COLB 03.31.13 Pub.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 March 31, 2013.
¨
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 April 30, 2013 was 51,027,081.
 


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 BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
 
 
 
 
 
 
March 31,
2013
 
December 31,
2012
ASSETS
 
(in thousands)
Cash and due from banks
 
$
91,889

 
$
124,573

Interest-earning deposits with banks
 
356,056

 
389,353

Total cash and cash equivalents
 
447,945

 
513,926

Securities available for sale at fair value (amortized cost of $984,075 and $969,359, respectively)
 
1,012,162

 
1,001,665

Federal Home Loan Bank stock at cost
 
21,621

 
21,819

Loans held for sale
 
888

 
2,563

Loans, excluding covered loans, net of unearned income of ($6,985) and ($7,767), respectively
 
2,621,212

 
2,525,710

Less: allowance for loan and lease losses
 
51,119

 
52,244

Loans, excluding covered loans, net
 
2,570,093

 
2,473,466

Covered loans, net of allowance for loan losses of ($29,489) and ($30,056), respectively
 
363,213

 
391,337

Total loans, net
 
2,933,306

 
2,864,803

FDIC loss-sharing asset
 
83,115

 
96,354

Interest receivable
 
16,321

 
14,268

Premises and equipment, net
 
120,665

 
118,708

Other real estate owned ($13,811 and $16,311 covered by FDIC loss-share, respectively)
 
25,727

 
26,987

Goodwill
 
115,554

 
115,554

Core deposit intangible, net
 
14,693

 
15,721

Other assets
 
113,014

 
113,967

Total assets
 
$
4,905,011

 
$
4,906,335

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Noninterest-bearing
 
$
1,274,330

 
$
1,321,171

Interest-bearing
 
2,772,209

 
2,720,914

Total deposits
 
4,046,539

 
4,042,085

Federal Home Loan Bank advances
 
6,634

 
6,644

Securities sold under agreements to repurchase
 
25,000

 
25,000

Other liabilities
 
57,178

 
68,598

Total liabilities
 
4,135,351

 
4,142,327

Commitments and contingent liabilities
 

 

Shareholders’ equity:
 
 
 
 
 
 
 
 
March 31,
2013
 
December 31,
2012
 
 
 
 
Common stock (no par value)
 
 
 
 
 
 
 
Authorized shares
63,033

 
63,033

 
 
 
 
Issued and outstanding
39,844

 
39,686

 
582,348

 
581,471

Retained earnings
 
170,593

 
162,388

Accumulated other comprehensive income
 
16,719

 
20,149

Total shareholders’ equity
 
769,660

 
764,008

Total liabilities and shareholders’ equity
 
$
4,905,011

 
$
4,906,335


See accompanying Notes to unaudited Consolidated Financial Statements.

1

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
 
(in thousands except per share amounts)
Interest Income
 
 
 
 
Loans
 
$
48,028

 
$
61,777

Taxable securities
 
4,234

 
5,245

Tax-exempt securities
 
2,298

 
2,525

Federal funds sold and deposits in banks
 
201

 
165

Total interest income
 
54,761

 
69,712

Interest Expense
 
 
 
 
Deposits
 
1,089

 
1,779

Federal Home Loan Bank advances
 
71

 
750

Other borrowings
 
119

 
120

Total interest expense
 
1,279

 
2,649

Net Interest Income
 
53,482

 
67,063

Provision (recapture) for loan and lease losses
 
(1,000
)
 
4,500

Provision for losses on covered loans
 
980

 
15,685

Net interest income after provision for loan and lease losses
 
53,502

 
46,878

Noninterest Income
 
 
 
 
Service charges and other fees
 
7,594

 
7,177

Merchant services fees
 
1,851

 
2,018

Investment securities gains, net
 
370

 
62

Bank owned life insurance
 
698

 
711

Change in FDIC loss-sharing asset
 
(10,483
)
 
(1,668
)
Other
 
1,628

 
1,274

Total noninterest income
 
1,658

 
9,574

Noninterest Expense
 
 
 
 
Compensation and employee benefits
 
21,653

 
21,995

Occupancy
 
4,753

 
5,333

Merchant processing
 
857

 
873

Advertising and promotion
 
870

 
882

Data processing and communications
 
2,580

 
2,213

Legal and professional fees
 
2,050

 
1,609

Taxes, licenses and fees
 
1,387

 
1,355

Regulatory premiums
 
857

 
860

Net cost (benefit) of operation of other real estate owned
 
(2,501
)
 
910

Amortization of intangibles
 
1,029

 
1,150

Other
 
4,514

 
7,172

Total noninterest expense
 
38,049

 
44,352

Income before income taxes
 
17,111

 
12,100

Income tax provision
 
4,935

 
3,198

Net Income
 
$
12,176

 
$
8,902

Earnings per common share
 
 
 
 
Basic
 
$
0.31

 
$
0.22

Diluted
 
$
0.31

 
$
0.22

Dividends paid per common share
 
$
0.10

 
$
0.37

Weighted average number of common shares outstanding
 
39,348

 
39,195

Weighted average number of diluted common shares outstanding
 
39,351

 
39,298






See accompanying Notes to unaudited Consolidated Financial Statements.

2

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Columbia Banking System, Inc.
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
 
(in thousands)
Net income as reported
 
$
12,176

 
$
8,902

Unrealized loss from securities:
 
 
 
 
Net unrealized holding loss from available for sale securities arising during the period, net of tax of $1,357 and $926
 
(2,493
)
 
(1,645
)
Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $130 and $22
 
(240
)
 
(40
)
Net unrealized loss from securities, net of reclassification adjustment
 
(2,733
)
 
(1,685
)
Pension plan liability adjustment:
 
 
 
 
Net unrealized loss from unfunded defined benefit plan liability arising during the period, net of tax of $412 and $0
 
(757
)
 

Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($32) and ($7)
 
60

 
13

Pension plan liability adjustment, net
 
(697
)
 
13

Total comprehensive income
 
$
8,746

 
$
7,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying Notes to unaudited Consolidated Financial Statements.


3

Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Columbia Banking System, Inc.
(Unaudited)
 
  
 
Common Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
 
Number of
Shares
 
Amount
 
 
 
(in thousands)
Balance at January 1, 2012
 
39,506

 
$
579,136

 
$
155,069

 
$
25,133

 
$
759,338

Net income
 

 

 
8,902

 

 
8,902

Other comprehensive loss
 

 

 

 
(1,672
)
 
(1,672
)
Issuance of common stock - stock option and other plans
 
18

 
308

 

 

 
308

Issuance of common stock - restricted stock awards, net of canceled awards
 
146

 
450

 

 

 
450

Cash dividends paid on common stock
 

 

 
(14,623
)
 

 
(14,623
)
Balance at March 31, 2012
 
39,670

 
$
579,894

 
$
149,348

 
$
23,461

 
$
752,703

Balance at January 1, 2013
 
39,686

 
$
581,471

 
$
162,388

 
$
20,149

 
$
764,008

Net income
 

 

 
12,176

 

 
12,176

Other comprehensive income
 

 

 

 
(3,430
)
 
(3,430
)
Issuance of common stock - stock option and other plans
 
18

 
326

 

 

 
326

Issuance of common stock - restricted stock awards, net of canceled awards
 
140

 
551

 

 

 
551

Cash dividends paid on common stock
 

 

 
(3,971
)
 

 
(3,971
)
Balance at March 31, 2013
 
39,844

 
$
582,348

 
$
170,593

 
$
16,719

 
$
769,660

















See accompanying Notes to unaudited Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
(in thousands)
Cash Flows From Operating Activities
 
 
 
 
Net Income
 
$
12,176

 
$
8,902

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Provision (recapture) for loan and lease losses and losses on covered loans
 
(20
)
 
20,185

Stock-based compensation expense
 
551

 
450

Depreciation, amortization and accretion
 
13,015

 
16,141

Investment securities gain, net
 
(370
)
 
(62
)
Net realized gain on sale of other assets
 
(80
)
 
(21
)
Net realized gain on sale of other real estate owned
 
(2,787
)
 
(2,954
)
Write-down on other real estate owned
 
158

 
3,127

Net change in:
 
 
 
 
Loans held for sale
 
1,675

 
82

Interest receivable
 
(2,053
)
 
(750
)
Interest payable
 
(40
)
 
(148
)
Other assets
 
3,192

 
(1,166
)
Other liabilities
 
(11,739
)
 
(8,403
)
Net cash provided by operating activities
 
13,678

 
35,383

Cash Flows From Investing Activities
 
 
 
 
Loans originated and acquired, net of principal collected
 
(71,815
)
 
(16,814
)
Purchases of:
 
 
 
 
Securities available for sale
 
(84,673
)
 
(30,177
)
Premises and equipment
 
(3,624
)
 
(6,682
)
Proceeds from:
 
 
 
 
FDIC reimbursement on loss-sharing asset
 
3,119

 
14,804

Sales of securities available for sale
 
3,023

 
3,845

Principal repayments and maturities of securities available for sale
 
64,758

 
49,654

Sales of other assets
 
287

 

Sales of covered other real estate owned
 
6,438

 
8,025

Sales of other real estate and other personal property owned
 
2,019

 
7,829

Capital improvements on other real estate properties
 

 
(90
)
Net cash (used in) provided by investing activities
 
(80,468
)
 
30,394

Cash Flows From Financing Activities
 
 
 
 
Net increase in deposits
 
4,454

 
49,916

Proceeds from:
 
 
 
 
Federal Home Loan Bank advances
 
100

 

Federal Reserve Bank borrowings
 
50

 

Exercise of stock options
 
326

 
308

Payments for:
 
 
 
 
Repayment of Federal Home Loan Bank advances
 
(100
)
 
(4,210
)
Repayment of Federal Reserve Bank borrowings
 
(50
)
 

Common stock dividends
 
(3,971
)
 
(14,623
)
Net cash provided by financing activities
 
809

 
31,391

Increase (Decrease) in cash and cash equivalents
 
(65,981
)
 
97,168

Cash and cash equivalents at beginning of period
 
513,926

 
294,289

Cash and cash equivalents at end of period
 
$
447,945

 
$
391,457

Supplemental Information:
 
 
 
 
Cash paid during the year for:
 
 
 
 
Cash paid for interest
 
$
1,319

 
$
2,797

Cash paid for income tax
 
$
5,500

 
$

Non-cash investing activities
 
 
 
 
Loans transferred to other real estate owned
 
$
4,114

 
$
6,092





See accompanying Notes to unaudited Consolidated Financial Statements.

5

Table of Contents

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated 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 three months ended March 31, 2013 are not necessarily indicative of results to be anticipated for the year ending December 31, 2013. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2012 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 2012 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2012 Form 10-K disclosure for the year ended December 31, 2012, except for the adoption of ASU 2012-06 as noted below.
2.
Accounting Pronouncements Recently Issued
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The Update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The Company adopted the ASU 2013-02 reporting requirements during the current period with no impact to the Company's financial condition or results of operations. See Note 11 to the Consolidated Financial Statements of this report for new disclosures related to accumulated other comprehensive income.
In October 2012, the FASB issued ASU 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. ASU 2012-06 clarifies that when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and there is a subsequent change in the amount of cash flows expected to be collected on the indemnified asset, the reporting entity should subsequently measure the indemnification asset on the same basis as the underlying loans by taking into account the contractual limitations of the Loss-Sharing Agreement ("LSA"). For amortization of changes in value, the reporting entity should use the term of the indemnification agreement if it is shorter than the term of the acquired loans. ASU 2012-06 is effective for interim and annual periods beginning after December 15, 2012. The Company adopted the ASU as of January 1, 2013. As a result of the adoption of the ASU, an additional $2.5 million of indemnification asset amortization was recorded during the period, resulting in a reduction of $1.6 million in net income and $0.04 in earnings per share.

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3.
Securities
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities available for sale:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(in thousands)
March 31, 2013
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
502,652

 
$
15,484

 
$
(6,181
)
 
$
511,955

State and municipal securities
 
256,608

 
19,586

 
(589
)
 
275,605

U.S. government agency and government-sponsored enterprise securities
 
201,680

 
828

 
(981
)
 
201,527

U.S. government securities
 
19,811

 

 
(105
)
 
19,706

Other securities
 
3,324

 
87

 
(42
)
 
3,369

Total
 
$
984,075

 
$
35,985

 
$
(7,898
)
 
$
1,012,162

December 31, 2012
 

 

 

 

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
561,076

 
$
16,719

 
$
(5,426
)
 
$
572,369

State and municipal securities
 
265,070

 
20,893

 
(388
)
 
285,575

U.S. government agency and government-sponsored enterprise securities
 
120,085

 
851

 
(435
)
 
120,501

U.S. government securities
 
19,804

 
39

 
(15
)
 
19,828

Other securities
 
3,324

 
104

 
(36
)
 
3,392

Total
 
$
969,359

 
$
38,606

 
$
(6,300
)
 
$
1,001,665

The scheduled contractual maturities of investment securities available for sale at March 31, 2013 are presented as follows:
 
 
March 31, 2013
 
 
Amortized Cost
 
Fair Value
 
 
(in thousands)
Due within one year
 
$
17,771

 
$
18,025

Due after one year through five years
 
158,054

 
161,996

Due after five years through ten years
 
244,429

 
249,097

Due after ten years
 
560,497

 
579,677

Other securities with no stated maturity
 
3,324

 
3,367

Total investment securities available-for-sale
 
$
984,075

 
$
1,012,162

The following table summarizes, as of March 31, 2013, the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:
 
 
Carrying Amount
 
 
(in thousands)
To Washington and Oregon State to secure public deposits
 
$
282,025

To Federal Reserve Bank to secure borrowings
 
45,405

Other securities pledged
 
44,948

Total securities pledged as collateral
 
$
372,378


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The following table shows 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 March 31, 2013 and December 31, 2012:  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(in thousands)
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
160,587

 
(5,914
)
 
11,250

 
(267
)
 
171,837

 
(6,181
)
State and municipal securities
 
21,513

 
(584
)
 
210

 
(5
)
 
21,723

 
(589
)
U.S. government agency and government-sponsored enterprise securities
 
137,814

 
(981
)
 

 

 
137,814

 
(981
)
U.S. government securities
 
19,706

 
(105
)
 

 

 
19,706

 
(105
)
Other securities
 

 

 
958

 
(42
)
 
958

 
(42
)
Total
 
339,620

 
(7,584
)
 
12,418

 
(314
)
 
352,038

 
(7,898
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
167,739

 
(5,090
)
 
12,204

 
(336
)
 
179,943

 
(5,426
)
State and municipal securities
 
20,413

 
(383
)
 
210

 
(5
)
 
20,623

 
(388
)
U.S. government agency and government-sponsored enterprise securities
 
56,600

 
(435
)
 

 

 
56,600

 
(435
)
U.S. government securities
 
9,914

 
(15
)
 

 

 
9,914

 
(15
)
Other securities
 

 

 
964

 
(36
)
 
964

 
(36
)
Total
 
254,666

 
(5,923
)
 
13,378

 
(377
)
 
268,044

 
(6,300
)
At March 31, 2013, there were 18 U.S. government agency and government-sponsored enterprise mortgage-backed securities & collateralized mortgage obligations securities in an unrealized loss position, of which one was in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.
At March 31, 2013, there were 15 state and municipal government securities in an unrealized loss position, of which one was in a continuous loss position for 12 months or more. The unrealized losses on state and municipal securities were caused by interest rate changes or widening of market spreads subsequent to the purchase of the individual securities. Management monitors published credit ratings of these securities for adverse changes. As of March 31, 2013, none of the rated obligations of state and local government entities held by the Company had a below investment grade credit rating. Because the credit quality of these securities are investment grade and the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.
At March 31, 2013, there were 11 U.S. government agency and government-sponsored enterprise securities in an unrealized loss position, of which none were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not currently intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.
At March 31, 2013, there were two U.S. government securities in an unrealized loss position, neither of which was in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not

8

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currently intend to sell this security nor does the Company consider it more likely than not that it will be required to sell this security before the recovery of amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2013.
At March 31, 2013, there was one other security, a mortgage-backed securities fund in a continuous unrealized loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates and the additional risk premium investors are demanding for investment securities with these characteristics. The Company does not consider this investment to be other-than-temporarily impaired at March 31, 2013 as it has the intent and ability to hold the investment for sufficient time to allow for recovery in the market value.
4.
Noncovered Loans
Noncovered loans include loans originated through our branch network and loan departments as well as acquired loans that are not subject to FDIC loss-sharing agreements.
The following is an analysis of the noncovered loan portfolio by major types of loans (net of unearned income):
 
 
March 31,
2013
 
December 31,
2012
Noncovered loans:
 
(in thousands)
Commercial business
 
$
1,204,760

 
$
1,155,158

Real estate:
 
 
 
 
One-to-four family residential
 
43,604

 
43,922

Commercial and multifamily residential
 
1,106,987

 
1,061,201

Total real estate
 
1,150,591

 
1,105,123

Real estate construction:
 
 
 
 
One-to-four family residential
 
52,946

 
50,602

Commercial and multifamily residential
 
67,213

 
65,101

Total real estate construction
 
120,159

 
115,703

Consumer
 
152,687

 
157,493

Less: Net unearned income
 
(6,985
)
 
(7,767
)
Total noncovered loans, net of unearned income
 
2,621,212

 
2,525,710

Less: Allowance for loan and lease losses
 
(51,119
)
 
(52,244
)
Total noncovered loans, net
 
$
2,570,093

 
$
2,473,466

Loans held for sale
 
$
888

 
$
2,563

At March 31, 2013 and December 31, 2012, the Company had no material foreign activities. 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 has 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 $13.7 million and $14.2 million at March 31, 2013 and December 31, 2012, respectively. During the first three months of 2013, advances on related party loans were $475 thousand and repayments totaled $948 thousand.
At March 31, 2013 and December 31, 2012, $463.7 million and $443.4 million of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank borrowings and additional borrowing capacity. The Company has also pledged $17.4 million and $13.8 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at March 31, 2013 and December 31, 2012, respectively.

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Table of Contents

The following is an analysis of noncovered, nonaccrual loans as of March 31, 2013 and December 31, 2012:
 
 
March 31, 2013
 
December 31, 2012
 
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
Noncovered loans:
 
(in thousands)
Commercial business
 
 
 
 
 
 
 
 
Secured
 
$
9,383

 
$
16,192

 
$
9,037

 
$
17,821

Unsecured
 
121

 
121

 
262

 
262

Real estate:
 
 
 
 
 
 
 
 
One-to-four family residential
 
1,684

 
2,023

 
2,349

 
2,672

Commercial & multifamily residential
 
 
 
 
 
 
 
 
Commercial land
 
3,347

 
6,701

 
4,076

 
7,491

Income property
 
8,230

 
11,439

 
8,520

 
10,815

Owner occupied
 
5,825

 
6,997

 
6,608

 
7,741

Real estate construction:
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
Land and acquisition
 
2,646

 
5,841

 
3,084

 
6,704

Residential construction
 
388

 
388

 
1,816

 
2,431

Consumer
 
1,262

 
1,559

 
1,643

 
1,940

Total
 
$
32,886

 
$
51,261

 
$
37,395

 
$
57,877


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Table of Contents

 The following is an aging of the recorded investment of the noncovered loan portfolio as of March 31, 2013 and December 31, 2012:
 
 
 
Current
Loans
 
30 - 59
Days
Past Due
 
60 - 89
Days
Past Due
 
Total
Past Due
 
Nonaccrual
Loans
 
Total Loans
March 31, 2013
 
(in thousands)
Noncovered loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
1,142,942

 
$
3,739

 
$
1,154

 
$
4,893

 
$
9,383

 
$
1,157,218

Unsecured
 
43,918

 
112

 
164

 
276

 
121

 
44,315

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
41,330

 
849

 
61

 
910

 
1,684

 
43,924

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
43,785

 
1,006

 

 
1,006

 
3,347

 
48,138

Income property
 
645,058

 
2,434

 

 
2,434

 
8,230

 
655,722

Owner occupied
 
389,803

 
2,525

 
1,621

 
4,146

 
5,825

 
399,774

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
18,330

 
204

 
314

 
518

 
2,646

 
21,494

Residential construction
 
30,768

 

 

 

 
388

 
31,156

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
24,479

 

 

 

 

 
24,479

Owner occupied
 
42,192

 

 

 

 

 
42,192

Consumer
 
150,423

 
885

 
230

 
1,115

 
1,262

 
152,800

Total
 
$
2,573,028

 
$
11,754

 
$
3,544

 
$
15,298

 
$
32,886

 
$
2,621,212

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
Loans
 
30 - 59
Days
Past Due
 
60 - 89
Days
Past Due
 
Total
Past Due
 
Nonaccrual
Loans
 
Total Loans
December 31, 2012
 
(in thousands)
Noncovered loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
1,091,770

 
$
4,259

 
$
1,485

 
$
5,744

 
$
9,037

 
$
1,106,551

Unsecured
 
44,817

 
252

 
12

 
264

 
262

 
45,343

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
41,508

 
193

 
142

 
335

 
2,349

 
44,192

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
42,818

 
311

 
122

 
433

 
4,076

 
47,327

Income property
 
603,339

 
2,726

 
227

 
2,953

 
8,520

 
614,812

Owner occupied
 
387,525

 
1,040

 

 
1,040

 
6,608

 
395,173

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
15,412

 

 

 

 
3,084

 
18,496

Residential construction
 
29,848

 

 

 

 
1,816

 
31,664

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
28,342

 

 

 

 

 
28,342

Owner occupied
 
36,211

 

 

 

 

 
36,211

Consumer
 
155,207

 
387

 
362

 
749

 
1,643

 
157,599

Total
 
$
2,476,797

 
$
9,168

 
$
2,350

 
$
11,518

 
$
37,395

 
$
2,525,710


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Table of Contents

The following is an analysis of impaired loans as of March 31, 2013 and December 31, 2012: 
 
 
Recorded Investment
of Loans
Collectively Measured
for Contingency
Provision
 
Recorded Investment
of Loans
Individually
Measured for
Specific
Impairment
 
Impaired Loans With
Recorded Allowance
 
Impaired Loans Without
Recorded Allowance
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
March 31, 2013
 
(in thousands)
Noncovered loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
1,152,246

 
$
4,972

 
$
293

 
$
414

 
$
67

 
$
4,680

 
$
7,488

Unsecured
 
44,231

 
84

 
84

 
84

 
84

 

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
42,380

 
1,544

 
340

 
362

 
108

 
1,204

 
1,341

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
45,366

 
2,772

 

 

 

 
2,772

 
5,845

Income property
 
646,457

 
9,265

 
18

 
66

 
18

 
9,246

 
12,442

Owner occupied
 
388,437

 
11,337

 
605

 
606

 
34

 
10,732

 
14,135

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
18,914

 
2,580

 
117

 
116

 
74

 
2,463

 
4,033

Residential construction
 
31,011

 
145

 

 

 

 
145

 
144

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
24,479

 

 

 

 

 

 

Owner occupied
 
42,192

 

 

 

 

 

 

Consumer
 
152,674

 
126

 

 

 

 
126

 
126

Total
 
$
2,588,387

 
$
32,825

 
$
1,457

 
$
1,648

 
$
385

 
$
31,368

 
$
45,554

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
Recorded Investment
of Loans
Collectively Measured
for Contingency
Provision
 
Recorded Investment
of Loans
Individually
Measured for
Specific
Impairment
 
Impaired Loans With
Recorded Allowance
 
Impaired Loans Without
Recorded Allowance
 
 
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
December 31, 2012
 
(in thousands)
Noncovered loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
1,101,689

 
$
4,862

 
$
690

 
$
1,994

 
$
113

 
$
4,172

 
$
6,769

Unsecured
 
45,251

 
92

 
92

 
92

 
92

 

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
42,103

 
2,089

 
345

 
364

 
112

 
1,744

 
1,902

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
44,672

 
2,655

 

 

 

 
2,655

 
5,727

Income property
 
606,656

 
8,156

 
2,670

 
2,727

 
1,040

 
5,486

 
7,860

Owner occupied
 
383,269

 
11,904

 
608

 
610

 
38

 
11,296

 
14,642

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
15,677

 
2,819

 

 

 

 
2,819

 
4,813

Residential construction
 
29,707

 
1,957

 

 

 

 
1,957

 
2,570

Commercial & multifamily residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
28,342

 

 

 

 

 

 

Owner occupied
 
36,211

 

 

 

 

 

 

Consumer
 
157,472

 
127

 

 

 

 
127

 
127

Total
 
$
2,491,049

 
$
34,661

 
$
4,405

 
$
5,787

 
$
1,395

 
$
30,256

 
$
44,410


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The following table provides additional information on impaired loans for the three month periods indicated.
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
Noncovered loans:
 
(in thousands)
Commercial business
 
 
 
 
 
 
 
 
Secured
 
$
4,917

 
$
4

 
$
9,709

 
$
309

Unsecured
 
88

 
1

 
119

 
1

Real estate:
 
 
 
 
 
 
 
 
One-to-four family residential
 
1,816

 
4

 
2,266

 
1

Commercial & multifamily residential
 
 
 
 
 
 
 
 
Commercial land
 
2,714

 

 
3,405

 

Income property
 
8,710

 
29

 
8,083

 
115

Owner occupied
 
11,620

 
279

 
14,152

 
107

Real estate construction:
 
 
 
 
 
 
 
 
One-to-four family residential
 
 
 
 
 
 
 
 
Land and acquisition
 
2,700

 
1

 
6,539

 

Residential construction
 
1,051

 
2

 
4,286

 
358

Commercial & multifamily residential
 
 
 
 
 
 
 
 
Income property
 

 

 
6,045

 

Consumer
 
127

 
2

 
1,672

 

Total
 
$
33,743

 
$
322

 
$
56,276

 
$
891

There were no Troubled Debt Restructurings ("TDR") during the three months ended March 31, 2012. The following is an analysis of loans classified as TDR during the three months ended March 31, 2013:
 
 
Three months ended March 31, 2013
 
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
Noncovered loans:
 
(dollars in thousands)
Real estate construction:
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
Land and acquisition
 
1

 
$
117

 
$
117

Total
 
1

 
$
117

 
$
117

 
 
The Company's loans classified as TDR are loans that have been modified or the borrower has been granted special concessions due to financial difficulties that, if not for the challenges of the borrower, the Company would not otherwise consider. The Company had commitments to lend $1.8 million and $236 thousand of additional funds on loans classified as TDR as of March 31, 2013 and December 31, 2012, respectively. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended. Credit losses for loans classified as TDR are measured on the same basis as impaired loans. For impaired loans, an allowance is established when the collateral value less selling costs (or discounted cash flows or observable market price) of the impaired loan is lower than the recorded investment of that loan. The Company did not have any loans modified as TDR within the past twelve months that have defaulted during the three months ended March 31, 2013.

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Table of Contents

5.
Allowance for Noncovered Loan and Lease Losses and Unfunded Commitments and Letters of Credit
We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:
1.
General valuation allowance consistent with the Contingencies topic of the FASB Accounting Standards Codification ("ASC").
2.
Classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with the Receivables topic of the FASB ASC.
3.
The unallocated allowance provides for other factors inherent in our loan portfolio that may not have been contemplated in the general and specific components of the allowance. This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed quarterly based on trends in credit losses, the results of credit reviews and overall economic trends.
The general valuation allowance is systematically calculated quarterly using quantitative and qualitative information about specific loan classes. The minimum required level an entity develops a methodology to determine its allowance for loan and lease losses is by general categories of loans, such as commercial business, real estate, and consumer. However, the Company’s methodology in determining its allowance for loan and lease losses is prepared in a more detailed manner at the loan class level, utilizing specific categories such as commercial business secured, commercial business unsecured, real estate commercial land, and real estate income property multifamily. The quantitative information uses historical losses from a specific loan class and incorporates the loan’s risk rating migration from origination to the point of loss based upon the consideration of an appropriate look back period.
A loan’s risk rating is primarily determined based upon the borrower’s ability to fulfill its debt obligation from a cash flow perspective. In the event there is financial deterioration of the borrower, the borrower’s other sources of income or repayment are also considered, including recent appraisal values for collateral dependent loans. The qualitative information takes into account general economic and business conditions affecting our marketplace, seasoning of the loan portfolio, duration of the business cycle, etc. to ensure our methodologies reflect the current economic environment and other factors as using historical loss information exclusively may not give an accurate estimate of inherent losses within the Company’s loan portfolio.
When a loan is deemed to be impaired, the Company has to determine if a specific valuation allowance is required for that loan. The specific valuation allowance is a reserve, calculated at the individual loan level, for each loan determined to be both impaired and containing a value less than its recorded investment. The Company measures the impairment based on the discounted expected future cash flows, observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent or if foreclosure is probable. The specific reserve for each loan is equal to the difference between the recorded investment in the loan and its determined impairment value.
The ALLL is increased by provisions for loan and lease losses (“provision”) charged to expense, and is reduced by loans charged off, net of recoveries or a recovery of previous provisions. While the Company’s management believes the best information available is used to determine the ALLL, changes in market conditions could result in adjustments to the ALLL, affecting net income, if circumstances differ from the assumptions used in determining the ALLL.
We have used the same methodology for ALLL calculations during the three months ended March 31, 2013 and 2012. Adjustments to the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each class of loans. The Company reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments when appropriate. The Company continues to strive towards maintaining a conservative approach to credit quality and will continue to prudently adjust our ALLL as necessary in order to maintain adequate reserves. The Company carefully monitors the loan portfolio and continues to emphasize the importance of credit quality.
Once it is determined that all or a portion of a loan balance is uncollectable, and the amount can be reasonably estimated, the uncollectable portion of the loan is charged-off.

14

Table of Contents

The following tables show a detailed analysis of the allowance for loan and lease losses for noncovered loans for the three months ended March 31, 2013 and 2012: