UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2005.
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 April 30, 2005 was 15,651,381.
TABLE OF CONTENTS
Item 1.
Consolidated Condensed Unaudited Financial Statements
Consolidated Condensed Statements of Operations - three months ended March 31, 2005 and 2004
Consolidated Condensed Balance Sheets – March 31, 2005 and December 31, 2004
Consolidated Condensed Statements of Shareholders’ Equity – fiscal year ended December 31, 2004, and three months ended March 31, 2005
Consolidated Condensed Statements of Cash Flows - three months ended March 31, 2005 and 2004
Notes to Consolidated Condensed Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Item 6.
Exhibits
Signatures
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
Other borrowings
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 $609,998 and $627,519, respectively)
Securities held to maturity (fair value of $3,186 and $3,199, respectively)
Federal Home Loan Bank stock
Loans held for sale
Loans, net of unearned income of ($2,960) and ($2,839), respectively
Less: allowance for loan losses
Loans, net
Interest receivable
Premises and equipment, net
Real estate owned
Goodwill
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Long-term subordinated debt
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 income (loss) – Unrealized (losses) gains on securities available for sale, net of tax
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
3
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
RetainedEarnings
Accumulated
ComprehensiveIncome (Loss)
Total
Shareholders’Equity
Balance at January 1, 2004
Comprehensive income:
Net income
Reclassification of net losses on securities available for sale included in net income, net of tax of $2
Unrealized gains on securities available for sale, net of tax of $743
Total comprehensive income
Issuance of stock under stock option and other plans
Tax benefit associated with stock options
Issuance of stock in acquisition
Issuance of shares of common stock – 5% stock dividend
Cash dividends paid on common stock
Balance at December 31, 2004
Unrealized losses on securities available for sale, net of tax of $2,207
Balance at March 31, 2005
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
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 (gain) loss on sale of assets
Increase in loans held for sale
Increase in interest receivable
Increase (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 sales 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 Federal Home Loan Bank advances
Proceeds from other borrowings
Proceeds from issuance of common stock, net
Other, net
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Columbia Banking System, Inc. (the “Company”), through its wholly owned banking subsidiaries, provides a full range of banking services to small and medium-sized businesses, professionals and other individuals generally based in western Washington state and the northern Oregon coastal area. At March 31, 2005, the Company conducted its banking services in 39 office locations with nearly all of its loans, loan commitments and core deposits geographically concentrated in the Puget Sound region of Washington state.
In Washington state, the Company conducts a full-service commercial banking business through its wholly owned banking subsidiary, Columbia State Bank (“Columbia Bank”). In Oregon, the Company conducts a full-service commercial banking business through its wholly owned banking subsidiary, Bank of Astoria (“Astoria”), which was acquired on October 1, 2004. Astoria’s results of operations were included in the Company’s results beginning on the acquisition date. As such, the financial results for the first quarter of 2004 presented in this report do not include the results of operations of Astoria. See Note 2 of the consolidated financial statements in the Company’s 2004 Annual Report for additional information pertaining to the acquisition.
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. 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 subsidiaries Columbia Bank and Astoria. All significant intercompany transactions and accounts have been eliminated in consolidation. 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 three months ended March 31, 2005 are not necessarily indicative of results to be anticipated for the year ending December 31, 2005. Certain reclassifications of prior year amounts have been made to conform to current classification. These reclassifications had no effect on net income. 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 2004 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 shareholders 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 calculations of earnings per share are the inclusion of stock options and restricted stock awards increasing the shares outstanding in diluted earnings per share by 246,000 and 244,000 for the three months ended March 31, 2005 and 2004, respectively.
The Company has a stock option plan (“Plan”) and applies Accounting Principles Board Opinion No. 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.
7
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)
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:
3. Dividends
On January 27, 2005, the Company declared a quarterly cash dividend of $0.07 per share, payable on February 23, 2005, to shareholders of record at the close of business February 9, 2005. Subsequent to the current quarter-end, on April 27, 2005, the Company declared a quarterly cash dividend of $0.09 per share, payable on May 25, 2005, to shareholders of record at the close of business May 12, 2005. 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 and Astoria to the Company are subject to both Federal and State regulatory requirements.
4. Business Segment Information
Within Washington state, the Company is managed along three major lines of business: commercial banking, retail banking, and real estate lending. In Oregon, the Company operates as one segment through the Astoria banking subsidiary. 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. 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.
8
Financial highlights by lines of business are as follows:
Net interest income after provision for loan loss
Other income
Other expense
Contribution to overhead and profit
Income taxes
Total assets
5. 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 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 values of securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2005 are summarized as follows:
U.S. Government agency
U.S. Government agency mortgage-backed securities and collateralized mortgage obligations
State and municipal securities
Based on management’s evaluation and intent, none of the unrealized losses summarized above are considered other-than-temporary.
9
6. Comprehensive Income
The components of comprehensive income are as follows:
Net income as reported
Unrealized gains (losses) on securities available for sale:
Unrealized holding (losses) gains arising during the period
Tax benefit (expense)
Net unrealized (losses) gains on securities available for sale, net of tax
Less: reclassification adjustment of realized losses on securities available for sale
Tax benefit
Net realized losses on sale of securities available for sale, net of tax
7. 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 a general valuation allowance consistent with SFAS No. 5, “Accounting for Contingencies” and criticized/classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”.
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. These factors include existing general economic and business conditions affecting the Company’s market place, credit quality trends, including trends in nonperforming loans, collateral values, seasoning of the loan portfolio, bank regulatory examination results, findings of internal credit examiners and the duration of current business cycles. The allowance is increased by provisions charged to operations, 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 affected, if circumstances differ from the assumptions used in determining the allowance.
Beginning balance
Provision charged to expense
Loans charged-off
Recoveries
Ending balance
8. Goodwill and Intangible Assets
As a result of the acquisition of Astoria in October 2004, the Company had $29.7 million in goodwill at March 31, 2005 and December 31, 2004. At March 31, 2005 and December 31, 2004, the Company had a core deposit intangible asset of $3.8 million and $3.9 million, respectively. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is not amortized but is reviewed for potential impairment during the third quarter on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The core deposit intangible is evaluated for impairment if events and circumstances indicate a possible impairment based on undiscounted cash flow projections. The core deposit intangible is amortized on an accelerated basis over an estimated life of approximately 10 years. Amortization expense related to the core deposit intangible asset was $134,000 during the first quarter of 2005 and is included in other noninterest expense on the consolidated condensed statements of operations.
10
9. Income Tax
The provision for income tax is based on income and expense reported for financial statement purposes, using the “asset and liability method” for accounting for deferred income tax. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against any deferred tax assets for which it is more likely than not that the deferred tax asset will not be realized.
10. New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R eliminates the ability to account for share-based compensation transactions using APB No. 25 and requires all entities to recognize such transactions in an amount equal to the fair value of share-based payments granted to employees. On April 14, 2005, the U.S Securities and Exchange Commission announced a new rule which amends the implementation date for SFAS 123R from July 1, 2005 to January 1, 2006. The adoption of SFAS 123R is not expected to have a significant impact on the Company’s results of operations or financial condition.
In March 2004, the Emerging Issues Task Force (“EITF”) finalized and issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides recognition and measurement guidance regarding when impairments of equity and debt securities are considered other-than-temporary requiring a charge to operations, and also requires additional annual disclosures for investments in unrealized loss positions. The additional annual disclosure requirements were previously issued by the EITF in November 2003 and were effective for the Company for the year ended December 31, 2003. In September 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1 pending the issuance of further implementation guidance. We are currently evaluating the effect of the recognition and measurement provisions of EITF 03-1. While our analysis is pending the FASB’s revisions to EITF 03-1, we currently believe the adoption of EITF 03-1 will not have a significant impact on the Company’s results of operations or financial condition.
11
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 and in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.
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
Columbia Banking System, Inc. (the “Company”) is a registered bank holding company whose wholly owned banking subsidiaries, Columbia State Bank (“Columbia Bank”) and Bank of Astoria (“Astoria”), conduct 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.
The Company’s significant wholly owned banking subsidiary, Columbia Bank, has 34 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington state, as well as the Longview and Woodland communities in southwestern Washington state. 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.
On October 1, 2004, the Company completed its acquisition of Astoria, an Oregon state-chartered commercial bank headquartered in Astoria, Oregon. Astoria operates as a separate banking subsidiary of the Company and has five full service branch offices located within Clatsop and Tillamook Counties, along the northern Oregon coast. The deposits of Astoria are insured by the FDIC. Astoria is subject to regulation by the FDIC and the State of Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities. Although Astoria 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 Astoria. The results of operations at Astoria are included in the Company’s results beginning on the acquisition date.
Business Overview
The Company’s goal is to be a leading community banking company 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. Strategic business combinations may augment this internal growth.
The Company has established a network of 39 branches as of March 31, 2005 from which it intends to grow market share. Western Washington state locations consist of twenty-one branches in Pierce County, eight in King County, three in Cowlitz County, and one each in Kitsap and Thurston Counties. Northern Oregon coastal area locations consist of four branches in Clatsop County and one in Tillamook County. The Company is committed to increasing market share in the communities its serves by continuing to
12
leverage its existing branch network and adding new branch locations that are consistent with its expansion strategy throughout the Pacific Northwest. All Washington state branches operate as Columbia Bank and all Oregon branches operate as Bank of Astoria.
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 evaluates its business processes to benefit customers, create cost efficiencies, and increase profitability.
The Company’s business strategy is to provide its customers with the financial sophistication and 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 serves. 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 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 offers customers the support, reliability and personal relationships of a locally owned and operated community bank, combined with all the products, services and technology they would expect from a larger bank. New products, technologies and services are continually reviewed to meet customers’ financial services needs, and for business development and cost savings purposes. Some of the products and services available include tailored Commercial & Industrial, Real Estate and Real Estate Construction and Consumer lending, Business & Individual Checking, Savings & Time Deposits, Private Banking, Cash Management, Columbia OnLine™ (the Company’s online banking service), International, Merchant Card Services, Investment Services, Cash Management account analysis, sweep accounts, ACH and other electronic banking services.
Market Area
Approximately 70% of the Company’s branches are 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”. In early 2005, the Company announced the addition of its University Place branch located west of Tacoma. The South Sound is benefiting from major construction projects currently underway, including the new Tacoma Narrows Bridge Project and several commercial real estate projects including hotels, multi-family residential complexes, and office buildings. Additionally, expansion of the Port of Tacoma completed in late 2004 provides 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 Base and Fort Lewis Army Base), government related employment represents approximately 20% of the County’s total employment.
To the north of Tacoma, King County is Washington state’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 state, 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.
13
Through the acquisition of Astoria in October 2004, the Company added five branches located in the western portions of Clatsop and Tillamook Counties, Oregon, in the northern Oregon coastal area. Both Clatsop and Tillamook Counties are comprised primarily of forestry, commercial fishing, and tourism related businesses.
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 deferred tax assets and the impairment of investments, goodwill and other intangible assets. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis, in the notes to the consolidated condensed financial statements of this report 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, 2004. 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.
EFFECT OF INFLATION AND CHANGING PRICES
The impact of inflation on the Company’s operations is increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates.
HIGHLIGHTS
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 first quarter of 2005 increased 26% to $21.3 million, from $16.9 million in the first quarter of 2004. The Company’s net interest income was impacted favorably by continued growth in its loan portfolio, rising short-term interest rates and the acquisition of Astoria. Loan growth has been stimulated by improvements in the local economy and the addition of several experienced commercial lending officers to the King County lending team late in 2004. Increases in short-term interest rates have contributed to the increase in net interest income, as approximately 40% of the Company’s loan portfolio consists of variable rate loans tied to prime and other related indices. The increase in short-term interest rates were partially offset by relatively lower long-term rates.
14
The Company’s net interest margin (net interest income divided by average interest-earning assets) increased to 4.35% during the first quarter of 2005 from 4.25% during the first quarter of 2004. Average interest-earning assets grew to $2.04 billion, an increase of 24%, during the first quarter of 2005, compared with $1.64 billion during the same period in 2004. The yield on average interest-earning assets increased 29 basis points (a basis point is 1/100th of 1 percent, alternatively 100 basis points equals 1.00%) to 5.59% during the first quarter of 2005 compared with 5.30% during the same period of 2004. The increase in yield on average interest-earning assets is primarily due to loan growth and rising short-term interest rates. Average interest-bearing liabilities increased to $1.60 billion, or 24%, during the first quarter of 2005 compared with $1.29 billion in the same period of 2004. The average cost of interest-bearing liabilities increased 27 basis points to 1.59% during the first quarter of 2005, from 1.32% in the same period of 2004. The increase in the Company’s cost of interest-bearing liabilities is due to continued growth in core deposits, increasing deposit rates and increased borrowing levels resulting in a $2.0 million increase in interest expense.
At March 31, 2005, 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.
CONSOLIDATED AVERAGE BALANCES—NET CHANGES
ASSETS
Securities
Interest-earnings deposits with banks
Total interest-earning assets
Other earning assets
Noninterest-earning assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Other interest bearing liabilities
Total interest-bearing liabilities
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Noninterest income increased $560,000 or 11% to $5.7 million for the first quarter of 2005 from $5.1 million for the first quarter of 2004. The increase is primarily due to increased merchant services fees and earnings on bank owned life insurance (“BOLI”) policies. Merchant services fees increased $227,000 or 15% during the first quarter of 2005 as compared to the same period in 2004. This increase is consistent with trends in prior quarters and is a result of continued gains in market share. Earnings on BOLI policies increased $123,000 or 49% during the first quarter of 2005 as compared to the same period in 2004 due to purchases of additional policies and higher yields on underlying investments. These increases were partially offset by a decrease in mortgage banking income, which dropped 16% to $422,000 from the first quarter of 2004. The decrease in mortgage banking income is consistent with prior quarterly trends and is due to declining levels of refinancing activity and originations. The Company has responded to this downward trend by restructuring its mortgage banking department late in 2004 and allocating resources to more profitable areas within Columbia Bank.
15
Total noninterest expense increased 20% to $17.3 million for the first quarter of 2005 from $14.3 million for the first quarter of 2004. The increase is primarily due to higher employee compensation and benefits expense, occupancy expense and advertising and promotion expense. Compensation and benefits expense increased $1.5 million in the first quarter of 2005 as compared to the same period in 2004. The number of full-time equivalent employees increased with the acquisition of Astoria and the addition of commercial lending officers during the fourth quarter of 2004 which contributed to increased compensation costs. Additionally, the Company continues to experience higher employee benefit expenses due to rising health insurance premiums. Occupancy expense increased $246,000 or 12% during the first quarter of 2005 as compared to the same period in 2004. The increase in occupancy expense is primarily due to the Company’s sale and lease-back of its Broadway location in September 2004. The sale of the building resulted in decreased rental income received from tenants and increased rent expense. During the first quarter of 2005 advertising and promotion expense increased $233,000 or 86% as compared to the first quarter of 2004. This increase is due to residual payments associated with television commercials created early in 2004 which will continue to run throughout 2005. Consistent with historical trends, the Company’s advertising and promotional expenses are generally higher in the first quarter and decrease throughout subsequent quarters.
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 62.2% for the first quarter of 2005 compared to 63.4% for the first quarter of 2004. The improvement (decrease) in the efficiency ratio is due to increases in net interest income resulting from loan growth and increasing short-term interest rates exceeding increases in noninterest expense categories.
Reconciliation of Financial Data to GAAP Financial Measures
Net interest income (1)
Tax equivalent adjustment for non-taxable Investment securities interest income (2)
Adjusted net interest income
Noninterest income
(Gain) loss on sale of securities, net
Tax equivalent adjustment for BOLI income (2)
Adjusted noninterest income
Noninterest expense
Net gain (cost) of OREO
Adjusted noninterest expense
Efficiency ratio
Efficiency ratio (fully taxable-equivalent)
Tax Rate
Income Taxes
The Company recorded an income tax provision of $2.5 million for the first quarter of 2005 compared with a provision of $2.2 million for the same period in 2004. The effective tax rate was 28% for the first quarter of 2005 compared with 30% for the first quarter of 2004. The Company’s effective tax rate is less than the statutory rate primarily due to earnings on tax-exempt municipal securities and BOLI. For additional information, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2004.
16
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. 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 19.
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
The Company 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:
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 March 31, 2005 increased $77.1 million, to $1.44 billion from $1.36 billion at year-end 2004. Commercial real estate and commercial business loans contributed a majority of the growth in total loans.
Commercial Loans: As of March 31, 2005, commercial loans increased $52.0 million, or 11%, to $540.2 million from $488.2 million at year-end 2004, representing 38% of total loans at March 31, 2005 as compared with 36% of total loans at December 31, 2004. Management is committed to providing competitive commercial lending in the Company’s primary market areas. Management believes that increases in commercial lending during the first quarter of 2005 were due to increased confidence of business owners in response to an improving economy as well as the addition of several experienced commercial lending officers during the fourth quarter of 2004. Management expects to continue to expand its commercial lending products and to emphasize in particular its relationship banking with businesses, and business owners.
17
Real Estate Loans: Residential one-to-four family loans decreased $2.3 million to $47.2 million at March 31, 2005, representing 3% of total loans, compared with $49.6 million, or 4%, of total loans at December 31, 2004. The decrease in loans from December 31, 2004 is due to the effect of rising long-term interest rates which slowed refinancing activity and originations. 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.
Commercial and five-or-more family residential real estate lending increased $18.0 million, or 3%, to $613.8 million at March 31, 2005, representing 43% of total loans, from $595.8 million, or 44% of total loans at December 31, 2004. 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 $1.4 million, or 5%, to $28.2 million at March 31, 2005, representing 2% of total loans, from $26.8 million, or 2% of total loans at December 31, 2004. Commercial and five-or-more family real estate construction loans increased $6.3 million, or 9%, to $76.4 million at March 31, 2005, representing 5% of total loans, from $70.1 million, or 5% of total loans at December 31, 2004. This growth is due to the Company placing an increased emphasis on its Builder Banking program. The Company endeavors to limit its construction lending risk through adherence to strict underwriting procedures.
Consumer Loans: At March 31, 2005, the Company had $133.9 million of consumer loans outstanding, representing 9% of total loans, an increase of $1.8 million compared with $132.1 million at December 31, 2004. 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: The Company 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 totaled $7.4 million, or 0.33% of period-end assets at March 31, 2005 from $9.1 million, or 0.42% of period-end assets at December 31, 2004.
18
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 loans
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 collectibility 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 $7.4 million, or 0.51% of total loans (excluding loans held for sale) at March 31, 2005, compared to $8.4 million, or 0.62% of total loans at December 31, 2004. Nonaccrual loans decreased $1.0 million, or 13% from year-end 2004 to $7.2 million at March 31, 2005.
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 states of Washington and Oregon.
Real Estate Owned: Real estate owned (“REO”), is comprised of property from foreclosed real estate loans. During the first quarter of 2005, the Company sold all of its REO property totaling $680,000 for net realized gains of $5,000. There were no foreclosures or additions to REO, recoveries of previously charged-off balances or write-downs during the first quarter of 2005.
Other Personal Property Owned: Other personal property owned (“OPPO”) is comprised of other, non-real estate property from foreclosed loans. The Company had no outstanding OPPO balance at March 31, 2005 and December 31, 2004. There were no foreclosures, additions or charge-offs of OPPO during the first quarter of 2005.
Provision and Allowance for Loan Losses
At March 31, 2005, the Company’s allowance for loan losses was $20.2 million, or 1.40% of total loans (excluding loans held for sale), 273% of nonperforming loans, and 273% of nonperforming assets. This compares with an allowance of $19.9 million, or 1.46% of the total loan portfolio, excluding loans held for sale, 235% of nonperforming loans, and 218% of nonperforming assets at December 31, 2004. In the first quarter of 2005, the Company allocated $890,000 to its provision for loan losses, compared to $300,000 in the first quarter of 2004. The increase in the provision for loan losses is due to the significant growth in the Company’s loan portfolio.
19
The Company has used the same methodology for allowance calculations for the first quarter of 2005 and the year-ended December 31, 2004. Adjustments to the percentages of the allowance allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. There were no significant changes during the first quarter of 2005 in estimation methods or assumptions that affected the Company’s methodology for assessing the appropriateness of the allowance. The Company maintains a conservative approach to credit quality and will continue to prudently add to its loan loss allowance as necessary in order to maintain adequate reserves. The Company’s credit quality measures continue to improve into the first quarter of 2005 from the year-ended 2004 and are some of the strongest in the Company’s history. Management carefully monitors the loan portfolio and continues to emphasize credit quality and strengthening of its loan monitoring systems and controls.
The following table provides an analysis of the Company’s allowance for loan losses at the dates and the periods indicated:
Charge-offs:
Commercial real estate
Total charge-offs
Recoveries:
Total recoveries
Net charge-offs
Total loans, net at end of period (1)
Allowance for loan losses to total loans
In the first quarter of 2005, net charge-offs totaled $592,000 compared to net charge-offs of $603,000 during the same period of 2004. The net charge-offs during these periods were comprised of several loans.
At March 31, 2005, the Company’s securities (securities available for sale and securities held to maturity) decreased $23.9 million, or 4% to $608.1 million from $632.0 million at year-end 2004. In the first quarter of 2005, the Company purchased $2.9 million and received principal payments of $17.0 million and sold $1.6 million of securities at book value resulting in no gain or loss. 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. At March 31, 2005, the market value of securities available for sale had an unrealized loss of $3.2 million (net of tax) as compared to an unrealized gain of $909,000 (net of tax) at December 31, 2004. The change in market value of securities available for sale is due primarily to fluctuations in interest rates.
20
The following table sets forth the Company’s securities portfolio by type for the dates indicated:
Securities Available for Sale
U.S. Government agency mortgage-backed securities & collateralized mortgage obligations
State & municipal securities
Other securities
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 $6.1 million to $1.87 billion at March 31, 2005 from $1.86 billion at December 31, 2004. Core deposits (demand deposit, savings, and money market accounts) increased $11.5 million, or 1% and certificate of deposit balances decreased $5.4 million, or 1% compared to year-end 2004. Average core deposits decreased $2.6 million from quarter ended December 31, 2004 to $1.38 billion for the quarter ended March 31, 2005.
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 March 31, 2005, brokered and other wholesale deposits (excluding public deposits) totaled $10.9 million, less than 1% of total deposits, down from $11.0 million at December 31, 2004. 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 March 31, 2005, the Company had FHLB advances of $128.0 million, compared to advances of $68.7 million at December 31, 2004. 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 6.31% at March 31, 2005. 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 $22.3 million at March 31, 2005 and $22.2 million at December 31, 2004. The subordinated debt payable to the Trust is on the same interest and payment terms as the trust preferred obligations issued by the Trust.
21
Additionally, The Company has a $10.0 million line of credit with a large commercial bank with an interest rate indexed to LIBOR. At March 31, 2005 and December 31, 2004, the outstanding balance was $2.5 million with an interest rate of 4.55% and 4.10%, respectively. In the event of discontinuance of the line by either party, the Company has up to two years to repay any outstanding balance.
Contractual Obligations & Commitments
The Company is party to many contractual financial obligations, including repayment of borrowings, operating and equipment lease payments, and commitments to extend credit. The table below presents certain future financial obligations of the Company.
Operating & equipment leases
Capital lease
FHLB advances
At March 31, 2005, the Company had commitments to extend credit of $605.9 million compared to $588.2 million at December 31, 2004.
Capital Resources
Shareholders’ equity at March 31, 2005 was $204.8 million, up 1% from $203.2 million at December 31, 2004. The increase is due primarily to net income of $6.3 million for the quarter ended March 31, 2005. Shareholders’ equity was 9.13%, and 9.33% of total period-end assets at March 31, 2005, and December 31, 2004, respectively.
Capital Ratios: 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% to be considered “adequately capitalized”.
Federal Deposit Insurance Corporation regulations set forth the qualifications necessary for a bank to be classified as “well capitalized”, 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.
The Company and its subsidiaries qualify as “well-capitalized” at March 31, 2005 and December 31, 2004.
Adequately
capitalized
Well-
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Leverage ratio
22
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 March 31, 2005 the Company had not repurchased any shares of common stock in this current stock repurchase program.
23
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 March 31, 2005, 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, 2004. 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, 2004.
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 Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s first quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
24
PART II - OTHER INFORMATION
25
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.
26