COLB 09.30.2011 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________ 
FORM 10-Q
________________________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011.
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number 0-20288
 ________________________________________________________ 
COLUMBIA BANKING SYSTEM, INC.
(Exact name of issuer as specified in its charter)
 ________________________________________________________ 

Washington
 
91-1422237
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1301 “A” Street
Tacoma, Washington
 
98402-2156
(Address of principal executive offices)
 
(Zip Code)
(253) 305-1900
(Issuer’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of common stock outstanding at October 31, 2011 was 39,502,313.
 

Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
PART I — FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
i

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(in thousands except per share)
 
2011
 
2010
 
2011
 
2010
Interest Income
 
 
 
 
 
 
 
 
Loans
 
$
59,655

 
$
44,882

 
$
151,446

 
$
120,769

Taxable securities
 
6,037

 
4,660

 
16,701

 
14,113

Tax-exempt securities
 
2,500

 
2,252

 
7,483

 
6,988

Federal funds sold and deposits in banks
 
240

 
281

 
722

 
640

Total interest income
 
68,432

 
52,075

 
176,352

 
142,510

Interest Expense
 
 
 
 
 
 
 
 
Deposits
 
2,642

 
4,007

 
8,569

 
13,282

Federal Home Loan Bank advances
 
807

 
716

 
2,215

 
2,131

Long-term obligations
 
75

 
266

 
579

 
769

Other borrowings
 
120

 
121

 
377

 
357

Total interest expense
 
3,644

 
5,110

 
11,740

 
16,539

Net Interest Income
 
64,788

 
46,965

 
164,612

 
125,971

Provision for loan and lease losses
 
500

 
9,000

 
2,650

 
37,500

Provision for losses on covered loans
 
433

 
453

 
2,312

 
453

Net interest income after provision for loan and lease losses
 
63,855

 
37,512

 
159,650

 
88,018

Noninterest Income
 
 
 
 
 
 
 
 
Service charges and other fees
 
6,991

 
6,518

 
19,746

 
18,384

Gain on bank acquisitions, net of tax
 
1,830

 

 
1,830

 
9,818

Merchant services fees
 
1,952

 
2,051

 
5,393

 
5,700

Gain on sale of investment securities, net
 

 

 

 
58

Bank owned life insurance
 
523

 
521

 
1,556

 
1,541

Change in FDIC loss sharing asset
 
(10,855
)
 
(4,536
)
 
(32,048
)
 
(1,137
)
Other
 
1,755

 
629

 
3,842

 
2,529

Total noninterest income
 
2,196

 
5,183

 
319

 
36,893

Noninterest Expense
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
21,392

 
17,574

 
59,772

 
52,057

Occupancy
 
4,815

 
4,278

 
13,600

 
12,554

Merchant processing
 
976

 
934

 
2,764

 
2,697

Advertising and promotion
 
1,137

 
630

 
3,050

 
2,253

Data processing and communications
 
2,195

 
2,477

 
6,032

 
6,923

Legal and professional fees
 
1,957

 
1,609

 
4,868

 
4,584

Taxes, licenses and fees
 
1,211

 
803

 
2,983

 
2,055

Regulatory premiums
 
574

 
1,952

 
3,553

 
4,910

Net cost of operation of other real estate owned
 
(195
)
 
(1,442
)
 
(423
)
 
(802
)
Amortization of intangibles
 
1,177

 
1,044

 
3,116

 
2,886

FDIC clawback liability
 
1,146

 

 
3,294

 

Other
 
3,550

 
3,661

 
11,836

 
12,045

Total noninterest expense
 
39,935

 
33,520

 
114,445

 
102,162

Income before income taxes
 
26,116

 
9,175

 
45,524

 
22,749

Income tax provision
 
7,244

 
3,971

 
12,241

 
4,573

Net Income
 
$
18,872

 
$
5,204

 
$
33,283

 
$
18,176

Net Income Applicable to Common Shareholders
 
$
18,872

 
$
2,474

 
$
33,283

 
$
13,229

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.48

 
$
0.06

 
$
0.84

 
$
0.39

Diluted
 
$
0.48

 
$
0.06

 
$
0.84

 
$
0.38

Dividends paid per common share
 
$
0.06

 
$
0.01

 
$
0.14

 
$
0.03

Weighted average number of common shares outstanding
 
39,131

 
38,976

 
39,092

 
33,938

Weighted average number of diluted common shares outstanding
 
39,192

 
39,137

 
39,167

 
34,142


See accompanying notes to unaudited consolidated condensed financial statements.


1

Table of Contents

CONSOLIDATED CONDENSED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
 
(in thousands)
 
 
 
 
September 30,
2011
 
December 31,
2010
ASSETS
 
 
 
 
 
 
 
Cash and due from banks
 
 
 
 
$
97,432

 
$
55,492

Interest-earning deposits with banks
 
 
 
 
250,030

 
458,638

Total cash and cash equivalents
 
 
 
 
347,462

 
514,130

Securities available for sale at fair value (amortized cost of $954,415 and $743,928, respectively)
 
 
 
 
995,854

 
763,866

Federal Home Loan Bank stock at cost
 
 
 
 
22,215

 
17,908

Loans held for sale
 
 
 
 
2,568

 
754

Loans, excluding covered loans, net of unearned income of ($23,764) and ($3,490), respectively
 
 
 
 
2,257,899

 
1,915,754

Less: allowance for loan and lease losses
 
 
 
 
50,422

 
60,993

Loans, excluding covered loans, net
 
 
 
 
2,207,477

 
1,854,761

Covered loans, net of allowance for loan losses of ($8,327) and ($6,055), respectively
 
 
 
 
570,805

 
517,061

Total loans, net
 
 
 
 
2,778,282

 
2,371,822

FDIC loss sharing asset
 
 
 
 
193,869

 
205,991

Interest receivable
 
 
 
 
17,428

 
11,164

Premises and equipment, net
 
 
 
 
104,974

 
93,108

Other real estate owned ($24,835 and $14,443 covered by FDIC loss share, respectively)
 
 
 
 
49,891

 
45,434

Goodwill
 
 
 
 
118,434

 
109,639

Core deposit intangible, net
 
 
 
 
21,369

 
18,696

Other assets
 
 
 
 
103,486

 
103,851

Total Assets
 
 
 
 
$
4,755,832

 
$
4,256,363

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Noninterest-bearing
 
 
 
 
$
1,105,169

 
$
895,671

Interest-bearing
 
 
 
 
2,690,330

 
2,431,598

Total deposits
 
 
 
 
3,795,499

 
3,327,269

Federal Home Loan Bank advances
 
 
 
 
122,642

 
119,405

Securities sold under agreements to repurchase
 
 
 
 
25,000

 
25,000

Other borrowings
 
 
 
 

 
642

Long-term subordinated debt
 
 
 
 

 
25,735

Other liabilities
 
 
 
 
62,725

 
51,434

Total liabilities
 
 
 
 
4,005,866

 
3,549,485

Commitments and contingent liabilities
 
 
 
 

 

Shareholders’ equity:
 
 
 
 
 
 
 
 
September 30,
2011
 
December 31,
2010
 
 
 
 
Common Stock (no par value)
 
 
 
 
 
 
 
Authorized shares
63,033

 
63,033

 
 
 
 
Issued and outstanding
39,502

 
39,338

 
578,828

 
576,905

Retained earnings
 
 
 
 
145,451

 
117,692

Accumulated other comprehensive income
 
 
 
 
25,687

 
12,281

Total shareholders’ equity
 
 
 
 
749,966

 
706,878

Total Liabilities and Shareholders’ Equity
 
 
 
 
$
4,755,832

 
$
4,256,363

See accompanying notes to unaudited consolidated condensed financial statements.


2

Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Columbia Banking System, Inc.
(Unaudited)
 
  
 
Preferred Stock
 
Common Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
(in thousands)
 
Number of
Shares
 
Amount
 
Number of
Shares
 
Amount
 
Balance at January 1, 2010
 
77

 
$
74,301

 
28,129

 
$
348,706

 
$
93,316

 
$
11,816

 
$
528,139

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
18,176

 

 
18,176

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain from securities, net of reclassification adjustments
 

 

 

 

 

 
11,859

 
11,859

Net change in cash flow hedging instruments
 

 

 

 

 

 
(943
)
 
(943
)
Net pension plan liability adjustment
 

 

 

 

 

 
44

 
44

Other comprehensive income
 

 

 

 

 

 

 
10,960

Total comprehensive income
 

 

 

 

 

 

 
29,136

Redemption of preferred stock and common stock warrant
 

 
(76,898
)
 

 
(3,302
)
 


 

 


Accretion of preferred stock discount
 
(77
)
 
2,597

 

 

 
(2,597
)
 

 

Issuance of common stock, net of offering costs
 

 

 
11,040

 
229,129

 

 

 
229,129

Issuance of common stock - stock option and other plans
 

 

 
65

 
864

 

 

 
864

Issuance of common stock - restricted stock awards, net of cancelled awards
 

 

 
94

 
1,054

 

 

 
1,054

Tax benefit deficiency associated with share-based compensation
 

 

 

 
(13
)
 

 

 
(13
)
Preferred dividends
 

 

 

 

 
(2,349
)
 

 
(2,349
)
Cash dividends paid on common stock
 

 

 

 

 
(1,068
)
 

 
(1,068
)
Balance at September 30, 2010
 

 
$

 
39,328

 
$
576,438

 
$
105,478

 
$
22,776

 
$
704,692

Balance at January 1, 2011
 

 
$

 
39,338

 
$
576,905

 
$
117,692

 
$
12,281

 
$
706,878

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
33,283

 

 
33,283

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain from securities, net of reclassification adjustments
 

 

 

 

 

 
13,768

 
13,768

Net change in cash flow hedging instruments
 

 

 

 

 

 
(143
)
 
(143
)
Net pension plan liability adjustment
 

 

 

 

 

 
(219
)
 
(219
)
Other comprehensive income
 

 

 

 

 

 

 
13,406

Total comprehensive income
 

 

 

 

 

 

 
46,689

Issuance of common stock - stock option and other plans
 

 

 
47

 
792

 

 

 
792

Issuance of common stock - restricted stock awards, net of cancelled awards
 

 

 
119

 
1,163

 

 

 
1,163

Repurchase of shares
 

 

 
(2
)
 
(32
)
 

 

 
(32
)
Cash dividends paid on common stock
 

 

 

 

 
(5,524
)
 

 
(5,524
)
Balance at September 30, 2011
 

 
$

 
39,502

 
$
578,828

 
$
145,451

 
$
25,687

 
$
749,966


See accompanying notes to unaudited consolidated condensed financial statements.

3

Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
 
 
Nine Months Ended September 30,
(in thousands)
 
2011
 
2010 (1)
Cash Flows From Operating Activities
 
 
 
 
Net Income
 
$
33,283

 
$
18,176

Adjustments to reconcile net income to net cash provided by operating activities
 

 

Provision for loan and lease losses and losses on covered loans
 
4,962

 
37,953

Stock-based compensation expense
 
1,163

 
1,054

Depreciation, amortization and accretion
 
2,612

 
10,105

Net realized gain on FDIC assisted bank acquisitions
 
(1,830
)
 
(9,818
)
Net realized gain on sale of securities
 

 
(58
)
Net realized gain on sale of other assets
 
(13
)
 
(16
)
Net realized gain on sale of other real estate owned
 
(7,069
)
 
(3,527
)
Gain on termination of cash flow hedging instruments
 
(222
)
 
(1,463
)
Write-down on other real estate owned
 
5,392

 
4,586

Deferred income tax benefit
 

 
(394
)
Net change in:
 

 

FDIC loss-sharing asset
 
29,856

 
1,022

Loans held for sale
 
(1,814
)
 
(1,513
)
Interest receivable
 
(3,384
)
 
4,195

Interest payable
 
(226
)
 
(625
)
Other assets
 
5,886

 
(251
)
Other liabilities
 
1,608

 
22,053

Net cash provided by operating activities
 
70,204

 
81,479

Cash Flows From Investing Activities
 
 
 
 
Loans originated and acquired, net of principal collected
 
(69,420
)
 
114,618

Purchases of:
 

 

Securities available for sale
 
(294,678
)
 
(64,054
)
Premises and equipment
 
(10,619
)
 
(3,910
)
Proceeds from:
 

 

FDIC reimbursement on loss-sharing asset
 
51,000

 

Sales of securities available for sale
 

 
69,328

Principal repayments and maturities of securities available for sale
 
101,071

 
66,118

Disposal of premises and equipment
 
59

 
71

Sales of covered other real estate owned
 
14,604

 
10,652

Sales of other real estate and other personal property owned
 
10,234

 
3,943

Capital improvements on other real estate properties
 
(726
)
 
(1,147
)
Decrease in Small Business Administration secured borrowings
 
(642
)
 
1,599

Net cash acquired in business combinations
 
247,792

 
155,910

Net cash provided by investing activities
 
48,675

 
353,128

Cash Flows From Financing Activities
 
 
 
 
Net decrease in deposits
 
(215,701
)
 
(323,141
)
Proceeds from:
 

 

Issuance of common stock
 

 
229,129

Exercise of stock options
 
792

 
851

Federal Home Loan Bank advances
 
100

 

Federal Reserve Bank borrowings
 
100

 

Payment for:
 

 

Repayment of Federal Home Loan Bank advances
 
(39,447
)
 

Repayment of Federal Reserve Bank borrowings
 
(100
)
 
(36,237
)
Preferred stock dividends
 

 
(2,840
)
Common stock dividends
 
(5,524
)
 
(1,068
)
Repurchase of preferred stock and common stock warrant
 

 
(80,200
)
Repurchase of common stock
 
(32
)
 

Net decrease in other borrowings
 
(25,735
)
 
(86
)
Net cash used in financing activities
 
(285,547
)
 
(213,592
)
(Decrease) Increase in cash and cash equivalents
 
(166,668
)
 
221,015

Cash and cash equivalents at beginning of period
 
514,130

 
305,074

Cash and cash equivalents at end of period
 
$
347,462

 
$
526,089

Supplemental Information:
 
 
 
 
Cash paid during the year for:
 
 
 
 
Cash paid for interest
 
$
11,967

 
$
17,164

Cash paid for income tax
 
$
12,870

 
$
3,015

Non-cash investing activities
 

 

Assets acquired in FDIC assisted acquisitions (excluding cash and cash equivalents)
 
$
485,870

 
$
1,075,166

Liabilities assumed in FDIC assisted acquisitions
 
$
731,832

 
$
1,210,882

Loans transferred to other real estate owned
 
$
16,505

 
$
27,266

(1) Reclassified to conform to the current period’s presentation.
See accompanying notes to unaudited consolidated condensed financial statements.

4

Table of Contents

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiary Columbia Bank (the “Bank”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of results to be anticipated for the year ending December 31, 2011. 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 2010 Annual Report on Form 10-K.
Significant Accounting Policies
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2010 Annual Report on Form 10-K. Other than as discussed below, there have not been any changes in our significant accounting policies compared to those contained in our 2010 10-K disclosure for the year ended December 31, 2010.

Discounted Loans
Discounted loans are the loans acquired through acquisitions or direct purchase for which we believe a credit loss is not probable at the time of acquisition.  Discounted loans are included on the consolidated condensed balance sheet in the “Loans, excluding covered loans” line item. Generally these loans as a group do not exhibit pervasive indications of declines in credit quality from the time of initial origination.  Discounted loans are recorded at fair value at the time of acquisition.  The estimate of fair value includes a discount related to credit risk and a premium or discount related to interest rates that is recorded for each loan separately.   Interest income is recognized through the accrual of interest at the loans' stated rates, plus accretion or amortization of the discount or premium recorded at acquisition.  Credit losses for discounted loans are recorded through the provision for loan losses using a similar methodology as originated loans.  However, the amount of expected incurred loss of unpaid principal must be compared to the net carrying value which includes the remaining discount or premium. Currently none of our discounted loans are covered by indemnification agreements with the FDIC. 

2.
Accounting Pronouncements Recently Issued

In April 2011, the FASB issued Accounting Standards Update ("ASU") 2011-03, Reconsideration of Effective Control for Repurchase Agreements (Topic 860). ASU 2011-03 attempts to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before maturity. The effective date of ASU 2011-03 will be the first interim or annual period beginning after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is evaluating the impact this ASU will have on its financial condition and results of operations.
In April 2011, the Financial Accounting Standards Board issued ASU 2011-02, A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310). ASU 2011-02 clarifies the criteria for a restructuring to be classified as a Troubled Debt Restructuring ("TDR"). The Company adopted this ASU during the current period as well as the related disclosure requirements which were included in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310). Adoption of this ASU had no impact on the Company's financial condition or results of operations. See Note 6 for expanded disclosure requirements related to TDR.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) (Topic 820). ASU 2011-04 developed common requirements between GAAP and IFRS for measuring fair value and for disclosing information about fair value measurements. The effective date of ASU 2011-04 will be during interim or annual period beginning after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is evaluating the impact this ASU will have on its financial condition and results of operations.


5

Table of Contents

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). ASU 2011-05 attempts to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The effective date of ASU 2011-05 will be the first interim or fiscal period beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted. The Company will apply the disclosure requirements of ASU 2011-05 for its first interim period beginning after December 15, 2011.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (Topic 350). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. This ASU, which the Company adopted during the third quarter of 2011, did not have any impact on the Company's consolidated financial statements.

3.
Earnings per Common Share
Basic Earnings per Share (“EPS”) is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Common shares outstanding include common stock and vested restricted stock awards where recipients have satisfied the vesting terms. Diluted EPS reflects the assumed conversion of all dilutive securities, applying the treasury stock method. The Company calculates earnings per share using the two-class method as described in the Earnings per Share topic of the FASB Accounting Standards Codification (“ASC”). The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(in thousands except per share)
 
2011
 
2010
 
2011
 
2010
Basic EPS:
 
 
 
 
 
 
 
 
Net income
 
$
18,872

 
$
5,204

 
$
33,283

 
$
18,176

Less: Preferred dividends and accretion of issuance discount for preferred stock
 

 
(2,730)

 

 
(4,947)

Net income applicable to common shareholders
 
$
18,872

 
$
2,474

 
$
33,283

 
$
13,229

Less: Earnings allocated to participating securities
 
(177)

 
(22)

 
(311)

 
(127)

Earnings allocated to common shareholders
 
$
18,695

 
$
2,452

 
$
32,972

 
$
13,102

Weighted average common shares outstanding
 
39,131

 
38,976

 
39,092

 
33,938

Basic earnings per common share
 
$
0.48

 
$
0.06

 
$
0.84

 
$
0.39

Diluted EPS:
 
 
 
 
 
 
 
 
Earnings allocated to common shareholders
 
$
18,695

 
$
2,452

 
$
32,972

 
$
13,102

Weighted average common shares outstanding
 
39,131

 
38,976

 
39,092

 
33,938

Dilutive effect of equity awards and warrants
 
61

 
161

 
75

 
204

Weighted average diluted common shares outstanding
 
39,192

 
39,137

 
39,167

 
34,142

Diluted earnings per common share
 
$
0.48

 
$
0.06

 
$
0.84

 
$
0.38

Potentially dilutive share options that were not included in the computation of diluted EPS because to do so would be anti-dilutive.
 
75

 
62

 
62

 
54



6

Table of Contents

4.
Business Combinations
Summit Bank
On May 20, 2011 the Bank acquired certain assets and assumed certain liabilities of Summit Bank from the Federal Deposit Insurance Corporation (“FDIC”) in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into loss-sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and certain accrued interest on loans for up to 90 days. We refer to the acquired loans and OREO subject to the loss-sharing agreements collectively as “covered assets.” Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The loss-sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five years and ten years, respectively, from the May 20, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.
Summit Bank was a full service community bank headquartered in Burlington, Washington that operated three branch locations in Skagit County. We entered into this transaction to assist us with filling in our geographic footprint between Seattle and Bellingham, Washington and to support our recently expanded Bellingham banking team. We believe participating with the FDIC in this assisted transaction was, from an economical standpoint, advantageous to expansion through de novo branching.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were provisionally recorded at their estimated fair values as of the May 20, 2011 acquisition date. The initial accounting for acquired loans and the related indemnification asset for the Summit Bank acquisition was incomplete as of June 30, 2011. The amounts recognized at June 30, 2011 were determined provisionally as the fair value analysis of those assets utilizing an income approach was not complete as of June 30, 2011. These amounts have been retrospectively adjusted to reflect the completion of the fair value analysis utilizing an income approach during the current period. The adjustment recorded in the current period was an increase in the FDIC indemnification asset of $3.0 million, a decrease in acquired loans of $1.7 million, a decrease in goodwill of $851 thousand, and a decrease in other real estate owned covered by loss sharing of $509 thousand. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process. All of the goodwill and core deposit intangible assets recognized are deductible for income tax purposes.

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period May 21, 2011 to September 30, 2011. Due primarily to the significant amount of fair value adjustments and the FDIC loss-sharing agreements put in place, historical results of Summit Bank are not meaningful to the Company’s results and thus no proforma information is presented.

7

Table of Contents

The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:
 
 
May 20, 2011
 
(in thousands)
Assets
 
Cash and due from banks
$
1,837

Interest-earning deposits with banks and federal funds sold
14,198

Investment securities
871

Federal Home Loan Bank stock
406

Acquired loans
69,783

Accrued interest receivable
429

Premises and equipment
42

FDIC receivable
6,984

Other real estate owned covered by loss sharing
2,162

Goodwill
2,919

Core deposit intangible
509

FDIC indemnification asset
30,203

Other assets
786

Total assets acquired
$
131,129

Liabilities
 
Deposits
$
123,279

Federal Home Loan Bank advances
7,772

Accrued interest payable
71

Other liabilities
7

Total liabilities assumed
$
131,129

First Heritage Bank
On May 27, 2011 the Bank acquired certain assets and assumed certain liabilities of First Heritage Bank from the FDIC in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into loss-sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and certain accrued interest on loans for up to 90 days. We refer to the acquired loans and OREO subject to the loss-sharing agreements collectively as “covered assets.” Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The loss-sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five years and ten years, respectively, from the May 27, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.
First Heritage Bank was a full service community bank headquartered in Snohomish, Washington that operated five branch locations in King and Snohomish Counties. We entered into this transaction to assist us with filling in our geographic footprint between Seattle and Bellingham, Washington and to support our recently expanded Bellingham banking team. We believe participating with the FDIC in this assisted transaction was, from an economical standpoint, advantageous to expansion through de novo branching.

8

Table of Contents

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were provisionally recorded at their estimated fair values as of the May 27, 2011 acquisition date. The initial accounting for acquired loans and the related indemnification asset for the First Heritage Bank acquisition was incomplete as of June 30, 2011. The amounts recognized at June 30, 2011 were determined provisionally as the fair value analysis of those assets utilizing an income approach was not complete as of June 30, 2011. These amounts have been retrospectively adjusted to reflect the completion of the fair value analysis utilizing an income approach during the current period. The adjustment recorded in the current period was an increase in the FDIC indemnification asset of $427 thousand, a decrease in acquired loans of $369 thousand and a decrease in goodwill of $58 thousand. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process. All of the goodwill and core deposit intangible assets recognized are deductible for income tax purposes.
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period May 28, 2011 to September 30, 2011. Due primarily to the significant amount of fair value adjustments and the FDIC loss-sharing agreements put in place, historical results of First Heritage Bank are not meaningful to the Company’s results and thus no proforma information is presented.
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:
 
 
May 27, 2011
 
(in thousands)
Assets

Cash and due from banks
$
4,688

Interest-earning deposits with banks
6,689

Investment securities
5,303

Federal Home Loan Bank stock
477

Acquired loans
81,488

Accrued interest receivable
476

Premises and equipment
5,339

FDIC receivable
4,751

Other real estate owned covered by loss sharing
8,225

Goodwill
5,876

Core deposit intangible
1,337

FDIC indemnification asset
38,531

Other assets
1,804

Total assets acquired
$
164,984

Liabilities

Deposits
$
159,525

Federal Home Loan Bank advances
5,003

Accrued interest payable
421

Other liabilities
35

Total liabilities assumed
$
164,984


Bank of Whitman
On August 5, 2011 the Bank acquired certain assets and assumed certain liabilities of the Bank of Whitman from the FDIC in an FDIC-assisted transaction. The Bank and the FDIC entered into a modified whole bank purchase and assumption agreement without loss share. 
The Bank of Whitman was a full service community bank headquartered in Colfax, Washington.  We entered into this transaction to acquire nine branches total in Adams, Asotin, Grant, Spokane, Walla Walla, and Whitman counties to assist us with filling in our geographic footprint in eastern Washington. We believe participating with the FDIC in this assisted transaction was, from an economical standpoint, advantageous to expansion through de novo branching.

9

Table of Contents

 The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting (formerly the purchase method).  The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 5, 2011 acquisition date.  The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain, net of tax, of $1.8 million, which is included in the Gain on bank acquisition line item in the Consolidated Condensed Statements of Income, and a core deposit intangible of $3.9 million. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed and is influenced significantly by the FDIC-assisted transaction process. The core deposit intangible asset recognized is deductible for income tax purposes.
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period August 6, 2011 to September 30, 2011. Due to the exclusion of the majority of the non-performing loans and 11 branch locations, as well as the significant amount of fair value adjustments, historical results of the Bank of Whitman are not meaningful to the Company's results and thus no proforma information is presented.
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:
 
August 5, 2011
 
(in thousands)
Assets

Cash and due from banks
$
52,072

Investment securities
16,298

Federal Reserve Bank and Federal Home Loan Bank stock
3,977

Acquired loans
200,041

Accrued interest receivable
1,975

Premises and equipment
86

FDIC receivable
156,710

Core deposit intangible
3,943

Other assets
2,447

Total assets acquired
$
437,549

Liabilities


Deposits
401,127

Federal Home Loan Bank advances
32,949

Accrued interest payable
213

Deferred tax liability
1,034

Other liabilities
396

Total liabilities assumed
$
435,719

Net assets acquired (after tax gain)
$
1,830


10

Table of Contents


5.
Securities
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities available for sale:
 
(in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
September 30, 2011:
 

 

 

 

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
623,934

 
$
21,698

 
$
(906
)
 
$
644,726

State and municipal securities
 
256,343

 
20,189

 
(115
)
 
276,417

U.S. government and government-sponsored enterprise securities
 
70,857

 
523

 

 
71,380

Other securities
 
3,281

 
77

 
(27
)
 
3,331

Total
 
$
954,415

 
$
42,487

 
$
(1,048
)
 
$
995,854

December 31, 2010:
 

 

 

 

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
491,530

 
$
16,139

 
$
(1,027
)
 
$
506,642

State and municipal securities
 
249,117

 
7,247

 
(2,383
)
 
253,981

Other securities
 
3,281

 

 
(38
)
 
3,243

Total
 
$
743,928

 
$
23,386

 
$
(3,448
)
 
$
763,866


The scheduled contractual maturities of investment securities available for sale at September 30, 2011 are presented as follows:
 
 
 
September 30, 2011
 
 
Amortized Cost
 
Fair Value
 
 
(in thousands)
Due within one year
 
$
43,868

 
$
44,136

Due after one year through five years
 
91,742

 
94,242

Due after five years through ten years
 
168,119

 
176,815

Due after ten years
 
647,405

 
677,330

Total investment securities available-for-sale
 
$
951,134

 
$
992,523


The following table summarizes, as of September 30, 2011, the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:
 
(in thousands)
 
Carrying Amount
To Washington and Oregon State to secure public deposits
 
$
237,671

To Federal Home Loan Bank to secure advances
 
95,139

To Federal Reserve Bank to secure borrowings
 
55,947

Other securities pledged
 
50,080

Total securities pledged as collateral
 
$
438,837



11

Table of Contents

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010:
 
September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
(in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
119,998

 
$
(905
)
 
$
275

 
$
(1
)
 
$
120,273

 
(906
)
State and municipal securities
 
11,558

 
(97
)
 
1,204

 
(18
)
 
12,762

 
(115
)
U.S. government and government-sponsored enterprise securities
 
100

 

 

 

 
100

 

Other securities
 

 

 
973

 
(27
)
 
973

 
(27
)
Total
 
$
131,656

 
$
(1,002
)
 
$
2,452

 
$
(46
)
 
$
134,108

 
$
(1,048
)
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
(in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
86,529

 
$
(1,025
)
 
$
588

 
$
(2
)
 
$
87,117

 
$
(1,027
)
State and municipal securities
 
74,755

 
(2,099
)
 
2,792

 
(284
)
 
77,547

 
(2,383
)
Other securities
 
2,275

 
(6
)
 
968

 
(32
)
 
3,243

 
(38
)
Total
 
$
163,559

 
$
(3,130
)
 
$
4,348

 
$
(318
)
 
$
167,907

 
$
(3,448
)

The unrealized losses on the above securities are primarily attributable to increases in market interest rates subsequent to their purchase by the Company. Management does not intend to sell any impaired securities nor does available evidence suggest it is more likely than not that management will be required to sell any impaired securities. The Company’s securities portfolio does not include any private label mortgage backed securities or investments in trust preferred securities. Management believes the nature of securities in the Company’s investment portfolio present a very high probability of collecting all contractual amounts due, as the majority of the securities held are backed by government agencies or government-sponsored enterprises. However, this recovery in value may not occur for some time, perhaps greater than the one-year time horizon or perhaps even at maturity.


12

Table of Contents

6.
Noncovered Loans
Noncovered loans include loans originated through our branch network and loan departments as well as acquired loans, including discounted loans, that are not subject to FDIC loss share, including the loans acquired in the Bank of Whitman transaction described in Note 4.
The following is an analysis of the noncovered loan portfolio by major types of loans (net of unearned income):
 
(in thousands)
 
September 30,
2011
 
December 31,
2010
Noncovered loans:
 
 
 
 
Commercial Business
 
$
983,820

 
$
795,369

Real Estate:
 
 
 
 
One-to-four family residential
 
64,535

 
49,383

Commercial and multifamily residential
 
977,173

 
794,329

Total Real Estate
 
1,041,708

 
843,712

Real Estate Construction:
 
 
 
 
One-to-four family residential
 
52,287

 
67,961

Commercial and multifamily residential
 
27,181

 
30,185

Total Real Estate Construction
 
79,468

 
98,146

Consumer
 
176,667

 
182,017

Less: Net unearned income
 
(23,764
)
 
(3,490
)
Total noncovered loans, net of unearned income
 
2,257,899

 
1,915,754

Less: Allowance for loan and lease losses
 
(50,422
)
 
(60,993
)
Total noncovered loans, net
 
$
2,207,477

 
$
1,854,761

Loans held for sale
 
$
2,568

 
$
754


At September 30, 2011 and December 31, 2010, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington and Oregon.
The Company and its banking subsidiary have granted loans to officers and directors of the Company and related interests. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was $9.5 million and $12.9 million at September 30, 2011 and December 31, 2010, respectively. During the first nine months of 2011, advances on related party loans were $3.1 million and repayments totaled $6.5 million.
At September 30, 2011 and December 31, 2010, $401.6 million and $426.6 million of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank borrowings.

13

Table of Contents

The following is an analysis of noncovered, nonaccrual loans as of September 30, 2011 and December 31, 2010:
 
 
 
September 30, 2011
 
December 31, 2010
(in thousands)
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
Commercial Business
 
 
 
 
 
 
 
 
Secured
 
$
9,594

 
$
18,025

 
$
32,368

 
$
44,316

Unsecured
 
301

 
1,244

 

 
327

Real Estate:
 
 
 
 
 
 
 
 
One-to-four family residential
 
2,157

 
2,514

 
2,999

 
3,353

Commercial & multifamily residential
 
 
 
 
 
 
 
 
Commercial land
 
3,872

 
7,355

 
4,093

 
6,279

Income property multifamily
 
7,135

 
9,740

 
11,716

 
12,737

Owner occupied
 
9,845

 
10,908

 
7,407

 
8,990

Real Estate Construction:
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
Land and acquisition
 
7,817

 
15,952

 
11,608

 
21,344

Residential construction
 
3,164

 
4,691

 
6,503

 
11,547

Commercial & multifamily residential
 
 
 
 
 
 
 
 
Income property multifamily
 
7,622

 
14,963

 
7,585

 
12,916

Owner occupied
 

 

 

 

Consumer
 
3,545

 
4,390

 
5,022

 
5,192

Total
 
$
55,052

 
$
89,782

 
$
89,301

 
$
127,001

 


14

Table of Contents

The following is an analysis of the recorded investment of the aged loan portfolio as of September 30, 2011 and December 31, 2010:
 
(in thousands)
 
Current
Loans
 
30 - 59
Days
Past Due
 
60 - 89
Days
Past Due
 
Greater
than 90
Days Past
Due
 
Total
Past Due
 
Nonaccrual
Loans
 
Total Loans
September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Business
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
905,270

 
$
847

 
$
579

 
$

 
$
1,426

 
$
9,594

 
$
916,290

Unsecured
 
57,118

 
1,359

 
58

 

 
1,417

 
301

 
58,836

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
61,073

 
239

 
204

 

 
443

 
2,157

 
63,673

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
44,260

 

 

 

 

 
3,872

 
48,132

Income property multifamily
 
519,034

 
352

 
10

 

 
362

 
7,135

 
526,531

Owner occupied
 
378,541

 
2,488

 
931

 

 
3,419

 
9,845

 
391,805

Real Estate Construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
16,640

 
1,084

 
436

 

 
1,520

 
7,817

 
25,977

Residential construction
 
22,781

 

 

 

 

 
3,164

 
25,945

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property multifamily
 
5,168

 
1,011

 

 

 
1,011

 
7,622

 
13,801

Owner occupied
 
10,358

 

 

 

 

 

 
10,358

Consumer
 
172,094

 
465

 
447

 

 
912

 
3,545

 
176,551

Total
 
$
2,192,337

 
$
7,845

 
$
2,665

 
$

 
$
10,510

 
$
55,052

 
$
2,257,899

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Current
Loans
 
30 - 59
Days
Past Due
 
60 - 89
Days
Past Due
 
Greater
than 90
Days Past
Due
 
Total
Past Due
 
Nonaccrual
Loans
 
Total Loans
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Business
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
720,926

 
$
919

 
$
692

 
$
1

 
$
1,612

 
$
31,919

 
$
754,457

Unsecured
 
40,455

 
9

 

 

 
9

 
448

 
40,912

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
46,167

 
220

 

 

 
220

 
2,996

 
49,383

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
18,979

 

 
1,752

 

 
1,752

 
4,091

 
24,822

Income property multifamily
 
426,320

 
1,208

 
121

 

 
1,329

 
10,745

 
438,394

Owner occupied
 
318,508

 
497

 
3,752

 

 
4,249

 
8,356

 
331,113

Real Estate Construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
24,883

 
214

 
205

 

 
419