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 June 30, 2015.
¨
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 July 31, 2015 was 57,734,127.
 



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



PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
 
 
 
 
 
 
June 30,
2015
 
December 31,
2014
ASSETS
 
(in thousands)
Cash and due from banks
 
$
172,139

 
$
171,221

Interest-earning deposits with banks
 
5,564

 
16,949

Total cash and cash equivalents
 
177,703

 
188,170

Securities available for sale at fair value (amortized cost of $1,907,403 and $2,087,069, respectively)
 
1,914,445

 
2,098,257

Federal Home Loan Bank stock at cost
 
11,803

 
33,365

Loans held for sale
 
4,220

 
1,116

Loans, net of unearned income of ($49,359) and ($59,374), respectively
 
5,611,897

 
5,445,378

Less: allowance for loan and lease losses
 
69,257

 
69,569

Loans, net
 
5,542,640

 
5,375,809

FDIC loss-sharing asset
 
9,344

 
15,174

Interest receivable
 
27,483

 
27,802

Premises and equipment, net
 
170,380

 
172,090

Other real estate owned
 
20,617

 
22,190

Goodwill
 
382,537

 
382,537

Other intangible assets, net
 
26,924

 
30,459

Other assets
 
229,923

 
231,877

Total assets
 
$
8,518,019

 
$
8,578,846

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Noninterest-bearing
 
$
3,207,538

 
$
2,651,373

Interest-bearing
 
3,836,835

 
4,273,349

Total deposits
 
7,044,373

 
6,924,722

Federal Home Loan Bank advances
 
45,549

 
216,568

Securities sold under agreements to repurchase
 
92,230

 
105,080

Other borrowings
 

 
8,248

Other liabilities
 
99,653

 
96,053

Total liabilities
 
7,281,805

 
7,350,671

Commitments and contingent liabilities
 

 

Shareholders’ equity:
 
 
 
 
 
 
 
 
June 30,
2015
 
December 31,
2014
 
 
 
 
Preferred stock (no par value)
(in thousands)
 
 
 
 
Authorized shares
2,000

 
2,000

 
 
 
 
Issued and outstanding
9

 
9

 
2,217

 
2,217

Common stock (no par value)
 
 
 
 
 
 
 
Authorized shares
115,000

 
63,033

 
 
 
 
Issued and outstanding
57,709

 
57,437

 
987,320

 
985,839

Retained earnings
 
243,888

 
234,498

Accumulated other comprehensive income
 
2,789

 
5,621

Total shareholders’ equity
 
1,236,214

 
1,228,175

Total liabilities and shareholders’ equity
 
$
8,518,019

 
$
8,578,846

See accompanying Notes to unaudited Consolidated Financial Statements.

1


CONSOLIDATED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands except per share amounts)
Interest Income
 
 
 
 
 
 
 
 
Loans
 
$
71,744

 
$
67,004

 
$
142,566

 
$
132,545

Taxable securities
 
7,260

 
6,382

 
14,786

 
13,134

Tax-exempt securities
 
3,010

 
2,671

 
6,052

 
5,289

Deposits in banks
 
26

 
30

 
53

 
44

Total interest income
 
82,040

 
76,087

 
163,457

 
151,012

Interest Expense
 
 
 
 
 
 
 
 
Deposits
 
740

 
729

 
1,488

 
1,481

Federal Home Loan Bank advances
 
154

 
115

 
313

 
229

Other borrowings
 
136

 
119

 
282

 
238

Total interest expense
 
1,030

 
963

 
2,083

 
1,948

Net Interest Income
 
81,010

 
75,124

 
161,374

 
149,064

Provision for loan and lease losses
 
2,202

 
2,117

 
3,411

 
4,039

Net interest income after provision for loan and lease losses
 
78,808

 
73,007

 
157,963

 
145,025

Noninterest Income
 
 
 
 
 
 
 
 
Service charges and other fees
 
15,874

 
13,790

 
30,743

 
26,726

Merchant services fees
 
2,340

 
2,040

 
4,380

 
3,910

Investment securities gains, net
 
343

 
296

 
1,064

 
519

Bank owned life insurance
 
1,206

 
976

 
2,284

 
1,941

Change in FDIC loss-sharing asset
 
(1,494
)
 
(5,050
)
 
(1,344
)
 
(9,869
)
Other
 
3,193

 
2,575

 
7,102

 
5,408

Total noninterest income
 
21,462

 
14,627

 
44,229

 
28,635

Noninterest Expense
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
38,446

 
31,064

 
77,546

 
62,402

Occupancy
 
8,687

 
8,587

 
16,680

 
16,831

Merchant processing
 
1,079

 
998

 
2,056

 
1,978

Advertising and promotion
 
1,195

 
950

 
2,126

 
1,719

Data processing and communications
 
4,242

 
3,680

 
9,226

 
7,200

Legal and professional fees
 
2,847

 
2,303

 
5,354

 
4,472

Taxes, licenses and fees
 
1,427

 
1,051

 
2,659

 
2,231

Regulatory premiums
 
1,321

 
1,073

 
2,542

 
2,249

Net cost (benefit) of operation of other real estate owned
 
(563
)
 
(97
)
 
(1,809
)
 
49

Amortization of intangibles
 
1,718

 
1,480

 
3,535

 
3,060

Other
 
8,072

 
6,675

 
15,290

 
12,959

Total noninterest expense
 
68,471

 
57,764

 
135,205

 
115,150

Income before income taxes
 
31,799

 
29,870

 
66,987

 
58,510

Income tax provision
 
9,853

 
8,643

 
20,680

 
17,439

Net Income
 
$
21,946

 
$
21,227

 
$
46,307

 
$
41,071

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.38

 
$
0.40

 
$
0.80

 
$
0.79

Diluted
 
$
0.38

 
$
0.40

 
$
0.80

 
$
0.77

Dividends paid per common share
 
$
0.34

 
$
0.24

 
$
0.64

 
$
0.36

Weighted average number of common shares outstanding
 
57,055

 
52,088

 
56,999

 
51,600

Weighted average number of diluted common shares outstanding
 
57,069

 
52,494

 
57,012

 
52,463

See accompanying Notes to unaudited Consolidated Financial Statements.

2


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Columbia Banking System, Inc.
(Unaudited)
 
 
 
Three Months Ended
 
 
June 30,
 
 
2015
 
2014
 
 
(in thousands)
Net income as reported
 
$
21,946

 
$
21,227

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain (loss) from securities:
 
 
 
 
Net unrealized holding gain (loss) from available for sale securities arising during the period, net of tax of $6,457 and ($4,992)
 
(11,341
)
 
8,768

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $124 and $107
 
(219
)
 
(189
)
Net unrealized gain (loss) from securities, net of reclassification adjustment
 
(11,560
)
 
8,579

Pension plan liability adjustment:
 
 
 
 
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($35) and ($13)
 
63

 
24

Pension plan liability adjustment, net
 
63

 
24

Other comprehensive income (loss)
 
(11,497
)
 
8,603

Total comprehensive income
 
$
10,449

 
$
29,830

 
 
Six Months Ended
 
 
June 30,
 
 
2015
 
2014
 
 
(in thousands)
Net income as reported
 
$
46,307

 
$
41,071

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain (loss) from securities:
 
 
 
 
Net unrealized holding gain (loss) from available for sale securities arising during the period, net of tax of $1,119 and ($9,041)
 
(1,965
)
 
15,887

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $386 and $188
 
(678
)
 
(331
)
Net unrealized gain (loss) from securities, net of reclassification adjustment
 
(2,643
)
 
15,556

Pension plan liability adjustment:
 
 
 
 
Net unrealized loss from unfunded defined benefit plan liability arising during the period, net of tax of $159 and $0
 
(280
)
 

Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($51) and ($26)
 
91

 
48

Pension plan liability adjustment, net
 
(189
)
 
48

Other comprehensive income (loss)
 
(2,832
)
 
15,604

Total comprehensive income
 
$
43,475

 
$
56,675

See accompanying Notes to unaudited Consolidated Financial Statements.


3


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Columbia Banking System, Inc.
(Unaudited)
 
  
 
Preferred Stock
 
Common Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
 
Number of
Shares
 
Amount
 
Number of
Shares
 
Amount
 
 
 
(in thousands)
Balance at January 1, 2015
 
9

 
$
2,217

 
57,437

 
$
985,839

 
$
234,498

 
$
5,621

 
$
1,228,175

Net income
 

 

 

 

 
46,307

 

 
46,307

Other comprehensive loss
 

 

 

 

 

 
(2,832
)
 
(2,832
)
Issuance of common stock - stock option and other plans
 

 

 
21

 
519

 

 

 
519

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

 

 
282

 
1,836

 

 

 
1,836

Purchase and retirement of common stock
 

 

 
(31
)
 
(874
)
 

 

 
(874
)
Preferred dividends
 

 

 

 

 
(66
)
 

 
(66
)
Cash dividends paid on common stock
 

 

 

 

 
(36,851
)
 

 
(36,851
)
Balance at June 30, 2015
 
9

 
$
2,217

 
57,709

 
$
987,320

 
$
243,888

 
$
2,789

 
$
1,236,214

Balance at January 1, 2014
 
9

 
$
2,217

 
51,265

 
$
860,562

 
$
202,514

 
$
(12,044
)
 
$
1,053,249

Net income
 

 

 

 

 
41,071

 

 
41,071

Other comprehensive income
 

 

 

 

 

 
15,604

 
15,604

Issuance of common stock - cashless exercise of warrants
 

 

 
1,140

 

 

 

 

Activity in deferred compensation plan
 

 

 

 
(1
)
 

 

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

 

 
21

 
425

 

 

 
425

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

 

 
233

 
1,224

 

 

 
1,224

Purchase and retirement of common stock
 

 

 
(24
)
 
(601
)
 

 

 
(601
)
Preferred dividends
 

 

 

 

 
(37
)
 

 
(37
)
Cash dividends paid on common stock
 

 

 

 

 
(18,783
)
 

 
(18,783
)
Balance at June 30, 2014
 
9

 
$
2,217

 
52,635

 
$
861,609

 
$
224,765

 
$
3,560

 
$
1,092,151


See accompanying Notes to unaudited Consolidated Financial Statements.

4


CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2015
 
2014 (1)
 
 
(in thousands)
Cash Flows From Operating Activities
 
 
 
 
Net Income
 
$
46,307

 
$
41,071

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Provision for loan and lease losses
 
3,411

 
4,039

Stock-based compensation expense
 
1,836

 
1,224

Depreciation, amortization and accretion
 
14,630

 
17,057

Investment securities gain, net
 
(1,064
)
 
(519
)
Net realized (gain) loss on sale of other assets
 
(289
)
 
453

Net realized gain on sale of other real estate owned
 
(2,992
)
 
(2,972
)
Write-down on other real estate owned
 
793

 
2,554

Net change in:
 
 
 
 
Loans held for sale
 
(3,104
)
 
(15
)
Interest receivable
 
319

 
23

Interest payable
 
(105
)
 
(20
)
Other assets
 
1,579

 
3,062

Other liabilities
 
3,292

 
(2,589
)
Net cash provided by operating activities
 
64,613

 
63,368

Cash Flows From Investing Activities
 
 
 
 
Loans originated and acquired, net of principal collected
 
(175,260
)
 
(201,162
)
Purchases of:
 
 
 
 
Securities available for sale
 
(37,070
)
 
(22,804
)
Premises and equipment
 
(4,805
)
 
(8,383
)
Federal Home Loan Bank stock
 
(1,440
)
 

Proceeds from:
 
 
 
 
FDIC reimbursement on loss-sharing asset
 
4,009

 
3,982

Sales of securities available for sale
 
72,166

 
30,704

Principal repayments and maturities of securities available for sale
 
135,102

 
83,788

Sales of premises and equipment, Federal Home Loan Bank stock and loans held for investment
 
30,871

 
1,095

Sales of other real estate and other personal property owned (1)
 
11,553

 
15,932

Payments to FDIC related to loss-sharing asset
 
(487
)
 
(2,217
)
Net cash provided by (used in) investing activities
 
34,639

 
(99,065
)
Cash Flows From Financing Activities
 
 
 
 
Net increase in deposits
 
119,651

 
25,594

Net decrease in sweep repurchase agreements
 
(12,850
)
 

Proceeds from:
 
 
 
 
Federal Home Loan Bank advances
 
1,319,000

 
1,168,000

Federal Reserve Bank borrowings
 
1,010

 
50

Exercise of stock options
 
519

 
425

Payments for:
 
 
 
 
Repayment of Federal Home Loan Bank advances
 
(1,490,000
)
 
(1,094,000
)
Repayment of Federal Reserve Bank borrowings
 
(1,010
)
 
(50
)
Common stock dividends
 
(36,851
)
 
(18,783
)
Preferred stock dividends
 
(66
)
 
(37
)
Repayment of other borrowings
 
(8,248
)
 

Purchase and retirement of common stock
 
(874
)
 
(601
)
Net cash provided by (used in) financing activities
 
(109,719
)
 
80,598

Increase (decrease) in cash and cash equivalents
 
(10,467
)
 
44,901

Cash and cash equivalents at beginning of period
 
188,170

 
179,561

Cash and cash equivalents at end of period
 
$
177,703

 
$
224,462

Supplemental Information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Cash paid for interest
 
$
2,188

 
$
1,968

Cash paid for income tax
 
$
7,281

 
$
8,200

Non-cash investing and financing activities
 
 
 
 
Loans transferred to other real estate owned
 
$
7,836

 
$
7,841

__________
(1) Reclassified to conform to the current period’s presentation. The reclassification was limited to removing the separate line item for “Sales of covered other real estate owned” and including the prior period activity in the line item for sales of other real estate and other personal property owned.
See accompanying Notes to unaudited Consolidated Financial Statements.

5


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 Columbia Banking System, Inc. (“we”, “our”, “Columbia” or the “Company”) and its subsidiaries, including its wholly owned banking subsidiary Columbia State Bank (“Columbia Bank” or the “Bank”) and West Coast Trust Company, Inc. (“West Coast Trust”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the six months ended June 30, 2015 are not necessarily indicative of results to be anticipated for the year ending December 31, 2015. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2014 Annual Report on Form 10-K.
Our results of operations for the three and six month periods ended June 30, 2015 include the acquisition of Intermountain Community Bancorp (“Intermountain”) for the entire period. However, the results of operations for the prior year periods do not include the acquisition. See Note 3, Business Combinations, for further information regarding this acquisition.
Significant Accounting Policies
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2014 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2014 Form 10-K disclosure for the year ended December 31, 2014.
2.
Accounting Pronouncements Recently Issued
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update was to be effective for interim and annual periods beginning after December 15, 2016. However, on July 9, 2015, the FASB voted to approve a one year delay of the effective date and to permit companies to voluntarily adopt the new standard as of the original effective date. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company’s consolidated financial statements.
3.
Business Combinations
On November 1, 2014, the Company completed its acquisition of Intermountain. The Company paid $131.9 million in total consideration to acquire 100% of the equity interests of Intermountain. The primary reason for the acquisition was to expand the Company’s geographic footprint into the state of Idaho, consistent with its ongoing growth strategy.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the November 1, 2014 acquisition date. Initial accounting for deferred taxes was incomplete as of June 30, 2015. The amount currently recognized in the financial statements has been determined provisionally as the final Intermountain Community Bancorp tax return has not yet been completed. The application of the acquisition method of accounting resulted in recognition of goodwill of $38.6 million and a core deposit intangible of $10.9 million, or 1.75% of core deposits. The goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill is not deductible for income tax purposes.

6


The table below summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:
 
 
November 1, 2014
 
 
(in thousands)
 
 
 
Purchase price as of November 1, 2014
 
$
131,935

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value:
 
 
Cash and cash equivalents
 
$
47,283

Investment securities
 
299,458

Federal Home Loan Bank stock
 
2,124

Acquired loans
 
502,595

Interest receivable
 
4,656

Premises and equipment
 
20,696

Other real estate owned
 
2,752

Core deposit intangible
 
10,900

Other assets
 
35,353

Deposits
 
(736,795
)
Other borrowings
 
(22,904
)
Securities sold under agreements to repurchase
 
(59,043
)
Other liabilities
 
(13,725
)
Total fair value of identifiable net assets
 
93,350

Goodwill
 
$
38,585

See Note 9, Goodwill and Other Intangible Assets, for further discussion of the accounting for goodwill and other intangible assets.
The operating results of the Company reported herein include the operating results produced by the acquired assets and assumed liabilities for the period January 1, 2015 to June 30, 2015. Disclosure of the amount of Intermountain’s revenue and net income (excluding integration costs) included in Columbia’s consolidated income statement is impracticable due to the integration of the operations and accounting for this acquisition.

7


For illustrative purposes only, the following table presents certain unaudited pro forma information for the six month period ended June 30, 2014. This unaudited pro forma information was calculated as if Intermountain had been acquired as of the beginning of the year prior to the date of acquisition. The unaudited pro forma information combines the historical results of Intermountain with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective period. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value as of the beginning of the year prior to the date of acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Columbia expects to achieve further operating cost savings and other business synergies, including revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.
 
 
Unaudited Pro Forma
 
 
Six Months Ended June 30,
 
 
2014
 
 
(in thousands except per share)
Total revenues (net interest income plus noninterest income)
 
$
197,723

Net income
 
$
43,719

Earnings per share - basic
 
$
0.78

Earnings per share - diluted
 
$
0.77

In connection with the Intermountain acquisition, Columbia recognized $5.6 million and $8.5 million in acquisition-related expenses for the three and six month periods ended June 30, 2015, respectively, and recognized no acquisition-related expenses for the three and six month periods ended June 30, 2014. In addition, related to the acquisition of West Coast Bancorp (“West Coast”) which was completed on April 1, 2013, Columbia recognized $72 thousand in acquisition-related expenses for the six month period ended June 30, 2015, and $672 thousand and $1.6 million in acquisition-related expenses for the three and six month periods ended June 30, 2014, respectively.
The following table shows the impact of the acquisition-related expenses related to the acquisition of Intermountain for the three and six month periods ended June 30, 2015 to the various components of noninterest expense:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2015
 
 
(in thousands)
Noninterest Expense
 
 
 
 
Compensation and employee benefits
 
$
3,035

 
$
3,308

Occupancy
 
804

 
1,303

Advertising and promotion
 
247

 
343

Data processing and communications
 
180

 
1,738

Legal and professional fees
 
633

 
1,018

Other
 
744

 
835

Total impact of acquisition-related costs to noninterest expense
 
$
5,643

 
$
8,545

See Note 2, Business Combinations, in Item 8 of our 2014 Form 10-K for additional details related to the Intermountain acquisition.

8


4.
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)
June 30, 2015
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
1,042,134

 
$
8,427

 
$
(9,482
)
 
$
1,041,079

State and municipal securities
 
479,847

 
11,184

 
(2,000
)
 
489,031

U.S. government agency and government-sponsored enterprise securities
 
359,714

 
1,195

 
(1,884
)
 
359,025

U.S. government securities
 
20,424

 

 
(262
)
 
20,162

Other securities
 
5,284

 
23

 
(159
)
 
5,148

Total
 
$
1,907,403

 
$
20,829

 
$
(13,787
)
 
$
1,914,445

December 31, 2014
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
1,160,378

 
$
10,219

 
$
(8,210
)
 
$
1,162,387

State and municipal securities
 
483,578

 
14,432

 
(1,526
)
 
496,484

U.S. government agency and government-sponsored enterprise securities
 
416,919

 
856

 
(4,069
)
 
413,706

U.S. government securities
 
20,910

 

 
(411
)
 
20,499

Other securities
 
5,284

 
20

 
(123
)
 
5,181

Total
 
$
2,087,069

 
$
25,527

 
$
(14,339
)
 
$
2,098,257


9


Proceeds from sales of securities available-for-sale were $14.9 million and $24.3 million for the three months ended June 30, 2015 and 2014, respectively, and were $72.2 million and $30.7 million for the six months ended June 30, 2015 and 2014, respectively. The following table provides the gross realized gains and losses on the sales of securities for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Gross realized gains
 
$
343

 
$
296

 
$
1,073

 
$
519

Gross realized losses
 

 

 
(9
)
 

Net realized gains
 
$
343

 
$
296

 
$
1,064

 
$
519

The scheduled contractual maturities of investment securities available for sale at June 30, 2015 are presented as follows:
 
 
June 30, 2015
 
 
Amortized Cost
 
Fair Value
 
 
(in thousands)
Due within one year
 
$
20,112

 
$
20,399

Due after one year through five years
 
391,397

 
392,321

Due after five years through ten years
 
535,833

 
539,403

Due after ten years
 
954,777

 
957,174

Other securities with no stated maturity
 
5,284

 
5,148

Total investment securities available-for-sale
 
$
1,907,403

 
$
1,914,445

The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:
 
 
June 30, 2015
 
 
(in thousands)
Washington and Oregon State to secure public deposits
 
$
331,431

Federal Reserve Bank to secure borrowings
 
55,508

Other securities pledged
 
149,327

Total securities pledged as collateral
 
$
536,266


10


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 June 30, 2015 and December 31, 2014:
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
290,497

 
$
(2,468
)
 
$
200,514

 
$
(7,014
)
 
$
491,011

 
$
(9,482
)
State and municipal securities
 
123,367

 
(1,020
)
 
29,701

 
(980
)
 
153,068

 
(2,000
)
U.S. government agency and government-sponsored enterprise securities
 
128,033

 
(418
)
 
100,277

 
(1,466
)
 
228,310

 
(1,884
)
U.S. government securities
 

 

 
19,613

 
(262
)
 
19,613

 
(262
)
Other securities
 
2,304

 
(11
)
 
2,807

 
(148
)
 
5,111

 
(159
)
Total
 
$
544,201

 
$
(3,917
)
 
$
352,912

 
$
(9,870
)
 
$
897,113

 
$
(13,787
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
258,825

 
$
(1,287
)
 
$
279,015

 
$
(6,924
)
 
$
537,840

 
$
(8,211
)
State and municipal securities
 
71,026

 
(543
)
 
44,148

 
(982
)
 
115,174

 
(1,525
)
U.S. government agency and government-sponsored enterprise securities
 
105,250

 
(518
)
 
216,221

 
(3,551
)
 
321,471

 
(4,069
)
U.S. government securities
 

 

 
19,450

 
(411
)
 
19,450

 
(411
)
Other securities
 
2,313

 
(2
)
 
2,834

 
(121
)
 
5,147

 
(123
)
Total
 
$
437,414

 
$
(2,350
)
 
$
561,668

 
$
(11,989
)
 
$
999,082

 
$
(14,339
)
At June 30, 2015, there were 108 U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations securities in an unrealized loss position, of which 35 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 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 June 30, 2015.
At June 30, 2015, there were 123 state and municipal government securities in an unrealized loss position, of which 28 were 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 June 30, 2015, 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 June 30, 2015.
At June 30, 2015, there were 20 U.S. government agency and government-sponsored enterprise securities in an unrealized loss position, eight of which 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 upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2015.
At June 30, 2015, there were two U.S. government securities in an unrealized loss position, both of which 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

11


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 June 30, 2015.
At June 30, 2015, there were two other securities in an unrealized loss position, of which one was 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 these investments to be other-than-temporarily impaired at June 30, 2015 as it has the intent and ability to hold the investments for sufficient time to allow for recovery in the market value.
5.
Loans
The Company’s loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments are referred to collectively as loans, excluding purchased credit impaired loans. Purchased loans for which there was, at acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or “PCI loans.”
The following is an analysis of the loan portfolio by major types of loans (net of unearned income):
 
 
June 30, 2015
 
December 31, 2014
 
 
Loans, excluding PCI loans
 
PCI Loans
 
Total
 
Loans, excluding PCI loans
 
PCI Loans
 
Total
 
 
(in thousands)
Commercial business
 
$
2,255,468

 
$
41,221

 
$
2,296,689

 
$
2,119,565

 
$
44,505

 
$
2,164,070

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
181,849

 
25,740

 
207,589

 
175,571

 
26,993

 
202,564

Commercial and multifamily residential
 
2,406,594

 
108,578

 
2,515,172

 
2,363,541

 
128,769

 
2,492,310

Total real estate
 
2,588,443

 
134,318

 
2,722,761

 
2,539,112

 
155,762

 
2,694,874

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
127,311

 
2,882

 
130,193

 
116,866

 
4,021

 
120,887

Commercial and multifamily residential
 
129,302

 
2,020

 
131,322

 
134,443

 
2,321

 
136,764

Total real estate construction
 
256,613

 
4,902

 
261,515

 
251,309

 
6,342

 
257,651

Consumer
 
358,365

 
21,926

 
380,291

 
364,182

 
23,975

 
388,157

Less: Net unearned income
 
(49,359
)
 

 
(49,359
)
 
(59,374
)
 

 
(59,374
)
Total loans, net of unearned income
 
5,409,530

 
202,367

 
5,611,897

 
5,214,794

 
230,584

 
5,445,378

Less: Allowance for loan and lease losses
 
(53,083
)
 
(16,174
)
 
(69,257
)
 
(53,233
)
 
(16,336
)
 
(69,569
)
Total loans, net
 
$
5,356,447

 
$
186,193

 
$
5,542,640

 
$
5,161,561

 
$
214,248

 
$
5,375,809

Loans held for sale
 
$
4,220

 
$

 
$
4,220

 
$
1,116

 
$

 
$
1,116

At June 30, 2015 and December 31, 2014, 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, Oregon and Idaho.
The Company has made loans to executive 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 $10.1 million at June 30, 2015 and $13.2 million at December 31, 2014. During the first six months of 2015, there were $7 thousand in advances and $3.1 million in repayments.
At June 30, 2015 and December 31, 2014, $1.22 billion and $1.08 billion of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank of Des Moines (“FHLB”) borrowings and additional borrowing capacity. The Company has also pledged $47.5 million and $46.0 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at June 30, 2015 and December 31, 2014, respectively.


12



The following is an analysis of nonaccrual loans as of June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
December 31, 2014
 
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
 
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
Secured
 
$
13,018

 
$
17,139

 
$
16,552

 
$
21,453

Unsecured
 
521

 
673

 
247

 
269

Real estate:
 
 
 
 
 
 
 
 
One-to-four family residential
 
4,193

 
5,985

 
2,822

 
5,680

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
Commercial land
 
1,561

 
1,704

 
821

 
1,113

Income property
 
1,276

 
1,331

 
3,200

 
5,521

Owner occupied
 
972

 
1,131

 
3,826

 
5,837

Real estate construction:
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
Land and acquisition
 
862

 
866

 
95

 
112

Residential construction
 
1,075

 
1,222

 
370

 
370

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
Owner occupied
 
469

 
489

 
480

 
489

Consumer
 
1,799

 
2,176

 
2,939

 
3,930

Total
 
$
25,746

 
$
32,716

 
$
31,352

 
$
44,774


13


Loans, excluding purchased credit impaired loans
The following is an aging of the recorded investment of the loan portfolio as of June 30, 2015 and December 31, 2014:
 
 
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
June 30, 2015
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
2,149,972

 
$
3,847

 
$
1,589

 
$

 
$
5,436

 
$
13,018

 
$
2,168,426

Unsecured
 
81,433

 
270

 

 

 
270

 
521

 
82,224

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
172,268

 
2,024

 
128

 

 
2,152

 
4,193

 
178,613

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
206,558

 
1,154

 

 

 
1,154

 
1,561

 
209,273

Income property
 
1,310,441

 
1,756

 
415

 

 
2,171

 
1,276

 
1,313,888

Owner occupied
 
857,764

 
589

 
276

 

 
865

 
972

 
859,601

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
15,955

 

 

 

 

 
862

 
16,817

Residential construction
 
107,279

 
758

 

 

 
758

 
1,075

 
109,112

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
64,557

 

 

 

 

 

 
64,557

Owner occupied
 
61,572

 
981

 

 

 
981

 
469

 
63,022

Consumer
 
341,606

 
444

 
148

 

 
592

 
1,799

 
343,997

Total
 
$
5,369,405

 
$
11,823

 
$
2,556

 
$

 
$
14,379

 
$
25,746

 
$
5,409,530

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2014
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
2,004,418

 
$
5,137

 
$
6,149

 
$
1,372

 
$
12,658

 
$
16,552

 
$
2,033,628

Unsecured
 
79,661

 
185

 

 

 
185

 
247

 
80,093

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
167,197

 
1,700

 
45

 

 
1,745

 
2,822

 
171,764

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
187,470

 
1,454

 
34

 

 
1,488

 
821

 
189,779

Income property
 
1,294,982

 
3,031

 
786

 

 
3,817

 
3,200

 
1,301,999

Owner occupied
 
839,689

 
937

 
289

 

 
1,226

 
3,826

 
844,741

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
15,462

 
953

 

 

 
953

 
95

 
16,510

Residential construction
 
97,821

 
326

 

 
4

 
330

 
370

 
98,521

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
73,783

 

 

 

 

 

 
73,783

Owner occupied
 
57,470

 

 
994

 

 
994

 
480

 
58,944

Consumer
 
341,032

 
933

 
118

 
10

 
1,061

 
2,939

 
345,032

Total
 
$
5,158,985

 
$
14,656

 
$
8,415

 
$
1,386

 
$
24,457

 
$
31,352

 
$
5,214,794



14


The following is an analysis of impaired loans as of June 30, 2015 and December 31, 2014: 
 
 
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
June 30, 2015
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
2,160,836

 
$
7,590

 
$
1,230

 
$
1,231

 
$
1,161

 
$
6,360

 
$
8,169

Unsecured
 
82,224

 

 

 

 

 

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
174,430

 
4,183

 
416

 
458

 
111

 
3,767

 
4,428

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
209,273

 

 

 

 

 

 

Income property
 
1,311,944

 
1,944

 

 

 

 
1,944

 
2,326

Owner occupied
 
853,498

 
6,103

 
575

 
574

 
20

 
5,528

 
8,008

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
15,849

 
968

 
107

 
107

 
66

 
861

 
866

Residential construction
 
108,219

 
893

 

 

 

 
893

 
893

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
64,557

 

 

 

 

 

 

Owner occupied
 
63,022

 

 

 

 

 

 

Consumer
 
343,971

 
26

 

 

 

 
26

 
105

Total
 
$
5,387,823

 
$
21,707

 
$
2,328

 
$
2,370

 
$
1,358

 
$
19,379

 
$
24,795

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2014
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
2,023,104

 
$
10,524

 
$
99

 
$
99

 
$
25

 
$
10,425

 
$
12,410

Unsecured
 
80,091

 
2

 
2

 
2

 
2

 

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
169,619

 
2,145

 
424

 
465

 
120

 
1,721

 
2,370

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
189,779

 

 

 

 

 

 

Income property
 
1,295,650

 
6,349

 

 

 

 
6,349

 
10,720

Owner occupied
 
835,895

 
8,846

 
582

 
582

 
27

 
8,264

 
12,732

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
16,401

 
109

 
109

 
109

 
67

 

 

Residential construction
 
98,521

 

 

 

 

 

 

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
73,783

 

 

 

 

 

 

Owner occupied
 
58,944

 

 

 

 

 

 

Consumer
 
344,908

 
124

 

 

 

 
124

 
201

Total
 
$
5,186,695

 
$
28,099

 
$
1,216

 
$
1,257

 
$
241

 
$
26,883

 
$
38,433


15


The following table provides additional information on impaired loans for the three and six month periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
9,231

 
$
8

 
$
6,933

 
$
17

 
$
9,662

 
$
15

 
$
6,318

 
$
33

Unsecured
 

 

 
23

 

 
1

 

 
27

 
1

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
4,180

 
11

 
2,069

 
11

 
3,502

 
24

 
1,920

 
23

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
235

 

 
103

 

 
157

 

 
107

 

Income property
 
1,966

 
23

 
7,213

 
74

 
3,427

 
33

 
6,946

 
136

Owner occupied
 
6,567

 
235

 
9,222

 
235

 
7,326

 
468

 
9,817

 
476

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
974

 
2

 
653

 
1

 
686

 
3

 
1,083

 
3

Residential construction
 
893

 

 

 

 
595

 

 

 

Consumer
 
355

 
1

 
155

 
3

 
278

 
2

 
159

 
5

Total
 
$
24,401

 
$
280

 
$
26,371

 
$
341

 
$
25,634

 
$
545

 
$
26,377

 
$
677


16


The following is an analysis of loans classified as troubled debt restructurings (“TDR”) during the three and six months ended June 30, 2015 and 2014:
 
 
Three months ended June 30, 2015
 
Three months ended June 30, 2014
 
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
(dollars in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 

 
$

 
$

 
2

 
$
546

 
$
546

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
1

 
30

 
30

 

 

 

Total
 
1

 
$
30

 
$
30

 
2

 
$
546

 
$
546

 
 
Six months ended June 30, 2015
 
Six months ended June 30, 2014
 
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
(dollars in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 

 
$

 
$

 
4

 
$
759

 
$
759

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
1

 
30

 
30

 
2

 
494

 
494

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 

 

 

 
1

 
143

 
126

Total
 
1

 
$
30

 
$
30

 
7

 
$
1,396

 
$
1,379

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 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. The concessions granted in the restructurings completed in the three and six month periods ending June 30, 2015 and 2014 largely consisted of maturity extensions, interest rate modifications or a combination of both. In limited circumstances, a reduction in the principal balance of the loan could also be made as a concession. 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 had no commitments to lend additional funds on loans classified as TDR as of June 30, 2015 and December 31, 2014. The Company did not have any loans modified as TDR that defaulted within twelve months of being modified as TDR during the three and six month periods ended June 30, 2015 and 2014.
Purchased Credit Impaired Loans (“PCI Loans”)
PCI loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. Loans that have common risk characteristics are aggregated into pools. The Company remeasures contractual and expected cash flows, at the pool-level, on a quarterly basis.
Contractual cash flows are calculated based upon the loan pool terms after applying a prepayment factor. Calculation of the applied prepayment factor for contractual cash flows is the same as described below for expected cash flows.
Inputs to the determination of expected cash flows include cumulative default and prepayment data as well as loss severity and recovery lag information. Cumulative default and prepayment data are calculated via a transition matrix. The transition matrix is a matrix of probability values that specifies the probability of a loan pool transitioning into a particular delinquency state (e.g. 0-30 days past due, 31 to 60 days, etc.) given its delinquency state at the remeasurement date. Loss severity factors are based upon either actual charge-off data within the loan pools or industry averages and recovery lags are based upon the collateral within the loan pools.

17


The excess of cash flows expected to be collected over the initial fair value of purchased credit impaired loans is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes of indices for acquired loans with variable interest rates.
The following is an analysis of our PCI loans, net of related allowance for losses and remaining valuation discounts as of June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Commercial business
 
$
45,934

 
$
50,334

Real estate:
 
 
 
 
One-to-four family residential
 
29,860

 
31,981

Commercial and multifamily residential
 
116,992

 
140,398

Total real estate
 
146,852

 
172,379

Real estate construction:
 
 
 
 
One-to-four family residential
 
3,040

 
4,353

Commercial and multifamily residential
 
2,249

 
2,588

Total real estate construction
 
5,289

 
6,941

Consumer
 
24,427

 
26,814

Subtotal of PCI loans
 
222,502

 
256,468

Less:
 
 
 
 
Valuation discount resulting from acquisition accounting
 
20,135

 
25,884

Allowance for loan losses
 
16,174

 
16,336

PCI loans, net of allowance for loan losses
 
$
186,193

 
$
214,248

The following table shows the changes in accretable yield for PCI loans for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Balance at beginning of period
 
$
68,726

 
$
101,543

 
$
73,849

 
$
103,907

Accretion
 
(5,737
)
 
(10,055
)
 
(12,056
)
 
(20,624
)
Disposals
 
(959
)
 

 
(2,052
)
 
(2,826
)
Reclassifications from nonaccretable difference
 
5,253

 
1,023

 
7,542

 
12,054

Balance at end of period
 
$
67,283

 
$
92,511

 
$
67,283

 
$
92,511

6.
Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit
Loans, excluding PCI loans
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 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 calculated quarterly using quantitative and qualitative information about specific loan classes. The minimum required level with respect to which an entity develops a methodology to determine its ALLL is by

18


general categories of loans, such as commercial business, real estate, and consumer. However, the Company’s methodology in determining its ALLL 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 six months ended June 30, 2015 and 2014. 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 make revisions to our ALLL as necessary 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.
PCI Loans
Purchased credit impaired loans that have common risk characteristics are aggregated into loan pools. When required, we record impairment, at the pool-level, to adjust the pool’s carrying value to its net present value of expected future cash flows. Quarterly, we re-measure expected loan pool cash flows. If, due to credit deterioration, the present value of expected cash flows is less than carrying value, we reduce the loan pool’s carrying value by adjusting the ALLL with an impairment charge to earnings which is recorded as provision for loan losses. If credit quality improves and the present value of expected cash flows exceeds carrying value, we increase the loan pool’s carrying value by recapturing previously recorded ALLL, if any. See Note 5, Loans, for further discussion of the accounting for PCI loans.
Credit losses attributable to draws on purchased credit impaired loans, advanced subsequent to the loan purchase date, are accounted for under ASC 450-20 and those amounts are also subject to the Company’s internal and external credit review. An ALLL is estimated in a similar manner as loans, excluding PCI loans, and a provision for loan losses is charged to earnings as necessary.

19


The following tables show a detailed analysis of the ALLL for the three and six months ended June 30, 2015 and 2014: 
 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recovery)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Three months ended June 30, 2015
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
25,761

 
$
(2,022
)
 
$
200

 
$
3,769

 
$
27,708

 
$
1,161

 
$
26,547

Unsecured
 
1,012

 
(64
)
 
9

 
(100
)
 
857

 

 
857

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
1,364

 
(289
)
 
15

 
265

 
1,355

 
111

 
1,244

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
827

 

 

 
754

 
1,581

 

 
1,581

Income property
 
8,440

 
(43
)
 
7

 
(207
)
 
8,197

 

 
8,197

Owner occupied
 
5,612

 

 
13

 
176

 
5,801

 
20

 
5,781

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
1,026

 

 
1

 
(530
)
 
497

 
66

 
431

Residential construction
 
1,790

 

 
7

 
(839
)
 
958

 

 
958

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
827

 

 
2

 
(422
)
 
407

 

 
407

Owner occupied
 
499

 

 

 
(58
)
 
441

 

 
441

Consumer
 
2,835

 
(319
)
 
137

 
529

 
3,182

 

 
3,182

Purchased credit impaired
 
16,531

 
(2,876
)
 
2,043

 
476

 
16,174

 

 
16,174

Unallocated
 
3,710

 

 

 
(1,611
)
 
2,099

 

 
2,099

Total
 
$
70,234

 
$
(5,613
)
 
$
2,434

 
$
2,202

 
$
69,257

 
$
1,358

 
$
67,899

 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recovery)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Six months ended June 30, 2015
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
25,923

 
$
(3,408
)
 
$
712

 
$
4,481

 
$
27,708

 
$
1,161

 
$
26,547

Unsecured
 
927

 
(104
)
 
115

 
(81
)
 
857

 

 
857

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
2,281

 
(297
)
 
27

 
(656
)
 
1,355

 
111

 
1,244

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
799

 

 

 
782

 
1,581

 

 
1,581

Income property
 
9,159

 
(43
)
 
3,259

 
(4,178
)
 
8,197

 

 
8,197

Owner occupied
 
5,007

 

 
22

 
772

 
5,801

 
20

 
5,781

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
1,197

 

 
3

 
(703
)
 
497

 
66

 
431

Residential construction
 
1,860

 

 
33

 
(935
)
 
958

 

 
958

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
622

 

 
5

 
(220
)
 
407

 

 
407

Owner occupied
 
434

 

 

 
7

 
441

 

 
441

Consumer
 
3,180

 
(1,210
)
 
410

 
802

 
3,182

 

 
3,182

Purchased credit impaired
 
16,336

 
(6,976
)
 
3,729

 
3,085

 
16,174

 

 
16,174

Unallocated
 
1,844

 

 

 
255

 
2,099

 

 
2,099

Total
 
$
69,569

 
$
(12,038
)
 
$
8,315

 
$
3,411

 
$
69,257

 
$
1,358

 
$
67,899


20


 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recovery)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Three months ended June 30, 2014
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
28,801

 
$
(1,642
)
 
$
1,435

 
$
(3,077
)
 
$
25,517

 
$
128

 
$
25,389

Unsecured
 
746

 
(75
)
 
277

 
(194
)
 
754

 
19

 
735

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
1,194

 

 
12

 
(123
)
 
1,083

 
128

 
955

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
579

 
(29
)
 
2

 
(82
)
 
470

 

 
470

Income property
 
10,107

 
(1,934
)
 
505

 
1,833

 
10,511

 

 
10,511

Owner occupied
 
4,560

 

 
30

 
399

 
4,989

 
35

 
4,954

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
580

 

 
2

 
(179
)
 
403

 
69

 
334

Residential construction
 
696

 

 
440

 
(459
)
 
677

 

 
677

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
320

 

 

 
94

 
414

 

 
414

Owner occupied
 
154

 

 

 
12

 
166

 

 
166

Consumer
 
2,637

 
(909
)
 
338

 
577

 
2,643

 
1

 
2,642

Purchased credit impaired
 
20,129

 
(3,842
)
 
1,997

 
1,517

 
19,801

 

 
19,801

Unallocated
 
68

 

 

 
1,799

 
1,867

 

 
1,867

Total
 
$
70,571

 
$
(8,431
)
 
$
5,038

 
$
2,117

 
$
69,295

 
$
380

 
$
68,915

 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recovery)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Six months ended June 30, 2014
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
31,027

 
$
(1,840
)
 
$
1,883

 
$
(5,553
)
 
$
25,517

 
$
128

 
$
25,389

Unsecured
 
696

 
(110
)
 
319

 
(151
)
 
754

 
19

 
735

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
1,252

 
(207
)
 
40

 
(2
)
 
1,083

 
128

 
955

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
489

 
(29
)
 
19

 
(9
)
 
470

 

 
470

Income property
 
9,234

 
(1,934
)
 
518

 
2,693

 
10,511

 

 
10,511

Owner occupied
 
3,605

 
(1,023
)
 
39

 
2,368

 
4,989

 
35

 
4,954

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
610

 

 
41

 
(248
)
 
403

 
69

 
334

Residential construction
 
822

 

 
443

 
(588
)
 
677

 

 
677

Commercial & multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
285

 

 

 
129

 
414

 

 
414

Owner occupied
 
58

 

 

 
108

 
166

 

 
166

Consumer
 
2,547

 
(1,636
)
 
591

 
1,141

 
2,643

 
1

 
2,642

Purchased credit impaired
 
20,174

 
(8,115
)
 
3,803

 
3,939

 
19,801

 

 
19,801

Unallocated
 
1,655

 

 

 
212

 
1,867

 

 
1,867

Total
 
$
72,454

 
$
(14,894
)
 
$
7,696

 
$
4,039

 
$
69,295

 
$
380

 
$
68,915


21


Changes in the allowance for unfunded commitments and letters of credit, a component of other liabilities in the consolidated balance sheet, are summarized as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Balance at beginning of period
 
$
2,655

 
$
2,455

 
$
2,655

 
$
2,505

Net changes in the allowance for unfunded commitments and letters of credit
 
275

 
(100
)
 
275

 
(150
)
Balance at end of period
 
$
2,930

 
$
2,355

 
$
2,930

 
$
2,355

Risk Elements
The extension of credit in the form of loans or other credit products to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of loss on the loan increases. In the event 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, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan.
Pass loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans with a risk rating of Substandard or worse are reported as classified loans in our ALLL analysis. We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. Substandard loans reflect loans where a loss is possible if loan weaknesses are not corrected. Doubtful loans have a high probability of loss, however, the amount of loss has not yet been determined. Loss loans are considered uncollectable and when identified, are charged off.

22


The following is an analysis of the credit quality of our loan portfolio, excluding PCI loans, as of June 30, 2015 and December 31, 2014:
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
June 30, 2015
 
(in thousands)
Loans, excluding PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
2,082,480

 
$
34,027

 
$
51,919

 
$

 
$

 
$
2,168,426

Unsecured
 
81,667

 
46

 
511

 

 

 
82,224

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
172,318

 
53

 
6,242

 

 

 
178,613

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
200,614

 
6,919

 
1,740

 

 

 
209,273

Income property
 
1,301,846

 
4,995

 
7,047

 

 

 
1,313,888

Owner occupied
 
833,120

 
8,570

 
17,911

 

 

 
859,601

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
16,374

 

 
443

 

 

 
16,817

Residential construction
 
107,752

 

 
1,360

 

 

 
109,112

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
64,557

 

 

 

 

 
64,557

Owner occupied
 
62,148

 

 
874

 

 

 
63,022

Consumer
 
340,250

 

 
3,747

 

 

 
343,997

Total
 
$
5,263,126

 
$
54,610

 
$
91,794

 
$

 
$

 
5,409,530

Less:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
 
53,083

Loans, excluding PCI loans, net
 
$
5,356,447

 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
December 31, 2014
 
(in thousands)
Loans, excluding PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
1,963,210

 
$
15,790

 
$
54,628

 
$

 
$

 
$
2,033,628

Unsecured
 
79,534

 

 
559

 

 

 
80,093

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
163,914

 
55

 
7,795

 

 

 
171,764

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
183,701

 
4,217

 
1,861

 

 

 
189,779

Income property
 
1,287,729

 
5,885

 
8,385

 

 

 
1,301,999

Owner occupied
 
825,694

 
7,876

 
11,171

 

 

 
844,741

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
15,307

 
167

 
1,036

 

 

 
16,510

Residential construction
 
96,031

 
909

 
1,581

 

 

 
98,521

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
73,783

 

 

 

 

 
73,783

Owner occupied
 
58,055

 

 
889

 

 

 
58,944

Consumer
 
339,695

 
68

 
5,269

 

 

 
345,032

Total
 
$
5,086,653

 
$
34,967

 
$
93,174

 
$

 
$

 
5,214,794

Less:
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
 
53,233

Loans, excluding PCI loans, net
 
$
5,161,561


23


The following is an analysis of the credit quality of our PCI loan portfolio as of June 30, 2015 and December 31, 2014:
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
June 30, 2015
 
(in thousands)
PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
36,179

 
$
212

 
$
8,147

 
$

 
$

 
$
44,538

Unsecured
 
1,360

 

 
36

 

 

 
1,396

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
26,797

 

 
3,063

 

 

 
29,860

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
8,799

 

 
664

 

 

 
9,463

Income property
 
41,517

 

 
9,678

 

 

 
51,195

Owner occupied
 
52,908

 

 
3,426

 

 

 
56,334

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
1,261

 

 
537

 

 

 
1,798

Residential construction
 
1,226

 

 
16

 

 

 
1,242

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
1,340

 

 

 

 

 
1,340

Owner occupied
 
909

 

 

 

 

 
909

Consumer
 
23,023

 

 
1,404

 

 

 
24,427

Total
 
$
195,319

 
$
212

 
$
26,971

 
$

 
$

 
222,502

Less:
 
 
 
 
 
 
 
 
 
 
 
 
Valuation discount resulting from acquisition accounting
 
20,135

Allowance for loan losses
 
16,174

PCI loans, net
 
$
186,193

 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
December 31, 2014
 
(in thousands)
PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
37,927

 
$
937

 
$
9,223

 
$

 
$

 
$
48,087

Unsecured
 
2,156

 

 
91

 

 

 
2,247

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
28,822

 

 
3,159

 

 

 
31,981

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
9,104

 

 
6,240

 

 

 
15,344

Income property
 
51,435

 
1,892

 
7,186

 

 

 
60,513

Owner occupied
 
58,629

 
346

 
5,566

 

 

 
64,541

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
1,595

 

 
913

 

 

 
2,508

Residential construction
 
741

 

 
1,104

 

 

 
1,845

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
1,435

 

 
227

 

 

 
1,662

Owner occupied
 
926

 

 

 

 

 
926

Consumer
 
24,037

 

 
2,777

 

 

 
26,814

Total
 
$
216,807

 
$
3,175

 
$
36,486

 
$

 
$

 
256,468

Less:
 
 
 
 
 
 
 
 
 
 
 
 
Valuation discount resulting from acquisition accounting
 
25,884

Allowance for loan losses
 
16,336

PCI loans, net
 
$
214,248



24


7.
Other Real Estate Owned (“OREO”)
The following tables set forth activity in OREO for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Balance, beginning of period
 
$
23,299

 
$
30,553

 
$
22,190

 
$
35,927

Transfers in
 
3,143

 
2,090

 
7,836

 
7,841

Valuation adjustments
 
(596
)
 
(974
)
 
(793
)
 
(2,554
)
Proceeds from sale of OREO property
 
(6,484
)
 
(4,726
)
 
(11,608
)
 
(15,932
)
Gain on sale of OREO, net
 
1,255

 
1,311

 
2,992

 
2,972

Balance, end of period
 
$
20,617

 
$
28,254

 
$
20,617

 
$
28,254

At June 30, 2015, the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession was $2.1 million and the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $2.5 million.
8. FDIC Loss-sharing Asset and Covered Assets
We are a party to eight loss-sharing agreements with the FDIC relating to four FDIC-assisted acquisitions. Such agreements cover a substantial portion of losses incurred on acquired covered loans and OREO. The loss-sharing agreements relate to the acquisitions of (1) Columbia River Bank in January 2010, (2) American Marine Bank in January 2010, (3) Summit Bank in May 2011, and (4) First Heritage Bank in May 2011. Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries up to specified amounts. With respect to loss-sharing agreements for two acquisitions completed in 2010, after those specified amounts, the FDIC will absorb 95% of losses and share in 95% of loss recoveries. The loss-sharing provisions of the agreements for non-single family and single family mortgage loans are in effect for five and ten years, respectively and the loss recovery provisions are in effect for eight and ten years, respectively. The loss-sharing provisions for the Columbia River Bank and American Marine Bank non-single family covered assets were effective through March 31, 2015. Accordingly, further activity will be limited to recoveries through the first quarter of 2020 for assets covered by these loss-sharing agreements.
Ten years and forty-five days after the applicable acquisition dates, the Bank must pay to the FDIC a clawback in the event the losses from the acquisitions fail to reach stated levels. The amount of the clawback is determined by a formula specified in each individual loss-sharing agreement. As of June 30, 2015, the net present value of the Bank’s estimated clawback liability was $4.2 million, which was included in other liabilities on the consolidated balance sheets.
At June 30, 2015, the FDIC loss-sharing asset was comprised of a $9.0 million FDIC indemnification asset and a $344 thousand FDIC receivable. The indemnification asset represents the net present value of cash flows the Company expects to collect from the FDIC under the loss-sharing agreements and the FDIC receivable represents amounts from the FDIC for which the Company has requested reimbursement but has not yet received reimbursement.
For PCI loans, the Company remeasures contractual and expected cash flows on a quarterly basis. When the quarterly remeasurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded. As a result of this impairment, for loans covered by loss-share agreements with respect to which the loss-sharing provisions are still effective, the indemnification asset is increased to reflect anticipated future cash to be received from the FDIC. Consistent with the loss-sharing agreements between the Company and the FDIC, the amount of the increase to the indemnification asset is measured as 80% of the resulting impairment.
Alternatively, when the quarterly remeasurement results in an increase in expected future cash flows due to a decrease in expected credit losses, the nonaccretable difference decreases and the effective yield of the related loan portfolio is increased. As a result of the improved expected cash flows, for loans covered by loss-share agreements with respect to which the loss-sharing provisions are still effective, the indemnification asset would be reduced first by the amount of any impairment previously recorded and, second, by increased amortization over the remaining life of the related loss-sharing agreement.


25


The following table shows a detailed analysis of the FDIC loss-sharing asset for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Balance at beginning of period
 
$
14,644

 
$
36,837

 
$
15,174

 
$
39,846

Adjustments not reflected in income:
 
 
 
 
 
 
 
 
Cash received from the FDIC, net
 
(2,862
)
 
(3,442
)
 
(3,522
)
 
(1,765
)
FDIC reimbursable recoveries, net
 
(944
)
 
(364
)
 
(964
)
 
(231
)
Adjustments reflected in income:
 
 
 
 
 
 
 
 
Amortization, net
 
(1,376
)
 
(5,764
)
 
(3,670
)
 
(12,216
)
Loan impairment
 
1

 
1,214

 
1,532

 
3,151

Sale of other real estate
 
(208
)
 
(965
)
 
(627
)
 
(1,721
)
Write-downs of other real estate
 
52

 
276

 
1,124

 
792

Other
 
37

 
189

 
297

 
125

Balance at end of period
 
$
9,344

 
$
27,981

 
$
9,344

 
$
27,981

The following table presents information about the composition of the FDIC loss-sharing asset, the clawback liability, and the non-single family and the single family covered assets as of the date indicated:
 
 
June 30, 2015
 
 
Columbia River Bank
 
American Marine Bank
 
Summit Bank
 
First Heritage Bank
 
Total
 
 
(in thousands)
FDIC loss-sharing asset
 
$
470

 
$
3,158

 
$
3,585

 
$
2,131

 
$
9,344

Clawback liability
 
$
4,040

 
$
127

 
$

 
$

 
$
4,167

Non-single family covered assets
 
$
98,008

 
$
14,209

 
$
13,247

 
$
21,150

 
$
146,614

Single family covered assets
 
$
9,087

 
$
25,839

 
$
6,432

 
$
2,182

 
$
43,540

 
 
 
 
 
 
 
 
 
 
 
Loss-sharing expiration dates:
 
 
 
 
 
 
 
 
 
 
Non-single family
 
First Quarter 2015
 
First Quarter 2015
 
Second Quarter 2016
 
Second Quarter 2016
 
 
Single family
 
First Quarter 2020
 
First Quarter 2020
 
Second Quarter 2021
 
Second Quarter 2021
 
 
Loss recovery expiration dates:
 
 
 
 
 
 
 
 
 
 
Non-single family
 
First Quarter 2018
 
First Quarter 2018
 
Second Quarter 2019
 
Second Quarter 2019
 
 
Single family
 
First Quarter 2020
 
First Quarter 2020
 
Second Quarter 2021
 
Second Quarter 2021
 
 
9.
Goodwill and Other Intangible Assets
In accordance with the Intangibles – Goodwill and Other topic of the FASB ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis on July 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.
The core deposit intangible (“CDI”) is evaluated for impairment if events and circumstances indicate a possible impairment. The CDI is amortized on an accelerated basis over an estimated life of 10 years.

26


The following table sets forth activity for goodwill and other intangible assets for the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Goodwill
 
 
 
 
 
 
 
 
Total goodwill (1)
 
$
382,537

 
$
343,952

 
382,537

 
343,952

Other intangible assets, net
 
 
 
 
 
 
 
 
Core deposit intangible:
 
 
 
 
 
 
 
 
Gross core deposit intangible balance at beginning of period (1)
 
58,598

 
47,698

 
58,598

 
47,698

Accumulated amortization at beginning of period
 
(30,875
)
 
(24,344
)
 
(29,058
)
 
(22,765
)
Core deposit intangible, net at beginning of period
 
27,723

 
23,354

 
29,540

 
24,933

CDI current period amortization
 
(1,718
)
 
(1,481
)
 
(3,535
)
 
(3,060
)
Total core deposit intangible, net at end of period
 
26,005

 
21,873

 
26,005

 
21,873

Intangible assets not subject to amortization
 
919

 
919

 
919

 
919

Other intangible assets, net at end of period
 
26,924

 
22,792

 
26,924

 
22,792

Total goodwill and other intangible assets at end of period
 
$
409,461

 
$
366,744

 
$
409,461

 
$
366,744

__________
(1) See Note 3, Business Combinations, for additional information regarding goodwill and intangible assets recorded related to the acquisition of Intermountain on November 1, 2014.
The following table provides the estimated future amortization expense of core deposit intangibles for the remaining six months ending December 31, 2015 and the succeeding four years:
 
 
Amount
 
 
(in thousands)
Year ending December 31,
 
 
2015
 
$
3,347

2016
 
5,945

2017
 
4,913

2018
 
3,855

2019
 
2,951


27


10.
Derivatives and Balance Sheet Offsetting
The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at June 30, 2015 and December 31, 2014 was $216.2 million and $215.6 million, respectively. During the three and six months ended June 30, 2015, a mark-to-market gain of $9 thousand and $4 thousand, respectively were recorded to other noninterest expense. There were no earnings impacts for the three or six month periods ending June 30, 2014.
The following table presents the fair value of derivatives not designated as hedging instruments at June 30, 2015 and December 31, 2014:
 
Asset Derivatives
 
Liability Derivatives
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
(in thousands)
Interest rate contracts
Other assets
 
$
10,659

 
Other assets
 
$
11,800

 
Other liabilities
 
$
10,707

 
Other liabilities
 
$
11,851

The Company is party to interest rate contracts and repurchase agreements that are subject to enforceable master netting arrangements or similar agreements. Under these agreements, the Company may have the right to net settle multiple contracts with the same counterparty. The following tables show the gross interest rate swap agreements and repurchase agreements in the consolidated balance sheets and the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability. Therefore, instances of overcollateralization are not shown.
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
Collateral Posted
 
Net Amount
June 30, 2015
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
10,659

 
$

 
$
10,659

 
$

 
$
10,659

Liabilities
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
10,707

 
$

 
$
10,707

 
$
(10,707
)
 
$

Repurchase agreements
$
92,230

 
$

 
$
92,230

 
$
(92,230
)
 
$

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
11,800

 
$

 
$
11,800

 
$

 
$
11,800

Liabilities
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
11,851

 
$

 
$
11,851

 
$
(11,851
)
 
$

Repurchase agreements
$
105,080

 
$

 
$
105,080

 
$
(105,080
)
 
$


28


The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:
 
 
Remaining contractual maturity of the agreements
 
 
Overnight and continuous
 
Up to 30 days
 
30 - 90 days
 
Greater than 90 days
 
Total
June 30, 2015
 
(in thousands)
Class of collateral pledged for repurchase agreements
 
 
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
67,230

 
$

 
$

 
$
25,000

 
$
92,230

Gross amount of recognized liabilities for repurchase agreements
 
 
 
 
 
 
 
 
 
92,230

Amounts related to agreements not included in offsetting disclosure
 
 
 
 
 
 
 
 
 
$

The collateral utilized for the Company’s repurchase agreements is subject to market fluctuations as well as prepayments of principal. The Company monitors the risk of the fair value of its pledged collateral falling below acceptable amounts based on the type of the underlying repurchase agreement. The pledged collateral related to the Company’s term wholesale repurchase agreement, which matures in 2018, is monitored on a monthly basis and additional capital is pledged when necessary. The pledged collateral related to the Company’s sweep repurchase agreements, which mature on a daily basis, is monitored on a daily basis as the underlying sweep accounts can have daily transaction activity and the amount of pledged collateral is adjusted as necessary.
11.
Shareholders’ Equity
Preferred Stock. In conjunction with the 2013 acquisition of West Coast, the Company issued 8,782 shares of mandatorily convertible cumulative participating preferred stock, Series B (“Series B Preferred Stock”). The Series B Preferred Stock is not subject to the operation of a sinking fund. The Series B Preferred Stock is not redeemable by the Company and is perpetual with no maturity. The holders of Series B Preferred Stock have no general voting rights. If the Company declares and pays a dividend to its common shareholders, it must declare and pay to its holders of Series B Preferred Stock, on the same date, a dividend in an amount per share of the Series B Preferred Stock that is intended to provide such holders dividends in the amount they would have received if shares of Series B Preferred Stock had been converted into common stock as of that date. The outstanding shares of Series B Preferred Stock are convertible into 102,363 shares of Company common stock.
Dividends. On January 29, 2015, the Company declared a quarterly cash dividend of $0.16 per common share and common share equivalent for holders of preferred stock, and a special cash dividend of $0.14 per common share and common share equivalent for holders of preferred stock, both payable on February 25, 2015 to shareholders of record at the close of business on February 11, 2015.
On April 22, 2015, the Company declared a regular quarterly cash dividend of $0.18 per common share and common share equivalent for holders of preferred stock, and a special cash dividend of $0.16 per common share and common share equivalent for holders of preferred stock, both payable on May 20, 2015 to shareholders of record at the close of business on May 6, 2015.
Subsequent to quarter end, on July 23, 2015, the Company declared a regular quarterly cash dividend of $0.18 per common share and common share equivalent for holders of preferred stock, and a special cash dividend of $0.16 per common share and common share equivalent for holders of preferred stock, both payable on August 19, 2015 to shareholders of record at the close of business on August 5, 2015.
The payment of cash dividends is subject to federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both federal and state regulatory requirements.

29


12. Accumulated Other Comprehensive Income (Loss)
The following table shows changes in accumulated other comprehensive income (loss) by component for the three and six month periods ended June 30, 2015 and 2014:
 
 
Unrealized Gains and Losses on Available-for-Sale Securities (1)
 
Unrealized Gains and Losses on Pension Plan Liability (1)
 
Total (1)
Three months ended June 30, 2015
 
(in thousands)
Beginning balance
 
$
16,379

 
$
(2,093
)
 
$
14,286

Other comprehensive loss before reclassifications
 
(11,341
)
 

 
(11,341
)
Amounts reclassified from accumulated other comprehensive income (loss) (2)
 
(219
)
 
63

 
(156
)
Net current-period other comprehensive income (loss)
 
(11,560
)
 
63

 
(11,497
)
Ending balance
 
$
4,819

 
$
(2,030
)
 
$
2,789

Three months ended June 30, 2014
 
 
 
 
 
 
Beginning balance
 
$
(3,131
)
 
$
(1,912
)
 
$
(5,043
)
Other comprehensive income before reclassifications
 
8,768

 

 
8,768

Amounts reclassified from accumulated other comprehensive income (loss) (2)
 
(189
)
 
24

 
(165
)
Net current-period other comprehensive income
 
8,579

 
24

 
8,603

Ending balance
 
$
5,448

 
$
(1,888
)
 
$
3,560

Six months ended June 30, 2015
 
 
 
 
 
 
Beginning balance
 
$
7,462

 
$
(1,841
)
 
$
5,621

Other comprehensive loss before reclassifications
 
(1,965
)
 
(280
)
 
(2,245
)
Amounts reclassified from accumulated other comprehensive income (loss) (2)
 
(678
)
 
91

 
(587
)
Net current-period other comprehensive loss
 
(2,643
)
 
(189
)
 
(2,832
)
Ending balance
 
$
4,819

 
$
(2,030
)
 
$
2,789

Six months ended June 30, 2014
 
 
 
 
 
 
Beginning balance
 
$
(10,108
)
 
$
(1,936
)
 
$
(12,044
)
Other comprehensive income before reclassifications
 
15,887

 

 
15,887

Amounts reclassified from accumulated other comprehensive income (loss) (2)
 
(331
)
 
48

 
(283
)
Net current-period other comprehensive income
 
15,556

 
48

 
15,604

Ending balance
 
$
5,448

 
$
(1,888
)
 
$
3,560

__________
(1) All amounts are net of tax. Amounts in parenthesis indicate debits.
(2) See following table for details about these reclassifications.

30



The following table shows details regarding the reclassifications from accumulated other comprehensive income (loss) for the three and six month periods ended June 30, 2015 and 2014:
 
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Affected line Item in the Consolidated
 
 
2015
 
2014
 
2015
 
2014
 
Statement of Income
 
 
(in thousands)
 
 
Unrealized gains and losses on available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Investment securities gains
 
$
343

 
$
296

 
$
1,064

 
$
519

 
Investment securities gains, net
 
 
343

 
296

 
1,064

 
519

 
Total before tax
 
 
(124
)
 
(107
)
 
(386
)
 
(188
)
 
Income tax provision
 
 
$
219

 
$
189

 
$
678

 
$
331

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of pension plan liability
 
 
 
 
 
 
 
 
 
 
Actuarial losses
 
$
(98
)
 
$
(37
)
 
$
(142
)
 
$
(74
)
 
Compensation and employee benefits
 
 
(98
)
 
(37
)
 
(142
)
 
(74
)
 
Total before tax
 
 
35

 
13

 
51

 
26

 
Income tax benefit
 
 
$
(63
)
 
$
(24
)
 
$
(91
)
 
$
(48
)
 
Net of tax
13.
Fair Value Accounting and Measurement
The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Fair values are determined as follows:
Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all securities other than U.S. Treasury notes, which are considered a Level 1 input method.
Interest rate contract positions are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

31


The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2015 and December 31, 2014 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
 
Fair value
 
Fair Value Measurements at Reporting Date Using
 
 
Level 1
 
Level 2
 
Level 3
June 30, 2015
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations
 
$
1,041,079

 
$

 
$
1,041,079

 
$

State and municipal debt securities
 
489,031

 

 
489,031

 

U.S. government agency and government-sponsored enterprise securities
 
359,025

 

 
359,025

 

U.S. government securities
 
20,162

 
20,162

 

 

Other securities
 
5,148

 

 
5,148

 

Total securities available for sale
 
$
1,914,445

 
$
20,162

 
$
1,894,283

 
$

Other assets (Interest rate contracts)
 
$
10,659

 
$

 
$
10,659

 
$

Liabilities
 
 
 
 
 
 
 
 
Other liabilities (Interest rate contracts)
 
$
10,707

 
$

 
$
10,707

 
$

 
 
Fair value
 
Fair Value Measurements at Reporting Date Using
 
 
Level 1
 
Level 2
 
Level 3
December 31, 2014
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations
 
$
1,162,387

 
$

 
$
1,162,387

 
$

State and municipal debt securities
 
496,484

 

 
496,484

 

U.S. government agency and government-sponsored enterprise securities
 
413,706

 

 
413,706

 

U.S. government securities
 
20,499

 
20,499

 

 

Other securities
 
5,181

 

 
5,181

 

Total securities available for sale
 
$
2,098,257

 
$
20,499

 
$
2,077,758

 
$

Other assets (Interest rate contracts)
 
$
11,800

 
$

 
$
11,800

 
$

Liabilities
 
 
 
 
 
 
 
 
Other liabilities (Interest rate contracts)
 
$
11,851

 
$

 
$
11,851

 
$

There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the six month periods ended June 30, 2015 and 2014. The Company recognizes transfers between levels of the valuation hierarchy based on the valuation level at the end of the reporting period.

32


Nonrecurring Measurements
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:
Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral less estimated costs to sell if the loan is a collateral-dependent loan. Generally, the Company utilizes the fair market value of the collateral to measure impairment. The impairment evaluations are performed in conjunction with the ALLL process on a quarterly basis by officers in the Special Credits group, which reports to the Chief Credit Officer. The Real Estate Appraisal Services Department (“REASD”), which also reports to the Chief Credit Officer, is responsible for obtaining appraisals from third-parties or performing internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.
Other real estate owned—OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is generally measured based on the property’s fair market value as indicated by an appraisal or a letter of intent to purchase. OREO is initially recorded at the fair value less estimated costs to sell. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the ALLL, or in the event of a write-up without previous losses charged to the ALLL, a credit to earnings is recorded. Management periodically reviews OREO in an effort to ensure the property is recorded at its fair value, net of estimated costs to sell. Any fair value adjustments subsequent to acquisition are charged or credited to earnings. The initial and subsequent evaluations are performed by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD obtains appraisals from third-parties for OREO and performs internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.
The following tables set forth information related to the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the current and prior year quarterly periods:
 
 
Fair value at June 30, 2015
 
Fair Value Measurements at Reporting Date Using
 
Losses During the Three Months Ended
June 30, 2015
 
Losses During the Six Months Ended
June 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in thousands)
Impaired loans
 
$

 
$

 
$

 
$

 
$
1,138

 
$
1,138

OREO
 
1,664

 

 

 
1,664

 
611

 
655

 
 
$
1,664

 
$

 
$

 
$
1,664

 
$
1,749

 
$
1,793

 
 
Fair value at
June 30, 2014
 
Fair Value Measurements at Reporting Date Using
 
Losses During the Three Months Ended
June 30, 2014
 
Losses During the Six Months Ended June 30, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in thousands)
OREO (1)
 
$
3,226

 
$

 
$

 
$
3,226

 
$
862

 
$
1,602

 
 
$
3,226

 
$

 
$

 
$
3,226

 
$
862

 
$
1,602

__________
(1) Reclassified to conform to the current period’s presentation. The reclassification was limited to combining historically reported “Noncovered OREO” and “Covered OREO” into one line item for OREO.
The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent changes in any valuation allowances from updated appraisals that were recorded to earnings.

33


Quantitative information about Level 3 fair value measurements
The range and weighted-average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:
 
 
Fair value at June 30, 2015
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average) (1)
 
 
(dollars in thousands)
Impaired loans (2)
 
$

 
Fair Market Value of Collateral
 
Adjustment to Stated value
 
100%
OREO
 
1,664

 
Fair Market Value of Collateral
 
Adjustment to Appraisal Value
 
N/A (3)
(1) Discount applied to appraisal value, letter of intent to purchase, or stated value (in the case of accounts receivable, inventory and equipment).
(2) As there was only one impaired loan remeasured, a range of discounts could not be provided. The collateral for this loan consisted of non-proprietary software.
(3) Quantitative disclosures are not provided for OREO because there were no adjustments made to the appraisal value during the current period.
 
 
Fair value at
June 30, 2014
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average) (1)
 
 
(dollars in thousands)
OREO
 
$
3,226

 
Fair Market Value of Collateral
 
Adjustment to Appraisal Value
 
N/A (2)
(1) Discount applied to appraisal value, letter of intent to purchase, or stated value (in the case of accounts receivable, inventory and equipment).
(2) Quantitative disclosures are not provided for OREO because there were no adjustments made to the appraisal value during the current period.


34


Fair value of financial instruments
Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks and interest-earning deposits with banks—The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value that approximates carrying value (Level 1).
Securities available for sale—Securities at fair value, other than U.S. Treasury Notes, are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors (Level 2). U.S. Treasury Notes are priced using quotes in active markets (Level 1).
Federal Home Loan Bank stock—The fair value is based upon the par value of the stock which equates to its carrying value (Level 2).
Loans—Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. For most performing loans, fair value is estimated using expected duration and lending rates that would have been offered on June 30, 2015 or December 31, 2014, for loans which mirror the attributes of the loans with similar rate structures and average maturities. The fair values resulting from these calculations are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers’ credit quality since the loans were originated. For nonperforming loans, fair value is estimated by applying a valuation discount based upon loan sales data from the FDIC. For PCI loans, fair value is estimated by discounting the expected future cash flows using a lending rate that would have been offered on June 30, 2015 (Level 3).
FDIC loss-sharing asset —The fair value of the FDIC loss-sharing asset is estimated based on discounting the expected future cash flows using an estimated market rate (Level 3).
Interest rate contracts—Interest rate swap positions are valued in models, which use readily observable market parameters as their basis (Level 2).
Deposits—For deposits with no contractual maturity, the fair value is equal to the carrying value (Level 1). The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and current market rates for deposits of similar remaining maturities (Level 2).
FHLB advances—The fair value of FHLB advances is estimated based on discounting the future cash flows using the market rate currently offered (Level 2).
Repurchase Agreements—The fair value of term repurchase agreements is estimated based on discounting the future cash flows using the market rate currently offered. The carrying amount of sweep repurchase agreements approximates their fair values due to the short period of time between repricing dates (Level 2).
Other Borrowings— Other borrowings are trust preferred obligations assumed by the Company in the Intermountain acquisition. The fair value is estimated as the carrying value as these obligations are redeemable and a market participant would expect redemption in the near-term (Level 2).
Other Financial Instruments—The majority of our commitments to extend credit and standby letters of credit carry current market interest rates if converted to loans, as such, carrying value is assumed to equal fair value.

35


The following tables summarize carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value at June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
 
Carrying
Amount
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
172,139

 
$
172,139

 
$
172,139

 
$

 
$

Interest-earning deposits with banks
 
5,564

 
5,564

 
5,564

 

 

Securities available for sale
 
1,914,445

 
1,914,445

 
20,162

 
1,894,283

 

FHLB stock
 
11,803

 
11,803

 

 
11,803

 

Loans held for sale
 
4,220

 
4,220

 

 
4,220

 

Loans
 
5,542,640

 
5,624,212

 

 

 
5,624,212

FDIC loss-sharing asset
 
9,344

 
1,356

 

 

 
1,356

Interest rate contracts
 
10,659

 
10,659

 

 
10,659

 

Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
7,044,373

 
$
7,041,949

 
$
6,562,670

 
$
479,279

 
$

FHLB Advances
 
45,549

 
46,057

 

 
46,057

 

Repurchase agreements
 
92,230

 
93,175

 

 
93,175

 

Interest rate contracts
 
10,707

 
10,707

 

 
10,707

 

 
 
December 31, 2014
 
 
Carrying
Amount
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
171,221

 
$
171,221

 
$
171,221

 
$

 
$

Interest-earning deposits with banks
 
16,949

 
16,949

 
16,949

 

 

Securities available for sale
 
2,098,257

 
2,098,257

 
20,499

 
2,077,758

 

FHLB stock
 
33,365

 
33,365

 

 
33,365

 

Loans held for sale
 
1,116

 
1,116

 

 
1,116

 

Loans
 
5,375,809

 
5,516,286

 

 

 
5,516,286

FDIC loss-sharing asset
 
15,174

 
4,054

 

 

 
4,054

Interest rate contracts
 
11,800

 
11,800

 

 
11,800

 

Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
6,924,722

 
$
6,921,804

 
$
6,416,017

 
$
505,787

 
$

FHLB Advances
 
216,568

 
217,296

 

 
217,296

 

Repurchase agreements
 
105,080

 
106,171

 

 
106,171

 

Other borrowings
 
8,248

 
8,248

 

 
8,248

 

Interest rate contracts
 
11,851

 
11,851

 

 
11,851

 

14.
Earnings per Common Share
The Company applies the two-class method of computing basic and diluted EPS. Under the two-class method, EPS is determined for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The Company issues restricted shares under share-based compensation plans and preferred shares which qualify as participating securities.

36


The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands except per share)
Basic EPS:
 
 
 
 
 
 
 
 
Net income
 
$
21,946

 
$
21,227

 
$
46,307

 
$
41,071

Less: Earnings allocated to participating securities:
 
 
 
 
 
 
 
 
Preferred Shares
 
39

 
41

 
82

 
79

Nonvested restricted shares
 
248

 
206

 
475

 
378

Earnings allocated to common shareholders
 
$
21,659

 
$
20,980

 
$
45,750

 
$
40,614

Weighted average common shares outstanding
 
57,055

 
52,088

 
56,999

 
51,600

Basic earnings per common share
 
$
0.38

 
$
0.40

 
$
0.80

 
$
0.79

Diluted EPS:
 
 
 
 
 
 
 
 
Earnings allocated to common shareholders (1)
 
$
21,659

 
$
20,981

 
$
45,750

 
$
40,617

Weighted average common shares outstanding
 
57,055

 
52,088

 
56,999

 
51,600

Dilutive effect of equity awards
 
14

 
406

 
13

 
863

Weighted average diluted common shares outstanding
 
57,069

 
52,494

 
57,012

 
52,463

Diluted earnings per common share
 
$
0.38

 
$
0.40

 
$
0.80

 
$
0.77

Potentially dilutive share options that were not included in the computation of diluted EPS because to do so would be anti-dilutive
 
37

 
63

 
45

 
73

__________
(1)
Earnings allocated to common shareholders for basic and diluted EPS may differ under the two-class method as a result of adding common stock equivalents for options and warrants to dilutive shares outstanding, which alters the ratio used to allocate earnings to common shareholders and participating securities for the purposes of calculating diluted EPS.
15.
Subsequent Event
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
On August 6, 2015, we filed a shelf registration statement with the Securities and Exchange Commission registering an unlimited amount of any combination of debt or equity securities, depositary shares, purchase contracts, units and warrants in one or more offerings. Specific information regarding the terms of and the securities being offered will be provided at the time of any offering. Proceeds from future offerings are expected to be used for general corporate purposes, including, but not limited to, the repayment of debt, repurchasing or redeeming outstanding securities, working capital, funding future acquisitions or other purposes identified at the time of any offering.


37


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited consolidated financial statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, “Columbia” and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2014 audited consolidated financial statements and its accompanying notes included 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the factors set forth in the section titled “Risk Factors” in the Company’s Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results expressed or implied by the forward-looking statements:
local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth and maintain the quality of our earning assets;
the risks presented by the economy, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions and infrastructure may not be realized;
the ability to complete future acquisitions and to successfully integrate acquired entities;
interest rate changes could significantly reduce net interest income and negatively affect funding sources;
projected business increases following strategic expansion or opening of new branches could be lower than expected;
the impact of acquired loans on our earnings;
changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
changes in laws and regulations affecting our businesses, including changes in the enforcement and interpretation of such laws and regulations by applicable governmental and regulatory agencies;
competition among financial institutions could increase significantly;
continued consolidation in the Pacific Northwest financial services industry resulting in the creation of larger financial institutions that may have greater resources could change the competitive landscape;
the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;
the reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers;
our ability to identify and address cyber-security risks, including security breaches, “denial of service attacks,” “hacking” and identity theft;
any material failure or interruption of our information and communications systems or inability to keep pace with technological changes;
our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk;
the effect of geopolitical instability, including wars, conflicts and terrorist attacks;
our profitability measures could be adversely affected if we are unable to effectively manage our capital; and
the effects of any damage to our reputation resulting from developments related to any of the items identified above.
You should take into account that forward-looking statements speak only as of the date of this report. Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue

38


reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under federal securities laws.
CRITICAL ACCOUNTING POLICIES
Management has identified the accounting policies related to the ALLL, business combinations, PCI loans, FDIC loss-sharing asset and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation” under the headings “Allowance for Loan and Lease Losses”, “Business Combinations”, “Purchased Credit Impaired Loans”, “FDIC Loss-Sharing Asset” and “Valuation and Recoverability of Goodwill” in our 2014 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies as compared to those disclosed in our 2014 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, data processing and legal and professional fees. Like most financial institutions, our 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.
On November 1, 2014, the Company completed its acquisition of Intermountain. The Company acquired approximately $964.4 million in assets, including $502.6 million in loans measured at fair value, and approximately $736.8 million in deposits. Due to the timing of this acquisition, our results of operations for the six month period ended June 30, 2015 include the acquisition for the entire period, however the prior year period does not include the acquisition. See Note 3 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report for further information regarding this acquisition.
Earnings Summary
The Company reported net income for the second quarter of $21.9 million or $0.38 per diluted common share, compared to $21.2 million or $0.40 per diluted common share for the second quarter of 2014. The increase in net income for the current quarter compared to the prior year period was due to a combination of higher net interest income and noninterest income, partially offset by higher noninterest expense. These fluctuations were primarily due to the timing of the acquisition of Intermountain, as noted above.
Comparison of current quarter to prior year period
Revenue (net interest income plus noninterest income) for the three months ended June 30, 2015 was $102.5 million, 14% higher than the same period in 2014. The increase in revenue was a result of higher net interest income due to both the acquired loans and securities from the acquisition of Intermountain as well as organic loan growth. Also contributing to the increase in revenue was higher noninterest income due to both a decrease in the expense recorded for the change in the FDIC loss-sharing asset as well as an increase in service charges and other fees. For a more complete discussion of these topics, please refer to the net interest income and noninterest income sections contained in the ensuing pages.
The provision for loan and lease losses for the second quarter of 2015 was $2.2 million compared to a provision of $2.1 million during the second quarter of 2014. The provision recorded in the second quarter of 2015 was due to the recording of a $1.7 million provision on loans, excluding PCI loans and $476 thousand provision on PCI loans. For a more complete discussion of this topic, please refer to the provision for loan and lease losses section contained in the ensuing pages.
Total noninterest expense for the quarter ended June 30, 2015 was $68.5 million, up from $57.8 million for the second quarter of 2014. The increase from the prior-year period was primarily due to additional ongoing noninterest expense stemming from the growth resulting from the Intermountain acquisition as well as higher acquisition-related expenses recorded during the second quarter of 2015. For a more complete discussion of this topic, please refer to the noninterest expense section contained in the ensuing pages.


39


Net income was positively affected by the pre-tax earnings impact of the FDIC acquired loan portfolios for the current period, but was negatively affected by the pre-tax earnings impact of the FDIC acquired loan portfolios during the prior year period. The negative effect of the FDIC acquired loan portfolios in the prior year period was primarily due to greater amortization of the FDIC loss-sharing asset recorded in the prior year period. With the recent expiration of our two largest FDIC loss-sharing agreements, the amortization of the FDIC loss-sharing asset has declined. The following table illustrates the impact to earnings associated with the Company’s FDIC acquired loan portfolios for the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
( in thousands)
Incremental accretion income on FDIC purchased credit impaired loans
 
$
2,367

 
$
5,734

 
$
4,814

 
$
12,223

Incremental accretion income on other FDIC acquired loans
 
15

 
95

 
132

 
299

Provision for losses on purchased credit impaired loans
 
(476
)
 
(1,517
)
 
(3,085
)
 
(3,939
)
Change in FDIC loss-sharing asset (1)
 
(1,494
)
 
(5,050
)
 
(1,344
)
 
(9,869
)
FDIC clawback liability recovery (expense)
 
30

 
103

 
7

 
(101
)
Pre-tax earnings impact of FDIC acquired loan portfolios
 
$
442

 
$
(635
)
 
$
524

 
$
(1,387
)
__________
(1) For additional information on the FDIC loss-sharing asset, please see the “FDIC Loss-sharing Asset” section of this Management’s Discussion and Analysis and Note 8 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
Revenue (net interest income plus noninterest income) for the six months ended June 30, 2015 was $205.6 million, compared to $177.7 million for the same period in 2014. The increase in revenue was a result of higher net interest income due to both the acquired loans and securities from the acquisition of Intermountain as well as organic loan growth. Also contributing to the increase in revenue was higher noninterest income due to both a decrease in the expense recorded for the change in the FDIC loss-sharing asset as well as an increase in service charges and other fees. For a more complete discussion of this topic, please refer to the net interest income section and noninterest income sections contained in the ensuing pages.
The provision for loan and lease losses for the six months ended June 30, 2015 was $3.4 million compared to a provision of $4.0 million for the first six months of 2014. The $3.4 million provision was due to the recording of a $3.1 provision on PCI loans and a $326 thousand provision on loans, excluding PCI loans. For a more complete discussion of this topic, please refer to the provision for loan and lease losses section contained in the ensuing pages.
Total noninterest expense for the six months ended June 30, 2015 was $135.2 million, a 17% increase from the first six months of 2014. The increase from the prior-year period was primarily due to additional ongoing noninterest expense stemming from the growth resulting from the Intermountain acquisition as well as higher acquisition-related expenses recorded during the six months ended June 30, 2015. For a more complete discussion of this topic, please refer to the noninterest expense section contained in the ensuing pages.
Net Interest Income
Comparison of current quarter to prior year period
Net interest income for the second quarter of 2015 was $81.0 million, an increase of 8% from $75.1 million for the same quarter in 2014. The increase in net interest income was due to the acquired loans and securities from the Intermountain transaction as well as organic growth in the loan portfolio, partially offset by lower incremental accretion income on acquired loans. For additional information on the Company’s accounting policies related to recording interest income on loans, please refer to “Item 8. Financial Statements and Supplementary Data” in our 2014 Annual Report on Form 10-K.

40


The Company’s net interest margin (tax equivalent) decreased to 4.41% in the second quarter of 2015, from 4.86% for the same quarter last year. This decrease was due to lower incremental accretion income on acquired loan portfolios. The Company’s operating net interest margin (tax equivalent) (1) decreased to 4.17% from 4.27% due to lower rates on loans and securities.
Comparison of current year-to-date to prior year period
Net interest income for the six months ended June 30, 2015 was $161.4 million, an increase of 8% from $149.1 million for the same period in 2014. The increase in net interest income was due to higher average loan and securities balances during the current year as a result of the acquisition of Intermountain and organic growth in the loan portfolio. The Company’s net interest margin (tax equivalent) decreased to 4.40% for the first six months of 2015, from 4.86% for the prior year period. The decrease in the Company’s net interest margin (tax equivalent) was primarily due to lower accretion income on the acquired loan portfolios. As shown in the table below, the Company recorded $14.8 million in total incremental accretion during the six months ended June 30, 2015, a decrease of $8.8 million from the prior year period. The Company’s operating net interest margin (tax equivalent) (1) for the six months ended June 30, 2015 decreased modestly to 4.18% from 4.23% due to lower rates on loans and securities.
The following table shows the impact to interest income of incremental accretion income as well as the net interest margin and operating net interest margin for the periods presented:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(dollars in thousands)
Incremental accretion income due to:
 
 
 
 
 
 
 
 
FDIC purchased credit impaired loans
 
$
2,367

 
$
5,734

 
$
4,814

 
$
12,223

Other FDIC acquired loans
 
15

 
95

 
132

 
299

Other acquired loans
 
4,889

 
5,481

 
9,823

 
11,096

Incremental accretion income
 
$
7,271

 
$
11,310

 
$
14,769

 
$
23,618

 
 
 
 
 
 
 
 
 
Net interest margin (tax equivalent)
 
4.41
%
 
4.86
%
 
4.40
%
 
4.86
%
Operating net interest margin (tax equivalent) (1)
 
4.17
%
 
4.27
%
 
4.18
%
 
4.23
%
__________
(1) Operating net interest margin (tax equivalent) is a non-GAAP measurement. See Non-GAAP measures section of Item 2, Management’s Discussion and Analysis.

41


The following tables set forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and, in total, net interest income and net interest margin:
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net (1)(2)(3)
 
$
5,542,489

 
$
72,410

 
5.23
%
 
$
4,646,356

 
$
67,429

 
5.80
%
Taxable securities
 
1,516,740

 
7,260

 
1.91
%
 
1,281,753

 
6,382

 
1.99
%
Tax exempt securities (3)
 
460,219

 
4,631

 
4.03
%
 
364,240

 
4,192

 
4.60
%
Interest-earning deposits with banks
 
40,840

 
26

 
0.25
%
 
46,753

 
30

 
0.26
%
Total interest-earning assets
 
7,560,288

 
$
84,327

 
4.46
%
 
6,339,102

 
$
78,033

 
4.92
%
Other earning assets
 
148,573

 
 
 
 
 
130,462

 
 
 
 
Noninterest-earning assets
 
823,312

 
 
 
 
 
759,623

 
 
 
 
Total assets
 
$
8,532,173

 
 
 
 
 
$
7,229,187

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit
 
$
489,984

 
$
236

 
0.19
%
 
$
480,459

 
$
325

 
0.27
%
Savings accounts
 
626,930

 
17

 
0.01
%
 
527,370

 
14

 
0.01
%
Interest-bearing demand
 
883,366

 
155

 
0.07
%
 
1,187,274

 
115

 
0.04
%
Money market accounts
 
1,752,821

 
332

 
0.08
%
 
1,612,607

 
275

 
0.07
%
Total interest-bearing deposits
 
3,753,101

 
740

 
0.08
%
 
3,807,710

 
729

 
0.08
%
Federal Home Loan Bank advances
 
121,828

 
154

 
0.51
%
 
68,306

 
115

 
0.67
%
Other borrowings
 
86,084

 
136

 
0.63
%
 
25,000

 
119

 
1.90
%
Total interest-bearing liabilities
 
3,961,013

 
$
1,030

 
0.10
%
 
3,901,016

 
$
963

 
0.10
%
Noninterest-bearing deposits
 
3,225,371

 
 
 
 
 
2,161,171

 
 
 
 
Other noninterest-bearing liabilities
 
97,902

 
 
 
 
 
82,073

 
 
 
 
Shareholders’ equity
 
1,247,887

 
 
 
 
 
1,084,927

 
 
 
 
Total liabilities & shareholders’ equity
 
$
8,532,173

 
 
 
 
 
$
7,229,187

 
 
 
 
Net interest income (tax equivalent)
 
$
83,297

 
 
 
 
 
$
77,070

 
 
Net interest margin (tax equivalent)
 
4.41
%
 
 
 
 
 
4.86
%
__________
(1)
Adjusted to conform to the current period presentation. The adjustment was limited to including amounts historically disclosed as “Covered loans” in “Loans, net.”
(2)
Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on certain acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $1.5 million and $1.2 million for the three months ended June 30, 2015 and 2014, respectively. The incremental accretion income on acquired loans was $7.3 million and $11.3 million for the three months ended June 30, 2015 and 2014, respectively.
(3)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $666 thousand and $425 thousand for the three months ended June 30, 2015 and 2014, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.6 million and $1.5 million for the three months ended June 30, 2015 and 2014, respectively.


42


The following tables set forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and, in total, net interest income and net interest margin:
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net (1)(2)(3)
 
$
5,479,067

 
$
143,897

 
5.25
%
 
$
4,592,033

 
$
133,327

 
5.81
%
Taxable securities
 
1,562,776

 
14,786

 
1.89
%
 
1,305,584

 
13,134

 
2.01
%
Tax exempt securities (3)
 
459,853

 
9,311

 
4.05
%
 
358,497

 
8,301

 
4.63
%
Interest-earning deposits with banks
 
43,054

 
53

 
0.25
%
 
36,043

 
44

 
0.24
%
Total interest-earning assets
 
7,544,750

 
$
168,047

 
4.45
%
 
6,292,157

 
$
154,806

 
4.92
%
Other earning assets
 
147,321

 
 
 
 
 
128,703

 
 
 
 
Noninterest-earning assets
 
826,976

 
 
 
 
 
765,849

 
 
 
 
Total assets
 
$
8,519,047

 
 
 
 
 
$
7,186,709

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit
 
$
496,101

 
$
476

 
0.19
%
 
$
491,731

 
$
687

 
0.28
%
Savings accounts
 
626,036

 
36

 
0.01
%
 
520,678

 
28

 
0.01
%
Interest-bearing demand
 
1,047,844

 
293

 
0.06
%
 
1,178,042

 
223

 
0.04
%
Money market accounts
 
1,784,198

 
683

 
0.08
%
 
1,599,686

 
543

 
0.07
%
Total interest-bearing deposits
 
3,954,179

 
1,488

 
0.08
%
 
3,790,137

 
1,481

 
0.08
%
Federal Home Loan Bank advances
 
125,812

 
313

 
0.50
%
 
69,491

 
229

 
0.66
%
Other borrowings
 
97,066

 
282

 
0.58
%
 
25,000

 
238

 
1.90
%
Total interest-bearing liabilities
 
4,177,057

 
$
2,083

 
0.10
%
 
3,884,628

 
$
1,948

 
0.10
%
Noninterest-bearing deposits
 
2,999,075

 
 
 
 
 
2,145,407

 
 
 
 
Other noninterest-bearing liabilities
 
98,526

 
 
 
 
 
80,485

 
 
 
 
Shareholders’ equity
 
1,244,389

 
 
 
 
 
1,076,189

 
 
 
 
Total liabilities & shareholders’ equity
 
$
8,519,047

 
 
 
 
 
$
7,186,709

 
 
 
 
Net interest income (tax equivalent)
 
$
165,964

 
 
 
 
 
$
152,858

 
 
Net interest margin (tax equivalent)
 
4.40
%
 
 
 
 
 
4.86
%
__________
(1)
Adjusted to conform to the current period presentation. The adjustment was limited to including amounts historically disclosed as “Covered loans” in “Loans, net.”
(2)
Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on certain acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $2.6 million and $2.1 million for the six months ended June 30, 2015 and 2014, respectively. The incremental accretion income on acquired loans was $14.8 million and $23.6 million for the six months ended June 30, 2015 and 2014, respectively.
(3)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $1.3 million and $782 thousand for the six months ended June 30, 2015 and 2014, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.3 million and $3.0 million for the six months ended June 30, 2015 and 2014, respectively.


43


The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
 
 
Three Months Ended June 30,
2015 Compared to 2014
Increase (Decrease) Due to
 
 
Volume
 
Rate
 
Total
 
 
(in thousands)
Interest Income
 
 
 
 
 
 
Loans, net
 
$
12,149

 
$
(7,168
)
 
$
4,981

Taxable securities
 
1,133

 
(255
)
 
878

Tax exempt securities
 
1,011

 
(572
)
 
439

Interest earning deposits with banks
 
(4
)
 

 
(4
)
Interest income
 
$
14,289

 
$
(7,995
)
 
$
6,294

Interest Expense
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Certificates of deposit
 
$
6

 
$
(95
)
 
$
(89
)
Savings accounts
 
2

 
1

 
3

Interest-bearing demand
 
(35
)
 
75

 
40

Money market accounts
 
26

 
31

 
57

Total interest on deposits
 
(1
)
 
12

 
11

Federal Home Loan Bank advances
 
72

 
(33
)
 
39

Other borrowings
 
24

 
(7
)
 
17

Interest expense
 
$
95

 
$
(28
)
 
$
67


44


The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
 
 
Six Months Ended June 30,
2015 Compared to 2014
Increase (Decrease) Due to
 
 
Volume
 
Rate
 
Total
 
 
(in thousands)
Interest Income
 
 
 
 
 
 
Loans, net
 
$
24,109

 
$
(13,539
)
 
$
10,570

Taxable securities
 
2,469

 
(817
)
 
1,652

Tax exempt securities
 
2,143

 
(1,133
)
 
1,010

Interest earning deposits with banks
 
9

 

 
9

Interest income
 
$
28,730

 
$
(15,489
)
 
$
13,241

Interest Expense
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Certificates of deposit
 
$
6

 
$
(217
)
 
$
(211
)
Savings accounts
 
5

 
3

 
8

Interest-bearing demand
 
(26
)
 
96

 
70

Money market accounts
 
66

 
74

 
140

Total interest on deposits
 
51

 
(44
)
 
7

Federal Home Loan Bank advances
 
151

 
(67
)
 
84

Other borrowings
 
59

 
(15
)
 
44

Interest expense
 
$
261

 
$
(126
)
 
$
135

Provision for Loan and Lease Losses
Comparison of current quarter to prior year period
During the second quarter of 2015, the Company recorded a $2.2 million provision expense compared with a provision expense of $2.1 million during the second quarter of 2014. The $2.2 million net provision for loan and lease losses recorded during the current quarter was driven by the loans, excluding PCI loans portfolio, for which Columbia recorded a provision of $1.7 million and by a provision of $476 thousand related to PCI loans. The provision of $1.7 million related to loans, excluding PCI loans was due to charge-off activity during the current quarter as well as organic loan growth. The provision recorded relating to PCI loans was due to the decrease in the present value of expected future cash flows as remeasured during the current quarter, compared to the present value of expected future cash flows during the first quarter of 2015. The amount of provision was calculated in accordance with the Company’s methodology for determining the ALLL, discussed in Note 6 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
The provision for loan and lease losses for the six months ended June 30, 2015 was $3.4 million compared with provision expense of $4.0 million during the same period in 2014. The $3.4 million provision expense for loans recorded for the current year-to-date period was driven by the PCI loan portfolio, for which Columbia recorded a provision of $3.1 million and by a provision of $326 thousand related to loans, excluding PCI loans. The $3.1 million in provision expense for losses on PCI loans in the current period was primarily due to the decrease in the present value of expected future cash flows as remeasured during the current period, compared to the present value of expected future cash flows at the end of 2014, net of activity during the period. The $3.1 million provision related to PCI loans was partially offset by a $1.5 million favorable adjustment to the change in FDIC loss-sharing asset. The provision of $326 thousand related to loans, excluding PCI loans was due to the combination of loan growth and net loan charge-offs experienced in the period. The amount of provision was calculated in accordance with the Company’s methodology for determining the ALLL, discussed in Note 6 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.

45


Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
 
(dollars in thousands)
Service charges and other fees
 
$
15,874

 
$
13,790

 
$
2,084

 
15
 %
 
$
30,743

 
$
26,726

 
$
4,017

 
15
 %
Merchant services fees
 
2,340

 
2,040

 
300

 
15
 %
 
4,380

 
3,910

 
470

 
12
 %
Bank owned life insurance
 
1,206

 
976

 
230

 
24
 %
 
2,284

 
1,941

 
343

 
18
 %
Other
 
3,193

 
2,575

 
618

 
24
 %
 
7,102

 
5,408

 
1,694

 
31
 %
Subtotal
 
22,613

 
19,381

 
3,232

 
17
 %
 
44,509

 
37,985

 
6,524

 
17
 %
Investment securities gains, net
 
343

 
296

 
47

 
16
 %
 
1,064

 
519

 
545

 
105
 %
Change in FDIC loss-sharing asset
 
(1,494
)
 
(5,050
)
 
3,556

 
(70
)%
 
(1,344
)
 
(9,869
)
 
8,525

 
(86
)%
Total noninterest income
 
$
21,462

 
$
14,627

 
$
6,835

 
47
 %
 
$
44,229

 
$
28,635

 
$
15,594

 
54
 %
Comparison of current quarter to prior year period
Noninterest income was $21.5 million for the second quarter of 2015, compared to $14.6 million for the same period in 2014. The increase was primarily due to lower expense recorded for the change in FDIC loss-sharing asset, which was $3.6 million less in the current quarter compared to the same period in the prior year. Also contributing to the increase compared to the second quarter of 2014 was an increase in service charges and other fees of $2.1 million resulting from the increased customer base from the acquisition of Intermountain and an increase in other noninterest income primarily due to higher loan prepayment fees in the current quarter.
The change in FDIC loss-sharing asset has been a significant component of noninterest income. Changes in the asset are primarily driven by amortization of the asset, the provision recorded for reimbursable losses on covered loans and write-downs of covered other real estate owned (“OREO”). For the second quarter of 2015, the change in the asset was primarily driven by $1.4 million of amortization of the asset. The decline in amortization recorded in the current quarter was due to the recent expiration of our two most significant FDIC loss-sharing agreements. For the same period in 2014, there was $5.8 million of amortization of the asset and sales of OREO of $965 thousand, which were partially offset by increases in the asset of $1.2 million related to the provision recorded for reimbursable losses on covered loans and $276 thousand related to write-downs of OREO. For additional information on the FDIC loss-sharing asset, please see the “FDIC Loss-sharing Asset” section of this Management’s Discussion and Analysis and Note 8 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
For the six months ended June 30, 2015, noninterest income was $44.2 million compared to $28.6 million for the same period in 2014. The increase was primarily due to lower expense recorded for the change in FDIC loss-sharing asset, which was $8.5 million less in the current period compared to the prior year period. The increase was also driven by an increase of $4.0 million in service charges and other fees due to the increased customer base from the Intermountain acquisition and an increase of $1.7 million in other noninterest income due to both higher gains on sales of loans and increased loan prepayment fees in the current year.

46


Noninterest Expense
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014 (1)
 
$ Change
 
% Change
 
2015
 
2014 (1)
 
$ Change
 
% Change
 
 
(dollars in thousands)
Compensation and employee benefits
 
$
38,446

 
$
31,064

 
$
7,382

 
24
%
 
$
77,546

 
$
62,402

 
$
15,144

 
24
 %
All other noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Occupancy
 
8,687

 
8,587

 
100

 
1
%
 
16,680

 
16,831

 
(151
)
 
(1
)%
Merchant processing
 
1,079

 
998

 
81

 
8
%
 
2,056

 
1,978

 
78

 
4
 %
Advertising and promotion
 
1,195

 
950

 
245

 
26
%
 
2,126

 
1,719

 
407

 
24
 %
Data processing and communications
 
4,242

 
3,680

 
562

 
15
%
 
9,226

 
7,200

 
2,026

 
28
 %
Legal and professional services
 
2,847

 
2,303

 
544

 
24
%
 
5,354

 
4,472

 
882

 
20
 %
Taxes, license and fees
 
1,427

 
1,051

 
376

 
36
%
 
2,659

 
2,231

 
428

 
19
 %
Regulatory premiums
 
1,321

 
1,073

 
248

 
23
%
 
2,542

 
2,249

 
293

 
13
 %
Net cost (benefit) of operation of other real estate owned (1)
 
(563
)
 
(97
)
 
(466
)
 
480
%
 
(1,809
)
 
49

 
(1,858
)
 
(3,792
)%
Amortization of intangibles
 
1,718

 
1,480

 
238

 
16
%
 
3,535

 
3,060

 
475

 
16
 %
Other
 
8,072

 
6,675

 
1,397

 
21
%
 
15,290

 
12,959

 
2,331

 
18
 %
Total all other noninterest expense
 
30,025

 
26,700

 
3,325

 
12
%
 
57,659

 
52,748

 
4,911

 
9
 %
Total noninterest expense
 
$
68,471

 
$
57,764

 
$
10,707

 
19
%
 
$
135,205

 
$
115,150

 
$
20,055

 
17
 %
__________
(1) Reclassified to conform to the current period’s presentation. The reclassification was limited to removing the separate line item for “Net benefit of operation of covered other real estate owned” and including the prior period activity in the line item for net cost (benefit) of operation of other real estate owned.
The following table shows the impact of the acquisition-related expenses for the periods indicated to the various components of noninterest expense:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Acquisition-related expenses:
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
$
3,035

 
$
73

 
$
3,373

 
$
654

Occupancy
 
804

 
547

 
1,303

 
686

Advertising and promotion
 
247

 

 
343

 

Data processing and communications
 
180

 

 
1,738

 

Legal and professional fees
 
632

 
26

 
1,024

 
213

Other
 
745

 
26

 
836

 
85

Total impact of acquisition-related costs to noninterest expense (1)
 
$
5,643

 
$
672

 
$
8,617

 
$
1,638

__________
(1) Of the $8.6 million in acquisition-related expenses recorded during the six months ended June 30, 2015, $8.5 million related to the recent acquisition of Intermountain and $72 thousand related to the acquisition of West Coast Bancorp (“West Coast”). The acquisition-related expenses recorded during the six months ended June 30, 2014 related only to the acquisition of West Coast.

47


Comparison of current quarter to prior year period
Total noninterest expense for the second quarter of 2015 was $68.5 million, an increase of $10.7 million from a year earlier. The increase from the prior year period was due to additional ongoing noninterest expense stemming from the growth resulting from the Intermountain acquisition. Also contributing to the increase from the prior year period were acquisition-related expenses, which were $5.6 million during the current quarter compared to $672 thousand for the prior year period.
Comparison of current year-to-date to prior year period
For the six months ended June 30, 2015, noninterest expense was $135.2 million, an increase of $20.1 million, or 17% from $115.2 million a year earlier. The increase from the prior-year period was due to additional ongoing noninterest expense stemming from the growth resulting from the Intermountain acquisition. Also contributing to the increase from the prior year period were acquisition-related expenses, which were $8.6 million during the six months ended June 30, 2015 compared to $1.6 million for the prior year period.
The following table presents selected items included in Other noninterest expense and the associated change from period to period:
 
 
Three Months Ended June 30,
 
Increase
(Decrease)
Amount
 
Six Months Ended June 30,
 
Increase
(Decrease)
Amount
 
 
2015
 
2014
 
2015
 
2014
 
 
 
(in thousands)
Postage
 
$
608

 
$
920

 
$
(312
)
 
$
1,416

 
$
1,822

 
$
(406
)
Software support & maintenance
 
834

 
456

 
378

 
1,871

 
1,006

 
865

Supplies
 
405

 
376

 
29

 
722

 
756

 
(34
)
Insurance
 
630

 
398

 
232

 
1,026

 
800

 
226

ATM Network
 
413

 
179

 
234

 
806

 
468

 
338

Travel
 
952

 
527

 
425

 
1,498

 
949

 
549

Employee expenses
 
378

 
249

 
129

 
657

 
548

 
109

Sponsorships and charitable contributions
 
563

 
519

 
44

 
995

 
1,121

 
(126
)
Directors fees
 
216

 
162

 
54

 
455

 
331

 
124

Federal Reserve Bank processing fees
 
181

 
69

 
112

 
328

 
136

 
192

Investments in affordable housing projects expense
 

 
263

 
(263
)
 

 
529

 
(529
)
Investor relations
 
209

 
140

 
69

 
270

 
178

 
92

Other personal property owned
 
2

 
(20
)
 
22

 
6

 
(144
)
 
150

FDIC clawback expense
 
(30
)
 
(103
)
 
73

 
(7
)
 
101

 
(108
)
Miscellaneous
 
2,711

 
2,540

 
171

 
5,247

 
4,358

 
889

Total other noninterest expense
 
$
8,072

 
$
6,675

 
$
1,397

 
$
15,290

 
$
12,959

 
$
2,331

Comparison of current quarter to prior year period
Other noninterest expense increased $1.4 million due to acquisition-related expenses and additional ongoing noninterest expense stemming from the acquisition of Intermountain. Acquisition-related expenses recorded to other noninterest expense during the second quarter of 2015 were $745 thousand compared to $26 thousand for the prior year period. Partially offsetting these increases were decreases in postage and investments in affordable housing projects expense. As a result of the adoption of ASU 2014-01 Accounting for Investments in Qualified Affordable Housing Projects, the expense related to investments in affordable housing projects is now recorded to provision for income taxes in the consolidated statements of income. For additional information, see Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in our 2014 Annual Report on Form 10-K.

48


Comparison of current year-to-date to prior year period
Other noninterest expense increased $2.3 million due to additional ongoing noninterest expense stemming from the growth resulting from the Intermountain acquisition and acquisition-related expenses. Acquisition-related expenses recorded to other noninterest expense during the six months ended June 30, 2015 were $836 thousand compared to $85 thousand for the prior year period.
Income Taxes
We recorded an income tax provision of $9.9 million for the second quarter of 2015, compared to a provision of $8.6 million for the same period in 2014. For the six months ended June 30, 2015 and 2014, we recorded an income tax provision of $20.7 million and $17.4 million, respectively, with an effective tax rate of 31% and 30%, respectively. Our effective tax rate remains lower than the statutory tax rate due to the amount of tax-exempt municipal securities held in the investment portfolio and tax-exempt earnings on bank owned life insurance. For additional information, please refer to the Company’s annual report on Form 10-K for the year ended December 31, 2014.
FINANCIAL CONDITION
Total assets were $8.52 billion as of June 30, 2015, a decrease of $60.8 million from $8.58 billion at December 31, 2014. The decrease was primarily due to a decrease in securities available for sale and a decrease in Federal Home Loan Bank stock, partially offset by an increase in loans. Total liabilities were $7.28 billion as of June 30, 2015, a decrease of $68.9 million from $7.35 billion at December 31, 2014. The decrease was primarily due to a decrease in Federal Home Loan Bank advances, partially offset by an increase in deposits.
Investment Securities
At June 30, 2015, the Company held investment securities totaling $1.91 billion compared to $2.10 billion at December 31, 2014. All of our securities are classified as available for sale and carried at fair value. The decrease in the investment securities portfolio from year-end is due to $206.2 million in principal payments, maturities and sales, $10.5 million in premium amortization and a $4.1 million decrease in the fair value of securities in the portfolio, partially offset by $37.1 million in purchases. The average duration of our investment portfolio was approximately 3 years and 8 months at June 30, 2015. This duration takes into account calls, where appropriate, and consensus prepayment speeds.
The investment securities are used by the Company as a component of its balance sheet management strategies. From time-to-time, securities may be sold to reposition the portfolio in response to strategies developed by the Company’s asset liability committee. In accordance with our investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent.
The Company performs a quarterly assessment of the debt and equity securities in its investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their amortized cost basis is other-than-temporary. Impairment is considered other-than-temporary when it becomes probable that the Company will be unable to recover the entire amortized cost basis of its investment. The Company’s impairment assessment takes into consideration factors such as the length of time and the extent to which the market value has been less than cost, defaults or deferrals of scheduled interest or principal, external credit ratings and recent downgrades, internal assessment of credit quality, and whether the Company intends to sell the security and whether it is more likely than not it will be required to sell the security prior to recovery of its amortized cost basis. If a decline in fair value is judged to be other-than-temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis. The new cost basis is not adjusted for subsequent recoveries in fair value.
When there are credit losses associated with an impaired debt security and the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company will separate the amount of the impairment into the amount that is credit-related and the amount related to non-credit factors. The credit-related impairment is recognized in earnings and the non-credit-related impairment is recognized in accumulated other comprehensive income.
At June 30, 2015, the market value of securities available for sale had a net unrealized gain of $7.0 million compared to a net unrealized gain of $11.2 million at December 31, 2014. The change in valuation was the result of fluctuations in market interest rates subsequent to purchase. At June 30, 2015, the Company had $897.1 million of investment securities with gross unrealized losses of $13.8 million; however, we did not consider these investment securities to be other-than-temporarily impaired.

49


The following table sets forth our securities portfolio by type for the dates indicated:
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Securities Available for Sale
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
1,041,079

 
$
1,162,387

State and municipal securities
 
489,031

 
496,484

U.S. government and government-sponsored enterprise securities
 
359,025

 
413,706

U.S. government securities
 
20,162

 
20,499

Other securities
 
5,148

 
5,181

Total
 
$
1,914,445

 
$
2,098,257

For further information on our investment portfolio, see Note 4 of the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Credit Risk Management
The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of our principal commerce activities. Our policies, applicable laws, and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
In analyzing our existing portfolio, we review our 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, 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.
We review these loans to assess the ability of our borrowers to service all 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, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan. For additional discussion on our methodology in managing credit risk within our loan portfolio, see the following: “Allowance for Loan and Lease Losses” section in this Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2014 Annual Report on Form 10-K.
Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of our Chief Credit Officer and approved, as appropriate, by the board of directors. Credit Administration, together with the management loan committee, has the responsibility for administering the credit approval process. As another part of its control process, we use an internal credit review and examination function to provide reasonable assurance that loans and commitments are made and maintained as prescribed by our credit policies. This includes a review of documentation when the loan is initially extended and subsequent examination to ensure continued performance and proper risk assessment.

50


Loan Portfolio Analysis
Our wholly owned banking subsidiary Columbia State Bank (“Columbia Bank” or the “Bank”) is a full service commercial bank, which originates a wide variety of loans, and focuses 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:
 
 
June 30, 2015
 
% of Total
 
December 31, 2014
 
% of Total
 
 
(dollars in thousands)
Commercial business
 
$
2,255,468

 
40.2
 %
 
$
2,119,565

 
38.9
 %
Real estate:
 
 
 
 
 
 
 
 
One-to-four family residential
 
181,849

 
3.2
 %
 
175,571

 
3.2
 %
Commercial and multifamily residential
 
2,406,594

 
42.9
 %
 
2,363,541

 
43.5
 %
Total real estate
 
2,588,443

 
46.1
 %
 
2,539,112

 
46.7
 %
Real estate construction:
 
 
 
 
 
 
 
 
One-to-four family residential
 
127,311

 
2.3
 %
 
116,866

 
2.1
 %
Commercial and multifamily residential
 
129,302

 
2.3
 %
 
134,443

 
2.5
 %
Total real estate construction
 
256,613

 
4.6
 %
 
251,309

 
4.6
 %
Consumer
 
358,365

 
6.4
 %
 
364,182

 
6.7
 %
Purchased credit impaired
 
202,367

 
3.6
 %
 
230,584

 
4.2
 %
Subtotal
 
5,661,256

 
100.9
 %
 
5,504,752

 
101.1
 %
Less: Net unearned income
 
(49,359
)
 
(0.9
)%
 
(59,374
)
 
(1.1
)%
Loans, net of unearned income (before Allowance for Loan and Lease Losses)
 
$
5,611,897

 
100.0
 %
 
$
5,445,378

 
100.0
 %
Loans held for sale
 
$
4,220

 
 
 
$
1,116

 
 
Total loans increased $166.5 million from year-end 2014. The loan portfolio continues to be diversified, with the intent to mitigate risk by minimizing concentration in any one segment. The $49.4 million in unearned income recorded at June 30, 2015 was comprised of $40.4 million in discount on acquired loans and $9.0 million in deferred loan fees. The $59.4 million in unearned income recorded at December 31, 2014 consisted of $50.8 million in discount on acquired loans and $8.6 million in deferred loan fees.
The following table provides additional detail related to the net discount of acquired and purchased loans, excluding PCI loans, by acquisition:
 
 
June 30, 2015
 
December 31, 2014
Acquisition:
 
(dollars in thousands)
Intermountain
 
$
9,071

 
$
10,453

West Coast
 
31,780

 
40,623

Other
 
(442
)
 
(303
)
Total net discount at period end
 
$
40,409

 
$
50,773

Commercial Loans: We are committed to providing competitive commercial lending in our primary market areas. Management expects a continued focus within its commercial lending products and to emphasize, in particular, relationship banking with businesses, and business owners.
Real Estate Loans: One-to-four family residential loans are secured by properties located within our primary market areas and, typically, have loan-to-value ratios of 80% or lower at origination. Our underwriting standards for commercial and multifamily residential loans 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. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

51


Real Estate Construction Loans: We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits and loan advance limits, as applicable. Our underwriting guidelines for commercial and multifamily residential real estate construction loans generally require that the loan-to-value ratio not exceed 75% and stabilized debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. As noted above, underwriting standards can be influenced by competition and other factors. However, we endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
Consumer Loans: Consumer loans include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.
Foreign Loans: The Company has 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, Oregon and Idaho.
Purchased Credit Impaired Loans: PCI loans are comprised of loans and loan commitments acquired in connection with the 2011 FDIC-assisted acquisitions of First Heritage Bank and Summit Bank, as well as the 2010 FDIC-assisted acquisitions of Columbia River Bank and American Marine Bank. PCI loans are generally accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).
For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
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 collectability of principal or interest within the existing terms of the loan, (ii) OREO; and (iii) other personal property owned, if applicable.
Nonaccrual 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 nonaccrual status, which occurs when there are serious doubts about the collectability of principal or interest. Our policy is generally to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status. Loans accounted for under ASC 310-30 are generally considered accruing and performing as the loans accrete interest income over the estimated lives of the loans when cash flows are reasonably estimable. Accordingly, PCI loans accounted for under ASC 310-30 that are contractually past due are still considered to be accruing and performing loans.

52


The following table set forth, at the dates indicated, information with respect to our nonaccrual loans and total nonperforming assets:
 
 
June 30,
2015
 
December 31,
2014
 
 
(in thousands)
Nonperforming assets
 
 
 
 
Nonaccrual loans:
 
 
 
 
Commercial business
 
$
13,539

 
$
16,799

Real estate:
 
 
 
 
One-to-four family residential
 
4,193

 
2,822

Commercial and multifamily residential
 
3,809

 
7,847

Total real estate
 
8,002

 
10,669

Real estate construction:
 
 
 
 
One-to-four family residential
 
1,937

 
465

Commercial and multifamily residential
 
469

 
480

Total real estate construction
 
2,406

 
945

Consumer
 
1,799

 
2,939

Total nonaccrual loans
 
25,746

 
31,352

Other real estate owned and other personal property owned
 
20,665

 
22,225

Total nonperforming assets
 
$
46,411

 
$
53,577

 
 
 
 
 
Loans, net of unearned income
 
$
5,611,897

 
$
5,445,378

Total assets
 
$
8,518,019

 
$
8,578,846

 
 
 
 
 
Nonperforming loans to period end loans
 
0.46
%
 
0.58
%
Nonperforming assets to period end assets
 
0.54
%
 
0.62
%
At June 30, 2015, nonperforming assets were $46.4 million, compared to $53.6 million at December 31, 2014. Nonperforming assets decreased $7.2 million during the six months ended June 30, 2015 as a result of a $5.6 decline in nonaccrual loans and a $1.6 million decline in OREO, primarily due to OREO sales.
Other Real Estate Owned: During the six months ended June 30, 2015, OREO decreased $1.6 million. The following table sets forth activity in OREO for the periods indicated:
 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
(in thousands)
Balance, beginning of period
 
$
22,190

 
$
35,927

Transfers in
 
7,836

 
7,841

Valuation adjustments
 
(793
)
 
(2,554
)
Proceeds from sale of OREO property
 
(11,608
)
 
(15,932
)
Gain on sale of OREO, net
 
2,992

 
2,972

Balance, end of period
 
$
20,617

 
$
28,254


53


Allowance for Loan and Lease Losses
Loans, excluding Purchased Credit Impaired Loans
We maintain an 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 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.
On a quarterly basis, our Chief Credit Officer reviews with executive management and the board of directors the various additional factors that management considers when determining the adequacy of the ALLL, including economic and business condition reviews. Factors which influenced management’s judgment in determining the amount of the additions to the ALLL charged to operating expense include the following as of the applicable balance sheet dates:
Existing general economic and business conditions affecting our market place
Credit quality trends
Historical loss experience
Seasoning of the loan portfolio
Bank regulatory examination results
Findings of internal credit examiners
Duration of current business cycle
Specific loss estimates for problem loans
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 recapture of previous provision. While we believe the best information available is used by us 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.
In addition to the ALLL, we maintain an allowance for unfunded commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. This methodology is similar to the methodology we use for determining the adequacy of our ALLL. For additional information on our allowance for unfunded commitments and letters of credit, see Note 6 to the Consolidated Financial Statements presented elsewhere in this report.
Purchased Credit Impaired Loans
PCI loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. PCI loans that have common risk characteristics are aggregated into pools. The Company re-measures contractual and expected loan cash flows, at the pool-level, on a quarterly basis. If, due to credit deterioration, the present value of expected cash flows, as periodically re-measured, is less than the carrying value of the loan pool, the Company adjusts the carrying value of the loan pool to the lower amount by adjusting the ALLL with a charge to earnings through the provision for loan losses. If the present value of expected cash flows is greater than the carrying value of the loan pool, the Company adjusts the carrying value of the loan pool to a higher amount by recapturing previously recorded allowance for loan losses, if any.
At June 30, 2015, our ALLL was $69.3 million, or 1.23% of total loans (excluding loans held for sale). This compares with an ALLL of $69.6 million, or 1.28% of total loans (excluding loans held for sale) at December 31, 2014 and an ALLL of $69.3 million or 1.47% of total loans (excluding loans held for sale) at June 30, 2014.

54


The following table provides an analysis of the Company’s ALLL for loans at the dates and the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Beginning balance
 
$
70,234

 
$
70,571

 
$
69,569

 
$
72,454

Charge-offs:
 
 
 
 
 
 
 
 
Commercial business
 
(2,086
)
 
(1,717
)
 
(3,512
)
 
(1,950
)
One-to-four family residential
 
(289
)
 

 
(297
)
 
(207
)
Commercial and multifamily residential
 
(43
)
 
(1,963
)
 
(43
)
 
(2,986
)
Consumer
 
(319
)
 
(909
)
 
(1,210
)
 
(1,636
)
Purchased credit impaired
 
(2,876
)
 
(3,842
)
 
(6,976
)
 
(8,115
)
Total charge-offs
 
(5,613
)
 
(8,431
)
 
(12,038
)
 
(14,894
)
Recoveries:
 
 
 
 
 
 
 
 
Commercial business
 
209

 
1,712

 
827

 
2,202

One-to-four family residential
 
15

 
12

 
27

 
40

Commercial and multifamily residential
 
20

 
537

 
3,281

 
576

One-to-four family residential construction
 
8

 
442

 
36

 
484

Commercial and multifamily residential construction
 
2

 

 
5

 

Consumer
 
137

 
338

 
410

 
591

Purchased credit impaired
 
2,043

 
1,997

 
3,729

 
3,803

Total recoveries
 
2,434

 
5,038

 
8,315

 
7,696

Net charge-offs
 
(3,179
)
 
(3,393
)
 
(3,723
)
 
(7,198
)
Provision for loan and lease losses
 
2,202

 
2,117

 
3,411

 
3,827

Ending balance
 
$
69,257

 
$
69,295

 
$
69,257

 
$
69,083

Total loans, net at end of period, excluding loans held of sale
 
$
5,611,897

 
$
4,714,575

 
$
5,611,897

 
$
4,714,575

Allowance for loan and lease losses to period-end loans
 
1.23
%
 
1.47
%
 
1.23
%
 
1.47
%
Allowance for unfunded commitments and letters of credit
 
 
 
 
 
 
Beginning balance
 
$
2,655

 
$
2,455

 
$
2,655

 
$
2,505

Net changes in the allowance for unfunded commitments and letters of credit
 
275

 
(100
)
 
275

 
(150
)
Ending balance
 
$
2,930

 
$
2,355

 
$
2,930

 
$
2,355



55


FDIC Loss-sharing Asset
The Company has elected to account for amounts receivable under loss-sharing agreements with the FDIC as an indemnification asset in accordance with the Business Combinations topic of the FASB ASC. The FDIC indemnification asset is initially recorded at fair value, based on the discounted expected future cash flows under the loss-sharing agreements.
Subsequent to initial recognition, the FDIC indemnification asset is reviewed quarterly and adjusted for any changes in expected cash flows. These adjustments are measured on the same basis as the related covered loans. Any decrease in expected cash flows on the covered loans due to an increase in expected credit losses will increase the FDIC indemnification asset and any increase in expected future cash flows on the covered loans due to a decrease in expected credit losses will decrease the FDIC indemnification asset. Changes in the estimated cash flows on covered assets that are immediately recognized in income generally result in a similar immediate adjustment to the loss-sharing asset while changes in expected cash flows on covered assets that are accounted for as an adjustment to yield generally result in adjustments to the amortization or accretion rate for the loss-sharing asset. Increases and decreases to the FDIC loss-sharing asset are recorded as adjustments to noninterest income.
At June 30, 2015, the FDIC loss-sharing asset was $9.3 million, which was comprised of a $9.0 million FDIC indemnification asset and a $344 thousand FDIC receivable. The FDIC receivable represents the amounts due from the FDIC for claims related to covered losses the Company has incurred net of amounts due to the FDIC relating to shared recoveries.
The following table summarizes the activity related to the FDIC loss-sharing asset for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Balance at beginning of period
 
$
14,644

 
$
36,837

 
$
15,174

 
$
39,846

Adjustments not reflected in income:
 
 
 
 
 
 
 
 
Cash received from the FDIC, net
 
(2,862
)
 
(3,442
)
 
(3,522
)
 
(1,765
)
FDIC reimbursable recoveries, net
 
(944
)
 
(364
)
 
(964
)
 
(231
)
Adjustments reflected in income:
 
 
 
 
 
 
 
 
Amortization, net
 
(1,376
)
 
(5,764
)
 
(3,670
)
 
(12,216
)
Loan impairment
 
1

 
1,214

 
1,532

 
3,151

Sale of other real estate
 
(208
)
 
(965
)
 
(627
)
 
(1,721
)
Write-downs of other real estate
 
52

 
276

 
1,124

 
792

Other
 
37

 
189

 
297

 
125

Balance at end of period
 
$
9,344

 
$
27,981

 
$
9,344

 
$
27,981

For additional information on the FDIC loss-sharing asset, please see Note 8 to the Consolidated Financial Statements presented elsewhere in this report.
Liquidity and Sources of Funds
Our primary sources of funds are customer deposits. Additionally, we utilize advances from the FHLB of Des Moines (“Des Moines Bank”), the Federal Reserve Bank of San Francisco, and wholesale and retail repurchase agreements to supplement our funding needs. 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.
In addition, we have a shelf registration statement on file with the Securities and Exchange Commission registering an unlimited amount of any combination of debt or equity securities, depositary shares, purchase contracts, units and warrants in one or more offerings. Specific information regarding the terms of and the securities being offered will be provided at the time of any offering. Proceeds from future offerings are expected to be used for general corporate purposes, including, but not limited to, the repayment of debt, repurchasing or redeeming outstanding securities, working capital, funding future acquisitions or other purposes identified at the time of any offering.
During the second quarter of 2015, the FHLB of Seattle (“Seattle Bank”) merged with and into the Des Moines Bank. As a result of the merger, certain of Columbia’s shares of Seattle Bank capital stock were converted into shares of Des Moines Bank capital stock; excess Seattle Bank shares were redeemed for cash. The balance of Columbia’s FHLB stock decreased from

56


$33.4 million at December 31, 2014 to $11.8 million at June 30, 2015, reflecting, in part, the redemption of excess Seattle Bank shares. The balance of Columbia’s FHLB stock will continue to fluctuate based upon Columbia’s borrowing activity with the Des Moines Bank.
Deposit Activities
Our deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Core deposits (demand deposit, savings, money market accounts and certificates of deposit less than $100,000) increased $118.0 million since year-end 2014. During the current year, as part of a product migration to our new deposit account product line, a substantial portion of our interest-bearing deposits which were typically bearing a nominal interest rate were migrated to noninterest-bearing deposit products. This migration resulted in a decrease in interest-bearing demand deposit balances and an increase in noninterest-bearing deposit balances during the current year.
We have established a branch system to serve our consumer and business depositors. In addition, management’s strategy for funding asset growth is to make use of brokered and other wholesale deposits on an as-needed basis. The Company participates in the Certificate of Deposit Account Registry Service (CDARS®) program. CDARS® is a network that allows participating banks to offer extended FDIC deposit insurance coverage on time deposits. The Company also participates in a similar program to offer extended FDIC deposit insurance coverage on money market accounts. These extended deposit insurance programs are generally available only to existing customers and are not used as a means of generating additional liquidity. At June 30, 2015, CDARS® deposits and brokered money market deposits were $111.4 million, or 2% of total deposits, compared to $101.8 million at year-end 2014. The brokered deposits have varied maturities.
The following table sets forth the Company’s deposit base by type of product for the dates indicated:
 
 
June 30, 2015
 
December 31, 2014
 
 
Balance
 
% of
Total
 
Balance
 
% of
Total
 
 
(dollars in thousands)
Core deposits:
 
 
 
 
 
 
 
 
Demand and other noninterest-bearing
 
$
3,207,538

 
45.5
%
 
$
2,651,373

 
38.3
%
Interest-bearing demand
 
912,637

 
13.0
%
 
1,304,258

 
18.8
%
Money market
 
1,718,000

 
24.4
%
 
1,760,331

 
25.4
%
Savings
 
630,897

 
9.0
%
 
615,721

 
8.9
%
Certificates of deposit less than $100,000
 
268,897

 
3.8
%
 
288,261

 
4.2
%
Total core deposits
 
6,737,969

 
95.7
%
 
6,619,944

 
95.6
%
Certificates of deposit greater than $100,000
 
194,449

 
2.7
%
 
202,014

 
2.9
%
Certificates of deposit insured by CDARS®
 
18,357

 
0.3
%
 
18,429

 
0.3
%
Brokered money market accounts
 
93,061

 
1.3
%
 
83,402

 
1.2
%
Subtotal
 
7,043,836

 
100.0
%
 
6,923,789

 
100.0
%
Premium resulting from acquisition date fair value adjustment
 
537

 
 
 
933

 
 
Total deposits
 
$
7,044,373

 
 
 
$
6,924,722

 
 
Borrowings
We rely on FHLB advances and FRB borrowings as another source of both short and long-term funding. FHLB advances and FRB borrowings are secured by bonds within our investment portfolio, and residential, commercial and commercial real estate loans. At June 30, 2015, we had FHLB advances of $45.5 million compared to $216.6 million at December 31, 2014.
We also utilize wholesale and retail repurchase agreements as a supplement to our funding sources. Our wholesale repurchase agreements are secured by mortgage-backed securities. At June 30, 2015 and December 31, 2014, we had term repurchase agreements of $25.0 million, which mature in 2018, and sweep-related repurchase agreements of $67.2 million and $80.1 million, respectively, which mature on a daily basis. Management anticipates we will continue to rely on FHLB advances, FRB borrowings, and wholesale and retail repurchase agreements in the future and we will use those funds primarily to make loans and purchase securities.

57


Contractual Obligations, Commitments & Off-Balance Sheet Arrangements
We are party to many contractual financial obligations, including repayment of borrowings, operating and equipment lease payments, off-balance sheet commitments to extend credit and investments in affordable housing partnerships. At June 30, 2015, we had commitments to extend credit of $1.69 billion compared to $1.62 billion at December 31, 2014.
Capital Resources
Shareholders’ equity at June 30, 2015 was $1.24 billion, an increase from $1.23 billion at December 31, 2014. Shareholders’ equity was 15% of total period-end assets at June 30, 2015 and 14% at December 31, 2014.
Capital Ratios: Basel III capital requirements became effective on January 1, 2015. The new capital requirements, among other things, (i) introduce a new capital measure called “Common Equity Tier 1,” or CET1, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations. Under the requirements that are now effective, the minimum capital ratios are now (i) 4.5% CET1 to risk-weighted assets, (ii) 6% Tier 1 capital to risk-weighted assets, (iii) 8% total capital to risk-weighted assets and (iv) 4% Tier 1 leverage. The Company and the Bank have made the one-time election to opt-out of including accumulated other comprehensive income items in regulatory capital calculations.
FDIC 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 CET1 risk-adjusted capital ratio of 6.5%, a Tier I risk-adjusted capital ratio of at least 8%, 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 banking subsidiary qualify as “well-capitalized” at June 30, 2015. The following table presents the regulatory standards for adequately capitalized and well-capitalized institutions and the capital ratios for the Company and its banking subsidiary at June 30, 2015:
 
 
Company
 
Columbia Bank
 
Requirements
 
 
June 30, 2015
 
June 30, 2015
 
Adequately
capitalized
 
Well-
Capitalized
Common equity tier 1 (CET1) risk-based capital ratio
 
12.36
%
 
12.18
%
 
4.50
%
 
6.50
%
Tier 1 risk-based capital ratio
 
12.36
%
 
12.18
%
 
6.00
%
 
8.00
%
Total risk-based capital ratio
 
13.43
%
 
13.24
%
 
8.00
%
 
10.00
%
Leverage ratio
 
10.28
%
 
10.16
%
 
4.00
%
 
5.00
%
For additional information concerning the new Basel III capital requirements, including information regarding those requirements when fully phased in, see “Business-Regulatory Capital Requirements” in our 2014 Form 10-K. See Note 24, Regulatory Capital Requirements, in Item 8 of our 2014 Form 10-K for additional details related to our capital ratios as of December 31, 2014 based on capital requirements then in effect.

58


Non-GAAP Financial Measures

The Company considers operating net interest margin (tax equivalent) to be an important measurement as it more closely reflects the ongoing operating performance of the Company. Despite the importance of the operating net interest margin (tax equivalent) to the Company, there is no standardized definition for it and, as a result, the Company’s calculations may not be comparable with other organizations. The Company encourages readers to consider its consolidated financial statements in their entirety and not to rely on any single financial measure.

The following table reconciles the Company’s calculation of the operating net interest margin (tax equivalent) to the net interest margin (tax equivalent) for the periods indicated:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Operating net interest margin non-GAAP reconciliation:
 
(dollars in thousands)
Net interest income (tax equivalent) (1)
 
$
83,297

 
$
77,070

 
$
165,964

 
$
152,858

Adjustments to arrive at operating net interest income (tax equivalent):
 
 
 
 
 
 
 
 
Incremental accretion income on FDIC purchased credit impaired loans
 
(2,367
)
 
(5,734
)
 
(4,814
)
 
(12,223
)
Incremental accretion income on other FDIC acquired loans
 
(15
)
 
(95
)
 
(132
)
 
(299
)
Incremental accretion income on other acquired loans
 
(4,889
)
 
(5,481
)
 
(9,823
)
 
(11,096
)
Premium amortization on acquired securities
 
2,706

 
1,554

 
5,567

 
3,179

Interest reversals on nonaccrual loans
 
156

 
392

 
806

 
680

Operating net interest income (tax equivalent) (1)
 
$
78,888

 
$
67,706

 
$
157,568

 
$
133,099

Average interest earning assets
 
$
7,560,288

 
$
6,339,102

 
$
7,544,750

 
$
6,292,157

Net interest margin (tax equivalent) (1)
 
4.41
%
 
4.86
%
 
4.40
%
 
4.86
%
Operating net interest margin (tax equivalent) (1)
 
4.17
%
 
4.27
%
 
4.18
%
 
4.23
%
__________
(1) Tax-exempt interest income has been adjusted to a tax equivalent basis. The amount of such adjustment was an addition to net interest income of $2.3 million and $1.9 million for the three months ended June 30, 2015 and 2014, respectively, and an addition to net interest income of $4.6 million and $3.8 million for the six months ended June 30, 2015 and 2014, respectively.


59


Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analysis. 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 June 30, 2015, 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, 2014. For additional information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2014 Annual Report on Form 10-K.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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 in ensuring that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is (i) accumulated and communicated to our management (including the CEO and CFO) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls Over Financial Reporting
There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

60


PART II - OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are party to routine litigation arising in the ordinary course of business. Management believes that, based on information currently known to it, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial conditions, results of operations or cash flows.
Item 1A. RISK FACTORS
Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of risk factors relating to the Company’s business. The Company believes that there has been no material change in its risk factors as previously disclosed in the Company’s Form 10-K.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Not applicable
(b)
Not applicable
(c)
The following table provides information about repurchases of common stock by the Company during the quarter ended June 30, 2015:
Period
 
Total Number of Common Shares Purchased (1)
 
Average Price Paid per Common Share
 
Total number of Shares Purchased as Part of Publicly Announced Plan (2)
 
Maximum Number of Remaining Shares That May Be Purchased at Period End Under the Plan (2)
4/1/2015 - 4/30/2015
 
1,750

 
$
29.46

 

 

5/1/2015 - 5/31/2015
 
42

 
30.19

 

 

6/1/2015 - 6/30/2015
 
1,218

 
32.54

 

 

 
 
3,010

 
$
30.72

 

 
 
(1)
Common shares repurchased by the Company during the quarter consist of cancellation of 3,010 shares of common stock to pay the shareholders’ withholding taxes.
(2)
The Company does not have a current share repurchase plan.
Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
Item 5.
OTHER INFORMATION
None.

61


Item 6.
EXHIBITS
 
3.1
 
Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005)
 
 
 
3.2
 
Articles of Amendment of the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed November 21, 2008)
 
 
 
3.3
 
Articles of Amendment of the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed April 2, 2013)
 
 
 
3.4
 
Articles of Amendment of the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 4.4 of the Company’s S-3 Registration Statement (File No. 333-206125) filed August 6, 2015)
 
 
 
31.1+
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2+
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32+
 
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101+
 
The following financial information from Columbia Banking System, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements.

+    Filed herewith

62


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.
 
 
 
 
 
 
 
 
 
 
COLUMBIA BANKING SYSTEM, INC.
 
 
 
 
 
 
Date:
August 6, 2015
 
By
 
/s/ MELANIE J. DRESSEL
 
 
 
 
 
Melanie J. Dressel
 
 
 
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
Date:
August 6, 2015
 
By
 
/s/ CLINT E. STEIN
 
 
 
 
 
Clint E. Stein
 
 
 
 
 
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
 
Date:
August 6, 2015
 
By
 
/s/ BARRY S. RAY
 
 
 
 
 
Barry S. Ray
 
 
 
 
 
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)


63


INDEX TO EXHIBITS
 
3.1
 
Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005)
 
 
 
3.2
 
Articles of Amendment of the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed November 21, 2008)
 
 
 
3.3
 
Articles of Amendment of the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed April 2, 2013)
 
 
 
3.4
 
Articles of Amendment of the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 4.4 of the Company’s S-3 Registration Statement (File No. 333-206125) filed August 6, 2015)
 
 
 
31.1+
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2+
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32+
 
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101+
 
The following financial information from Columbia Banking System, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements.

+    Filed herewith

64




EXHIBIT 31.1
CERTIFICATION
I, Melanie J. Dressel, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Columbia Banking System, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
/s/ MELANIE J. DRESSEL
 
Melanie J. Dressel
President and Chief Executive Officer
Date: August 6, 2015







EXHIBIT 31.2
CERTIFICATION
I, Clint E. Stein, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Columbia Banking System, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
/s/ CLINT E. STEIN
 
Clint E. Stein
Executive Vice President and
Chief Financial Officer

Date: August 6, 2015







EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Columbia Banking System, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Melanie J. Dressel, President and Chief Executive Officer, and Clint E. Stein, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ MELANIE J. DRESSEL
 
Melanie J. Dressel
President and Chief Executive Officer
Columbia Banking System, Inc.
 
 
 
/s/ CLINT E. STEIN
 
Clint E. Stein
Executive Vice President and
Chief Financial Officer
Columbia Banking System, Inc.
Dated: August 6, 2015



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