At September 30, 2004, the Company estimates that its balance sheet is asset sensitive over a short-term horizon of three months, which means that interest-earning assets mature or reprice more rapidly than interest-bearing liabilities. Therefore, the Company’s net interest margin may increase during a rising rate environment and may decrease in a declining rate environment. Three 25 basis point increases in the prime lending rate, which took effect in late June, August and late September 2004, had a positive impact on net interest income, as approximately 40% of the Company’s total loan portfolio is tied to prime or other related indices.
CONSOLIDATED AVERAGE BALANCES—NET CHANGES
Three Months Ended
Increase
(Decrease)
ASSETS
Securities
Interest earnings deposits with banks
Total interest-earning assets
Other earning assets
Noninterest-earning assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Trust preferred obligations
Other interest bearing liabilities
Total interest-bearing liabilities
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Noninterest income decreased $696,000 or 12% to $5.3 million for the third quarter of 2004 from $6.0 million for the third quarter of 2003. Noninterest income decreased $1.0 million or 6% to $16.3 million for the first nine months of 2004 from $17.3 million for the first nine months of 2003. The decrease for both periods is primarily due to decreased mortgage banking income, which decreased $940,000 and $2.0 million during the third quarter and first nine months of 2004, respectively, as compared to the same periods in 2003. The decline in mortgage banking income is a result of increases in long-term interest rates, which lowered demand for home refinancing. The Company has responded to the drop in production by restructuring its mortgage banking department in an effort to devote resources to more profitable areas of Columbia Bank such as the Builder Banking program. The decrease in mortgage banking income has been partially offset by increased merchant services income in both the quarter and nine months ended September 30, 2004. Merchant services income increased $315,000 and $910,000 during the third quarter and first nine months of 2004, respectively, as compared to the same periods in 2003. The increase in merchant services income for both periods is due to increased market share.
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In accordance with the Company’s investment strategy, management monitors market conditions with a view to realizing gains on its available for sale securities portfolio as market conditions allow. During the first nine months of 2004, the Company recorded net losses on sales of investment securities of $6,000. There were no sales of securities during the same period in 2003.
Total noninterest expense increased 5% to $15.1 million for the third quarter of 2004 from $14.3 million for the third quarter of 2003 and for the first nine months of 2004 increased 6% to $44.6 million from $42.0 million as compared to the same period in 2003. The increase for both periods is primarily due to increased employee benefit expenses, advertising and promotion expenses, and legal and professional services expenses related to implementing internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Consistent with national trends, the Company has experienced increased costs of providing employee benefits, primarily health insurance coverage. Increased health insurance premiums and higher state employment taxes resulted in compensation and employee benefits increasing 3% or $233,000 in the third quarter of 2004 and 6% or $1.3 million for the first nine months of 2004 compared to the same periods in 2003. Advertising and promotion expenses, to support the Company’s growth strategy, increased $111,000, or 30%, during the third quarter of 2004 and $224,000, or 16%, for the first nine months of 2004 compared to the same periods in 2003. This increase is primarily due to higher television production and media costs. Due to implementation of internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002, legal and professional services increased 156% to $1.0 million for the third quarter of 2004 as compared to $398,000 for the third quarter of 2003 and increased 67% to $2.3 million for the first nine months of 2004 as compared to $1.4 million for the same period in 2003. Sarbanes-Oxley 404 external implementation expenses for the third quarter of 2004 were $626,000, and $866,000 for the first nine months of 2004. These expenses were initiated during the first quarter of 2004 and are anticipated to continue into subsequent quarters as the Company implements requirements.
The Company’s efficiency ratio [noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gain (loss) on sale of investment securities and net cost (gain) of OREO] was 64.14% for the third quarter 2004 and was 63.90% for the first nine months of 2004, compared to 64.36% and 62.87% for the third quarter and first nine months of 2003, respectively. Sarbanes-Oxley 404 implementation expenses had a significant impact on the Company’s efficiency ratio. Excluding these expenses, the pro-forma efficiency ratio for the third quarter and first nine months of 2004 would have been 61.49% and 62.66%, respectively. Improvement in the efficiency ratio will depend on the Company growing the loan portfolio and fee income and continuing to control expenses while adhering to core values of customer service.
Income Taxes
The Company recorded an income tax provision of $2.1 million and $6.5 million for the third quarter and first nine months of 2004, respectively, compared with a provision of $2.1 million and $6.0 million for the same periods in 2003. The effective tax rate was 28% for the third quarter of 2004 compared with 30% for the third quarter 2003. The Company’s effective tax rate is less than the statutory rate primarily due to earnings on tax-exempt municipal securities and bank owned life insurance. For additional information, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2003.
Sale of Buildings
On September 30, 2004, the Company sold two buildings located in Tacoma and Longview, WA for $10.4 million resulting in a receivable that is reported in other assets. At September 30, 2004, the Company continues to occupy the buildings under leaseback agreements with the purchaser. The transaction does not qualify for sale-leaseback accounting because the Company provided financing to the purchaser for the entire sales price. As such, the Company is accounting for the transaction as a financing in which the sales proceeds, net of direct costs, have been reported as a finance lease obligation and the buildings continue to be reported as assets. At the time the loan to the purchaser is paid in full, the gain on the sale will approximate $1.8 million and will be deferred over the remaining life of the leases under sale-leaseback accounting.
Credit Risk Management
The extension of credit in the form of loans or other credit products to individuals and businesses is one of the Company’s principal business activities. Company policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. The Company manages its credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. The Company also manages credit risk through diversification of the loan portfolio by type of loan, type of industry, type of borrower and by limiting the aggregation of debt limits to a single borrower.
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In analyzing its existing portfolio, the Company reviews its consumer and residential loan portfolios by their performance as a pool of loans since no single loan is individually significant or judged by its risk rating, size, or potential risk of loss. In contrast, the monitoring process for the commercial business, private banking, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan by loan basis. The Company reviews these loans to assess the ability of the borrower to service all of its interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, the Company assesses whether an impairment of a loan warrants specific reserves or a write-down of the loan. See “Provision and Allowance For Loan Losses” on page 18.
Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of the Company’s Chief Credit Officer and approved, as appropriate, by the Board. Credit Administration, together with the loan committee, has the responsibility for administering the credit approval process. As another part of its control process, the Company uses an independent internal credit review and examination function to provide assurance that loans and commitments are made and maintained as prescribed by its credit policies. This includes a review of documentation when the loan is initially extended and subsequent on-site examination to ensure continued performance and proper risk assessment.
Loan Portfolio Analysis
Columbia Bank is a full service commercial bank, which originates a wide variety of loans, and concentrates its lending efforts on originating commercial business and commercial real estate loans.
The following table sets forth the Company’s loan portfolio by type of loan for the dates indicated:
2004
% of
December 31,
2003
Commercial business
Real estate:
One-to-four family residential
Commercial and five or more family residential commercial properties
Total real estate
Real estate construction:
Total real estate construction
Consumer
Sub-total loans
Less: Deferred loan fees
Total loans
Total loans (excluding loans held for sale) at September 30, 2004 increased $87.0 million, to $1.17 billion from $1.08 billion at year-end 2003. This growth is despite unusually high payoffs due to the sale of two large real estate projects, the culmination of several construction projects and historically low business and credit line usage.
Commercial Loans: As of September 30, 2004, commercial loans increased $1.4 million, or 0.36%, to $383.0 million from $381.7 million at year-end 2003, representing 32.9% of total loans at September 30, 2004 as compared with 35.4% of total loans at December 31, 2003. The increase in commercial loans is the result of an effective business development initiative and some early indications of an economic recovery in the Company’s market areas. The Company is committed to providing competitive commercial lending in its market areas. The Company plans to remain competitive yet cautious with its commercial lending products due to the current state of the economy and will continue to emphasize in particular its relationship banking with businesses, and business owners.
Real Estate Loans: Residential one-to-four family loans increased $1.1 million to $48.6 million at September 30, 2004, representing 4.2% of total loans, compared with $47.4 million, or 4.4%, of total loans at December 31, 2003. These loans are used by the Company to collateralize outstanding advances from the FHLB. Generally, the Company’s policy is to originate residential loans for sale to third parties. Those residential loans are secured by properties located within the Company’s primary market areas, and typically have loan-to-value ratios of 80% or lower. However, the loan amounts may exceed 80% with private mortgage insurance.
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Commercial and five-or-more family residential real estate lending increased $59.1 million, or 13%, to $532.0 million at September 30, 2004, representing 45.6% of total loans, from $472.8 million, or 43.8% of total loans at December 31, 2003. Generally, commercial and five-or-more family residential real estate loans are made to borrowers who have existing banking relationships with the Company. The Company’s underwriting standards generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices.
Real Estate Construction Loans: The Company originates a variety of real estate construction loans. One-to-four family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and provide financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one-to-four family residences increased $6.1 million, or 39%, to $21.7 million at September 30, 2004, representing 1.9% of total loans, from $15.6 million, or 1.4% of total loans at December 31, 2003. This growth is due to the Company placing an increased emphasis on its Builder Banking program.
Commercial and five-or-more family real estate construction loans decreased $3.1 million, or 5%, to $55.9 million at September 30, 2004, representing 4.8% of total loans, from $59.0 million, or 5.5% of total loans at December 31, 2003. The decrease in commercial and five-or-more family real estate construction loans is due to the completion of several construction projects.
Through the first nine months of 2004, demand for commercial real estate loans has outpaced commercial business loans due to current economic conditions and a favorable interest rate environment. The Company continues to manage its interest rate risk by focusing on commercial real estate loans with repricing of under five years.
Consumer Loans: At September 30, 2004, the Company had $126.6 million of consumer loans outstanding, representing 10.8% of total loans, an increase of $22.4 million, or 21%, compared with $104.2 million at December 31, 2003. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.
Foreign Loans: Columbia Bank is not involved with loans to foreign companies or foreign countries.
Nonperforming Assets
Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectibility of principal or interest; (ii) in most cases restructured loans, for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition (interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur); (iii) real estate owned; and (iv) personal property owned.
Total nonperforming assets decreased 53% to $7.3 million, or 0.38% of period-end assets at September 30, 2004 from $15.4 million, or 0.88% of period-end assets at December 31, 2003.
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The following tables set forth, at the dates indicated, information with respect to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), real estate owned, other personal property owned, and total nonperforming assets of the Company:
Nonaccrual:
Commercial and five or more family residential real estate
Total nonaccrual
Restructured:
Total restructured
Total nonperforming loans
Total nonperforming assets
Nonperforming Loans. The consolidated financial statements are prepared according to the accrual basis of accounting. This includes the recognition of interest income on the loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when there are serious doubts about the collectibilty of principal or interest. The policy of the Company generally is to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status.
Nonperforming loans were $6.0 million, or 0.51% of total loans (excluding loans held for sale) at September 30, 2004, compared to $13.3 million, or 1.23% of total loans at December 31, 2003. Nonaccrual loans decreased $7.5 million, or 57% from year-end 2003 to $5.7 million at September 30, 2004.
Nonaccrual loans and other nonperforming assets are centered in a small number of lending relationships which management considers adequately reserved. Generally, these relationships are well collateralized though loss of principal on certain of these loans will remain in question until the loans are paid or collateral is liquidated. The Company will continue its collection efforts and liquidation of collateral to recover as large a portion of the nonaccrual assets as possible. Substantially, all nonperforming loans are to borrowers within the state of Washington.
Real Estate and Other Personal Property Owned. Real estate owned (REO), which is comprised of property from foreclosed real estate loans, decreased $772,000 to $680,000 at September 30, 2004, from $1.5 million at December 31, 2003. During the first nine months of 2004, the Company sold four properties for net gains of $110,000 and no properties were foreclosed and moved to REO. At September 30, 2004, REO consisted of two properties. Other personal property owned, which is comprised of other, non-real estate property from foreclosed loans, decreased $76,000 during the first nine months of 2004 to $615,000 from $691,000 at December 31, 2003. The Company continues to liquidate the other personal property owned as quickly as possible to maximize recovery.
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Provision and Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The size of the allowance is determined through quarterly assessments of the probable estimated losses in the loan portfolio. The Company’s methodology for making such assessments and determining the adequacy of the allowance includes the following key elements:
On a quarterly basis the Chief Credit Officer of the Company reviews with Executive Management and the Board of Directors the various additional factors that management considers when determining the adequacy of the allowance, including economic and business condition reviews.
The allowance is increased by provisions charged to expense, and is reduced by loans charged off, net of recoveries. While management believes it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance.
At September 30, 2004, the Company’s allowance for loan losses was $19.9 million, or 1.71% of total loans (excluding loans held for sale), 333% of nonperforming loans, and 274% of nonperforming assets. This compares with an allowance of $20.3 million, or 1.88% of the total loan portfolio, excluding loans held for sale, 153% of nonperforming loans, and 132% of nonperforming assets at December 31, 2003. After careful analysis, the Company took $250,000 of provision for loan losses for the third quarter of 2004 and 2003. During the first nine months of 2004 the Company contributed $550,000 to its provision for loan losses, compared to $2.9 million in the first nine months of 2003, a decrease of $2.3 million. The decrease in loan loss provision during the first nine months is due to improved credit quality in the loan portfolio and lower charge-offs.
Management intends to continue to maintain a prudent approach in establishing the level of the loan loss allowance; the Company manages risk in its loan portfolio through placing emphasis on credit quality over loan growth. A strong monitoring system and internal controls assist management in setting reserve levels that adequately reflect the inherent loss within the loan portfolio. Additionally, environmental factors relevant to the market place, which may affect the condition of the loan portfolio, are taken into account when determining the required level of the loan loss allowance.
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The following table provides an analysis of the Company’s allowance for loan losses at the dates and the periods indicated:
Beginning balance
Charge-offs:
Real estate construction: One-to-four family residential
Commercial real estate
Total charge-offs
Recoveries:
Total recoveries
Net recoveries (charge-offs)
Provision charged to expense
Ending balance
Total loans, net at end of period (1)
Allowance for loan losses to total loans
In the third quarter and for the first nine months of 2004, net loan charge-offs were $92,000 and $884,000, respectively, compared with net loan recoveries of $87,000 in the third quarter of 2003 and net loan charge-offs of $1.7 million for the first nine months in 2003. The $884,000 in net charge-offs during the first nine months of 2004 was comprised of several loans.
At September 30, 2004, the Company’s securities (securities available for sale and securities held to maturity) increased $84.9 million, or 17% to $598.6 million from $513.7 million at year-end 2003. In the third quarter of 2004, the Company purchased $125.9 million and received principal payments of $17.0 million. There were no sales of securities during the third quarter of 2003. During the first nine months of 2004 the Company purchased $164.7 million, received principal payments and maturities of $66.0 million and sold $14.0 million of securities available for sale for net realized losses of $6,000. Approximately 99% of the Company’s securities are classified as available for sale and carried at fair value. These securities are used by management as part of its asset/liability management strategy and may be sold in response to changes in interest rates or significant prepayment risk. In accordance with the Company’s investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent. Consistent with this strategy, management increased the Company’s securities portfolio during the third quarter of 2004 as deposit growth outpaced loan demand.
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At September 30, 2004, the market value of securities available for sale had an unrealized gain of $2.8 million (net of tax) as compared to an unrealized loss of $513,000 (net of tax) at December 31, 2003. The change in market value of securities available for sale is due primarily to fluctuations in long-term interest rates.
The following table sets forth the Company’s securities portfolio by type for the dates indicated:
Securities Available for Sale
U.S. Government agency
U.S. Government agency mortgage-backed securities
State & municipal securities
Other securities
Securities held to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized in interest income using the interest method. If the security is determined to be other-than-temporarily impaired, the amount of the impairment is charged to operations.
Securities available for sale are carried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to contractual maturity. Unrealized holding gains and losses, or valuation allowances established for net unrealized losses, are excluded from earnings and reported as a separate component of shareholders’ equity as accumulated other comprehensive income, net of income taxes, unless the security is deemed other-than-temporarily impaired. If the security is determined to be other-than-temporarily impaired, the amount of the impairment is charged to operations.
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2004 are summarized as follows:
Fair
Value
State and municipal securities
For all of the above investment securities, the unrealized losses are due to increases in interest rates and are considered to be temporarily impaired as the Company has the ability and intent to hold the investments for a period of time sufficient for recovery of fair value up to (or beyond) the cost of the investment. There were no securities held to maturity with unrealized losses at September 30, 2004.
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Liquidity and Sources of Funds
The Company’s primary sources of funds are customer deposits and advances from the Federal Home Loan Bank of Seattle (the “FHLB”). These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds, are used to make loans, to acquire securities and other assets, and to fund continuing operations.
Deposit Activities
The Company’s deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Total deposits increased $143.8 million, or 9%, to $1.69 billion at September 30, 2004 from $1.54 billion at December 31, 2003. Core deposits (demand deposit, savings, and money market accounts) increased $148.7 million, or 14% during the first nine months of 2004 and certificate of deposit balances decreased $4.9 million, or 1% compared to year-end 2003. Average core deposits increased to $1.24 billion during the third quarter of 2004, from $1.08 billion in the fourth quarter 2003 and from $1.04 billion in the third quarter of 2003.
As equity markets improve, the Company recognizes that some of the deposit growth that occurred during the past couple of years may eventually be deployed elsewhere as customers regain confidence in those markets. At the same time, the Company anticipates growing its deposits through new customers and its current customer base as business and individual prosperity improves during an anticipated economic recovery.
The Company has established a branch system to serve its consumer and business depositors. In addition, management’s strategy for funding growth is to make use of brokered and other wholesale deposits. At September 30, 2004, brokered and other wholesale deposits (excluding public deposits) totaled $11.0 million, less than 1% of total deposits, down from $16.3 million at December 31, 2003. The brokered deposits have varied maturities.
Borrowings
The Company relies on FHLB advances to supplement its funding sources, and the FHLB serves as another source of both short and long-term borrowings. FHLB advances are secured by one-to-four family real estate mortgages and certain other assets. At September 30, 2004, the Company had FHLB advances of $32.0 million, compared to advances of $16.5 million at December 31, 2003. Management anticipates that the Company will continue to rely on the same sources of funds in the future, and will use those funds primarily to make loans and purchase securities.
During 2001, the Company, through a special purpose trust (“the Trust”) participated in a pooled trust preferred offering, whereby the Trust issued $22.0 million of 30 year floating rate capital securities. The capital securities constitute guaranteed preferred beneficial interests in debentures issued by the Trust. The debentures had an initial rate of 7.29% and a rate of 5.27% at September 30, 2004. The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted quarterly. The Company through the Trust may call the debt at five years for a premium and at ten years at par, allowing the Company to retire the debt early if conditions are favorable. Prior to December 31, 2003, the Trust was considered a consolidated subsidiary of the Company. At December 31, 2003, the Company adopted Financial Accounting Standards Board Interpretation (FIN) No. 46 (as revised), “Consolidation of Variable Interest Entities,” whereby the Trust was deconsolidated with the result being that the trust preferred obligations are now classified as long-term subordinated debt and the Company’s related investment in the Trust is recorded in other assets. The balance of the long-term subordinated debt was $22.2 million at September 30, 2004 and December 31, 2003. The subordinated debt payable to the Trust is on the same interest and payment terms as the trust preferred obligations issued by the Trust.
The Company has a $20.0 million line of credit with a large commercial bank. The interest rate on the line is indexed to LIBOR and at September 30, 2004, the Company had a balance outstanding of $1.0 million. There was no balance outstanding at December 31, 2003. In the event of discontinuance of the line by either party, the Company has up to two years to repay any outstanding balance.
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Capital
Shareholders’ equity at September 30, 2004 was $169.9 million, up 13% from $150.4 million at December 31, 2003. The increase is due primarily to net income of $16.0 million at September 30, 2004. Shareholders’ equity was 8.78%, and 8.62% of total period-end assets at September 30, 2004, and December 31, 2003, respectively.
Regulatory Capital Requirements
Banking regulations require bank holding companies to maintain a minimum “leverage” ratio of core capital to adjusted quarterly average total assets of at least 3%. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders’ equity and trust preferred obligations, less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations. Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8% of risk-adjusted assets to be considered “adequately capitalized”.
Federal Deposit Insurance Corporation regulations set forth the qualifications necessary to be classified as a “well capitalized” bank, primarily for assignment of FDIC insurance premium rates. To qualify as “well capitalized,” banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Failure to qualify as “well capitalized” can negatively impact a bank’s ability to expand and to engage in certain activities. Columbia Bank qualifies as “well-capitalized” at September 30, 2004 and December 31, 2003.
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Leverage ratio
Dividends
On January 29, 2004, the Company declared a quarterly cash dividend of $0.05 per share, payable on February 25, 2004, to shareholders of record at the close of business February 11, 2004. On April 28, 2004, the Company announced a quarterly cash dividend of $0.07 per share and a 5% stock dividend payable on May 26, 2004, to shareholders of record as of May 12, 2004. On July 29, 2004, the Company announced a quarterly dividend of $0.07 per share payable on August 25, 2004, to shareholders of record as of August 11, 2004. Average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to the 5% stock dividend declared on April 28, 2004.
Subsequent to quarter-end, on October 28, 2004, the Company announced a quarterly dividend of $0.07 per share payable on November 24, 2004, to shareholders of record as of November 10, 2004.
Stock Repurchase Program
In March 2002 the Board of Directors approved a stock repurchase program whereby the Company may systematically repurchase up to 500,000 of its outstanding shares of Common Stock. The Company may repurchase shares from time to time in the open market or in private transactions, under conditions which allow such repurchases to be accretive to earnings while maintaining capital ratios that exceed the guidelines for a well-capitalized financial institution. As of September 30, 2004 the Company had not repurchased any shares of common stock in this current stock repurchase program.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At September 30, 2004, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2003. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” referenced in the Company’s annual report on Form 10-K for the year ended December 31, 2003.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures. An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as required by Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.
Changes in Internal Controls
Changes in Internal Controls. No changes occurred since the quarter ended June 30, 2004 in our internal controls over financial reporting that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
On July 30, 2004, the Company filed an 8-K dated July 30, 2004 announcing a quarterly cash dividend. The press release was attached and incorporated by reference.
On July 30, 2004, the Company furnished an 8-K reporting under Item 12 “Results of Operations and Financial Condition” its second quarter 2004 financial results. The press release was attached and incorporated by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Melanie J. Dressel
Melanie J. Dressel
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gary R. Schminkey
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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