2012 Annual Report
Bellingham
Concrete
Everett
Redmond
Bellevue
Seattle
Port Angeles
Hoodsport
Tacoma
Olympia
Puyallup
Centralia
Astoria
Longview
Yakima
Tillamook
The Dalles
Vancouver
Portland
Salem
Newport
Eugene
Bend
Washington
Spokane
Colfax
Pullman
Tri-Cities
Walla Walla
Pendleton
Oregon
1301 A Street, Tacoma, WA 98402
253-305-1900 / 800-305-1905
ColumbiaBank.com
Member FDIC
A combined network of more than 150 branches.
Legacy Columbia Bank Branches
Former West Coast Bank Branches
Building the Premier
Pacific Northwest
Community Bank
2012 Annual Report
Port Angeles
Bellingham
Concrete
Everett
Redmond
Bellevue
Seattle
Hoodsport
Tacoma
Olympia
Puyallup
Centralia
Washington
Spokane
Colfax
Pullman
Astoria
Longview
Yakima
Vancouver
Portland
The Dalles
Tillamook
Newport
Salem
Eugene
Bend
Tri-Cities
Walla Walla
Pendleton
Oregon
1301 A Street, Tacoma, WA 98402
253-305-1900 / 800-305-1905
ColumbiaBank.com
Member FDIC
A combined network of more than 150 branches.
Legacy Columbia Bank Branches
Former West Coast Bank Branches
Building the Premier
Pacific Northwest
Community Bank
To Our Shareholders
Board of Directors
Columbia’s commitment to our communities continues.
levels remain well above the standard requirement, giving us the flexibility to consider other options for effective deployment of
When we opened our doors almost twenty years ago with four branches and about $200 million in assets, our goal was to
become a leading, customer-focused Pacific Northwest regional community bank. The merger with West Coast Bancorp
positioned us to achieve that goal. West Coast’s addition to the Columbia family has brought our footprint to about 150
branches throughout Washington and Oregon, over $7 billion in assets and a team of wonderful employees who are truly
committed to their legacy of customer service.
Our commitment to our customers and communities has not wavered despite our significant growth in size and in geographic
footprint over the past two decades. We will continue to emphasize our strong commitment to the hundreds of community
activities we support not only financially, but also by volunteering our time. As we often say, we want to be the community
bank in every community we serve.
Positive core performance trends – loan growth, credit quality, increased noninterest income and
controlled expenses.
Our core performance measures improved during 2012 compared to the full year 2011. This positive trend was a result
of our ongoing strategic initiatives, and resulted in solid loan growth, improved credit quality metrics, increased levels of
noninterest income and controlled expenses. Our net income was $46.1 million for the year, or $1.16 per diluted common
share, a decrease of 4% from net income of $48.0 million, or $1.21 per diluted common share, for 2011. Comparisons to
2011 are distorted by the favorable impact resulting from one of our FDIC-assisted acquisitions, which bolstered earnings
during the fourth quarter of 2011 by $0.15 per share, or $6.0 million.
Total shareholders’ equity at the end of 2012 was $764.0 million, an increase of 1% from $759.3 million at December 31,
2011. Total assets were approximately $4.91 billion at year-end 2012, up 3% from $4.79 billion at year-end 2011. Our net
interest margin for 2012 was 5.77% as compared to 6.27% for 2011.
Our loan growth in 2012 was a result of our banking teams’ ability to cultivate strong relationships with customers and
prospects throughout our market area. Our noncovered loans (loans not covered under the FDIC loss-sharing agreements)
were $2.53 billion at the end of 2012, up $177 million, or 8%, from $2.35 billion at the end of 2011. We saw the biggest
increase in our commercial business loans, which increased about 12% from the end of 2011, and our commercial real
estate loans, which were up about 9%.
Our commitment to a diversified loan portfolio continues to be a strength for us. At the end of 2012, 45% of our total
portfolio was in commercial business loans, 42% was in commercial real estate loans, 6% in consumer loans, 5% in real
estate construction-related loans, and approximately 2% in the for-sale housing segment.
Our overall loan quality continued its positive trend in 2012. At the end of December 2012, nonperforming, noncovered
assets were $48.5 million, down 43% from $85.4 million at the end of 2011. The allowance for loan losses was 2.07% of
total loans at December 31, 2012 compared to 2.26% at the end of 2011.
We reached $4 billion in total deposits at the end of 2012, a major milestone for our Company. This represented an increase
of 6% from $3.82 billion in 2011. Our core deposits, which are an important factor in maintaining a stable net interest margin,
increased 8% during the year to $3.80 billion, and comprised an exceptional 94% of total deposits.
Our total risk-based capital ratio at December 31, 2012 exceeded 20%, more than double the minimum of 10% required
to be considered “well-capitalized” under regulatory standards. Even after finalizing the West Coast acquisition, our capital
For two years running, Columbia
Bank has been the top-ranked bank
headquartered in Washington state on
Forbes’ list of America’s Best Banks.
© 2012, Forbes Media LLC. Used with permission.
capital.
The FDIC’s most recent deposit market share analysis shows that as of June 30, 2012, Columbia’s ranking was 8th among all
banks operating in Washington State, and 14th in the state of Oregon. Our merger with West Coast will elevate Columbia to
7th in both states; we will be the number one ranked community bank in both Washington and Oregon.
For the second consecutive year, Columbia was ranked as the best bank headquartered in Washington State on the Forbes list
of America’s Best Banks; we were also listed as second in the Pacific Northwest and 30th in the country. The ranking reflects
our commitment to providing a strong and secure community bank, as well as the accomplishments of our outstanding,
customer-focused employees. We were also very gratified this year to again receive recognition as one of the best places to
work in Washington by Seattle Business Magazine.
We want to express our deepest thanks to Thomas Matson and Donald Rodman, who have reached the mandatory age for
retiring from our board. Tom has served as a director since 1998, and has been a member of the Compensation, Nominating
and Trust committees. Don has been a director since 1991, serving on the Compensation and Enterprise Risk Management
committees. We are grateful for their wise counsel and valuable contributions to Columbia’s success.
We are delighted to welcome David Dietzler, a former West Coast director, to our board. Previously a managing partner of
KPMG LLP’s office in Portland, Oregon, Dave brings a wealth of experience auditing public companies, SEC reporting, financial
statement preparation, internal control and compliance.
In the coming months, we will focus on our strategic plan to integrate Columbia and West Coast, with both banks playing
essential roles. We anticipate a smooth transition and have eagerly welcomed West Coast’s staff and customers to Columbia.
Additionally, we will continue to keep our bankers externally focused with the intent to continue to drive loan growth, expand
noninterest income, and to develop strong relationships with customers and prospects. Equally as important will be our
continued focus on improving the efficiency of our company. With the additional expense of new regulations and cost of
compliance looming largely for our industry, it will be even more important to optimize our operational structure. Having a
broader base over which to spread infrastructure investments should help with this objective. Without sacrificing customer
service, we plan to deliver our products and services more efficiently, continue to manage our expenses closely and take
advantage of revenue-generating opportunities by introducing our customers to our broad array of services to meet virtually all
We firmly believe we are in a good position to provide long-term benefits for our shareholders, and are looking forward to the
of their financial needs.
exciting opportunities ahead.
Sincerely,
William T. Weyerhaeuser
Melanie J. Dressel
David A. Dietzler
John P. Folsom
Chairman of the Board
President & Chief Executive Officer
Frederick M. Goldberg
Thomas M. Hulbert
Michelle M. Lantow
Thomas L. Matson
Mae Fujita Numata
Daniel C. Regis
Donald H. Rodman
James M. Will
Executive Officers
William T. Weyerhaeuser
Chairman of the Board
Columbia Banking System, Inc.
Melanie J. Dressel
President and Chief Executive Officer
Columbia Banking System, Inc. and Columbia Bank
Andy McDonald
Executive Vice President &
Chief Credit Officer
Mark W. Nelson
Executive Vice President &
Chief Operating Officer
Kent L. Roberts
Clint E. Stein
Executive Vice President &
Human Resources Director
Executive Vice President &
Chief Financial Officer
Our people truly make the difference.
Columbia Bank has been recognized repeatedly by several organizations
as the best bank and a great place to work, including:
Puget Sound Business Journal – Best Places to Work
Seattle Business Magazine – Washington’s 100 Best Companies to Work For
South Sound Magazine – Best Bank
(cid:116)(cid:1)
(cid:116)(cid:1)
(cid:116)(cid:1)
To Our Shareholders
Columbia’s commitment to our communities continues.
When we opened our doors almost twenty years ago with four branches and about $200 million in assets, our goal was to
become a leading, customer-focused Pacific Northwest regional community bank. The merger with West Coast Bancorp
positioned us to achieve that goal. West Coast’s addition to the Columbia family has brought our footprint to about 150
branches throughout Washington and Oregon, over $7 billion in assets and a team of wonderful employees who are truly
committed to their legacy of customer service.
Our commitment to our customers and communities has not wavered despite our significant growth in size and in geographic
footprint over the past two decades. We will continue to emphasize our strong commitment to the hundreds of community
activities we support not only financially, but also by volunteering our time. As we often say, we want to be the community
bank in every community we serve.
Positive core performance trends – loan growth, credit quality, increased noninterest income and
controlled expenses.
Our core performance measures improved during 2012 compared to the full year 2011. This positive trend was a result
of our ongoing strategic initiatives, and resulted in solid loan growth, improved credit quality metrics, increased levels of
noninterest income and controlled expenses. Our net income was $46.1 million for the year, or $1.16 per diluted common
share, a decrease of 4% from net income of $48.0 million, or $1.21 per diluted common share, for 2011. Comparisons to
2011 are distorted by the favorable impact resulting from one of our FDIC-assisted acquisitions, which bolstered earnings
during the fourth quarter of 2011 by $0.15 per share, or $6.0 million.
Total shareholders’ equity at the end of 2012 was $764.0 million, an increase of 1% from $759.3 million at December 31,
2011. Total assets were approximately $4.91 billion at year-end 2012, up 3% from $4.79 billion at year-end 2011. Our net
interest margin for 2012 was 5.77% as compared to 6.27% for 2011.
Our loan growth in 2012 was a result of our banking teams’ ability to cultivate strong relationships with customers and
prospects throughout our market area. Our noncovered loans (loans not covered under the FDIC loss-sharing agreements)
were $2.53 billion at the end of 2012, up $177 million, or 8%, from $2.35 billion at the end of 2011. We saw the biggest
increase in our commercial business loans, which increased about 12% from the end of 2011, and our commercial real
estate loans, which were up about 9%.
Our commitment to a diversified loan portfolio continues to be a strength for us. At the end of 2012, 45% of our total
portfolio was in commercial business loans, 42% was in commercial real estate loans, 6% in consumer loans, 5% in real
estate construction-related loans, and approximately 2% in the for-sale housing segment.
Our overall loan quality continued its positive trend in 2012. At the end of December 2012, nonperforming, noncovered
assets were $48.5 million, down 43% from $85.4 million at the end of 2011. The allowance for loan losses was 2.07% of
total loans at December 31, 2012 compared to 2.26% at the end of 2011.
We reached $4 billion in total deposits at the end of 2012, a major milestone for our Company. This represented an increase
of 6% from $3.82 billion in 2011. Our core deposits, which are an important factor in maintaining a stable net interest margin,
increased 8% during the year to $3.80 billion, and comprised an exceptional 94% of total deposits.
Our total risk-based capital ratio at December 31, 2012 exceeded 20%, more than double the minimum of 10% required
to be considered “well-capitalized” under regulatory standards. Even after finalizing the West Coast acquisition, our capital
For two years running, Columbia
Bank has been the top-ranked bank
headquartered in Washington state on
Forbes’ list of America’s Best Banks.
© 2012, Forbes Media LLC. Used with permission.
levels remain well above the standard requirement, giving us the flexibility to consider other options for effective deployment of
capital.
The FDIC’s most recent deposit market share analysis shows that as of June 30, 2012, Columbia’s ranking was 8th among all
banks operating in Washington State, and 14th in the state of Oregon. Our merger with West Coast will elevate Columbia to
7th in both states; we will be the number one ranked community bank in both Washington and Oregon.
For the second consecutive year, Columbia was ranked as the best bank headquartered in Washington State on the Forbes list
of America’s Best Banks; we were also listed as second in the Pacific Northwest and 30th in the country. The ranking reflects
our commitment to providing a strong and secure community bank, as well as the accomplishments of our outstanding,
customer-focused employees. We were also very gratified this year to again receive recognition as one of the best places to
work in Washington by Seattle Business Magazine.
We want to express our deepest thanks to Thomas Matson and Donald Rodman, who have reached the mandatory age for
retiring from our board. Tom has served as a director since 1998, and has been a member of the Compensation, Nominating
and Trust committees. Don has been a director since 1991, serving on the Compensation and Enterprise Risk Management
committees. We are grateful for their wise counsel and valuable contributions to Columbia’s success.
We are delighted to welcome David Dietzler, a former West Coast director, to our board. Previously a managing partner of
KPMG LLP’s office in Portland, Oregon, Dave brings a wealth of experience auditing public companies, SEC reporting, financial
statement preparation, internal control and compliance.
In the coming months, we will focus on our strategic plan to integrate Columbia and West Coast, with both banks playing
essential roles. We anticipate a smooth transition and have eagerly welcomed West Coast’s staff and customers to Columbia.
Additionally, we will continue to keep our bankers externally focused with the intent to continue to drive loan growth, expand
noninterest income, and to develop strong relationships with customers and prospects. Equally as important will be our
continued focus on improving the efficiency of our company. With the additional expense of new regulations and cost of
compliance looming largely for our industry, it will be even more important to optimize our operational structure. Having a
broader base over which to spread infrastructure investments should help with this objective. Without sacrificing customer
service, we plan to deliver our products and services more efficiently, continue to manage our expenses closely and take
advantage of revenue-generating opportunities by introducing our customers to our broad array of services to meet virtually all
of their financial needs.
We firmly believe we are in a good position to provide long-term benefits for our shareholders, and are looking forward to the
exciting opportunities ahead.
Sincerely,
Board of Directors
William T. Weyerhaeuser
Melanie J. Dressel
David A. Dietzler
John P. Folsom
Chairman of the Board
President & Chief Executive Officer
Frederick M. Goldberg
Thomas M. Hulbert
Michelle M. Lantow
Thomas L. Matson
Mae Fujita Numata
Daniel C. Regis
Donald H. Rodman
James M. Will
Executive Officers
William T. Weyerhaeuser
Chairman of the Board
Columbia Banking System, Inc.
Melanie J. Dressel
President and Chief Executive Officer
Columbia Banking System, Inc. and Columbia Bank
Andy McDonald
Executive Vice President &
Chief Credit Officer
Mark W. Nelson
Executive Vice President &
Chief Operating Officer
Kent L. Roberts
Clint E. Stein
Executive Vice President &
Human Resources Director
Executive Vice President &
Chief Financial Officer
Our people truly make the difference.
Columbia Bank has been recognized repeatedly by several organizations
as the best bank and a great place to work, including:
Puget Sound Business Journal – Best Places to Work
Seattle Business Magazine – Washington’s 100 Best Companies to Work For
South Sound Magazine – Best Bank
(cid:116)(cid:1)
(cid:116)(cid:1)
(cid:116)(cid:1)
2012 Annual Report
and Form 10-K
Independent AudItoRs
deloitte & touche LLp
tRAnsFeR Agent And RegIstRAR
American stock transfer & trust Co.
FInAnCIAL InFoRmAtIon
Columbia news and financial results are
available through the Internet and mail.
ReguLAtoRy & seCuRItIes CounseL
graham & dunn pC
stoCK LIstIng
the Company’s common stock trades on the
nasdaq global select market tier of the nasdaq
stock markets under the symbol: CoLB
InteRnet
For information about Columbia Banking
system, Inc., including news and financial
results, product information and service
locations, access our home page on the World
Wide Web at www.columbiabank.com. you
can also view or retrieve copies of Columbia’s
financial reports on the Internet by connecting
to www.sec.gov. Immediate access to the
Company’s quarterly earnings news releases
via the Internet is provided by Company news
on Call at www.prnewswire.com.
1301 A street, tacoma, WA 98402
253-305-1900 / 800-305-1905
ColumbiaBank.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of
incorporation or organization)
91-1422237
(I.R.S. Employer
Identification Number)
1301 “A” Street
Tacoma, Washington 98402
(Address of principal executive offices) (Zip code)
Registrant’s Telephone Number, Including Area Code: (253) 305-1900
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
(Title of class)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
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
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or
a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act
(check one):
Large Accelerated Filer
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
The aggregate market value of Common Stock held by non-affiliates of the registrant at June 30, 2012 was $731,595,865
based on the closing sale price of the Common Stock on that date.
The number of shares of registrant’s Common Stock outstanding at January 31, 2013 was 39,707,319.
Portions of the Registrant’s definitive 2013 Annual Meeting Proxy Statement.
Part III
DOCUMENTS INCORPORATED BY REFERENCE:
COLUMBIA BANKING SYSTEM, INC.
FORM 10-K ANNUAL REPORT
DECEMBER 31, 2012
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . .
Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
12
18
19
19
19
20
22
25
53
55
108
108
110
111
111
111
111
111
112
113
114
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K may contain 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 other statements identified by words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. 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 sections titled “Risk Factors,” “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K, the following
factors, among others, could cause actual results to differ materially from the anticipated results:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 at historical rates
and maintain the quality of our earning assets;
the local housing/real estate markets where we operate and make loans could continue to face challenges;
the risks presented by a continued challenging economy, including the current uncertainty regarding sequestration,
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 could not be realized;
the possibility that the proposed acquisition of West Coast Bancorp (“West Coast”) does not close when expected or at
all because required regulatory, shareholder or other approvals and other conditions to closing are not received or
satisfied on a timely basis or at all;
the effect on the trading price of our stock if the acquisition of West Coast is not completed;
the ability to successfully combine Columbia and the West Coast organizations;
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;
our reliance on FHLB advances and FRB borrowings as additional sources of short and long-term funding;
changes in the scope and cost of FDIC insurance and other coverages;
the impact of FDIC-assisted loans on our earnings;
changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
competition among financial institutions could increase significantly;
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;
the terms and costs of the numerous actions taken by the Federal Reserve, the U.S. Congress, the Treasury, the FDIC,
the SEC and others in response to the liquidity and credit crisis, or the failure of these actions to help stabilize the
financial markets, asset prices, market liquidity, or worsening of current financial market and economic conditions
could materially and adversely affect our business, financial condition, results of operations, and the trading price of
our common stock;
our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and
regulatory and compliance risk; and
our profitability measures could be adversely affected if we are unable to effectively manage our capital.
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
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.
1
ITEM 1.
BUSINESS
General
PART I
Columbia Banking System, Inc. (referred to in this report as “we,” “our,”, “the Company”, and "Columbia") is a
registered bank holding company whose wholly owned banking subsidiary, Columbia State Bank (“Columbia Bank” or “the
Bank”) also does business under the Bank of Astoria name and conducts full-service commercial banking business in the states
of Washington and Oregon. Headquartered in Tacoma, Washington, we provide a full range of banking services to small and
medium-sized businesses, professionals and individuals.
Columbia Bank was established in 1993 to take advantage of commercial banking business opportunities in our principal
market area. The opportunities to capture commercial banking market share were due to increased consolidations of banks,
primarily through acquisitions by out-of-state bank holding companies, which created dislocation of customers.
At December 31, 2012 Columbia Bank had 99 branch locations in Washington and Oregon. Included in these branch
locations are six Columbia Bank branches doing business in Oregon under the Bank of Astoria name in Astoria, Warrenton,
Seaside and Cannon Beach in Clatsop County and in Manzanita and Tillamook in Tillamook County. Substantially all of
Columbia Bank’s loans, loan commitments and core deposits are within its service areas. Columbia Bank is a Washington state-
chartered commercial bank, the deposits of which are insured in whole or in part by the Federal Deposit Insurance Corporation
(“FDIC”). Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions
Division of Banks. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the
Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.
Business Overview
Our goal is to continue to be a leading Pacific Northwest regional community banking company while consistently
increasing shareholder value. We continue to build on our reputation for excellent customer service in order to be recognized as
the bank of choice for retail deposit customers, small to medium-sized businesses and affluent households in all markets we
serve.
We have established a network of 99 branches in Washington and Oregon as of December 31, 2012 from which we intend
to grow market share. We operate 59 branches in western Washington, 15 branches in eastern Washington, 15 branches in
western Oregon, and 10 branches in eastern Oregon. Washington counties include: Adams, Asotin, Benton, Clallam, Clark,
Cowlitz, Franklin, Jefferson, King, Kitsap, Klickitat, Mason, Pierce, Snohomish, Skagit, Spokane, Thurston, Walla Walla,
Whatcom, Whitman and Yakima. Oregon counties include Clackamas, Clatsop, Deschutes, Hood River, Jefferson, Marion,
Multnomah, Tillamook, Umatilla, Wasco and Yamhill.
In order to fund our lending activities and to allow for increased contact with customers, we utilize a branch system to
better serve both retail and business depositors. We believe this approach enables us to expand lending activities while
attracting a stable core deposit base. To support our strategy of market penetration and increased profitability while continuing
our personalized banking approach, we have invested in experienced banking and administrative personnel and have incurred
related costs in the creation of our branch network.
Business Strategy
Our business strategy is to provide our customers with the financial sophistication and product depth of a regional
banking company while retaining the appeal and service level of a community bank. We continually evaluate our existing
business processes while focusing on maintaining asset quality and balanced loan and deposit portfolios, building our strong
core deposit base, expanding total revenue and controlling expenses in an effort to increase our return on average equity and
gain operational efficiencies. As a result of our strong commitment to highly personalized, relationship-oriented customer
service, our varied products, our strategic branch locations and the long-standing community presence of our managers,
banking officers and branch personnel, we believe we are well positioned to attract and retain new customers and to increase
our market share of loans, deposits, investments, and other financial services. We are committed to increasing market share in
the communities we serve by continuing to leverage our existing branch network, adding new branch locations and considering
business combinations that are consistent with our expansion strategy throughout the Pacific Northwest.
2
To that end, on September 25, 2012, we entered into a definitive agreement to acquire West Coast Bancorp, the parent
company of West Coast Bank of Lake Oswego, Oregon, with $2.49 billion in assets at December 31, 2012 (“West Coast”).
Under the terms of the merger, West Coast shareholders will receive a combination of Company stock and cash valued at just
over $500 million. Regulatory applications have been filed and special shareholder meetings for the Company and West Coast
are scheduled for March 18, 2013. The merger is scheduled to close on April 1, 2013.
Products & Services
We place the highest priority on customer service and assist our customers in making informed decisions when selecting
from the products and services we offer. We continuously review our product and service offerings to ensure that we provide
our customers with the tools to meet their financial needs. A more complete listing of all the services and products available to
our customers can be found on our website: www.columbiabank.com. Some of the core products and services we offer include:
Personal Banking
Business Banking
Wealth Management
• Investment Services through CB
• Checking and Saving Accounts
• Online Banking
• Electronic Bill Pay
• Consumer Lending
• Residential Lending
• VISA® Card Services
• Checking & Saving Accounts
Financial Services
• Private Banking
• Trust Services
• Professional Banking
• Online Banking
• Remote Deposit Capture
• Cash Management
• Commercial & Industrial Lending
• VISA® Card Services
• Agricultural Lending
• SBA Lending
• Small Business Services
• International Banking
• Merchant Card Services
• Real Estate and Real Estate
Construction Lending
Personal Banking: We offer our personal banking customers an assortment of account products including noninterest
and interest-bearing checking, savings, money market and certificate of deposit accounts. Overdraft protection is also available
with direct links to the customer’s checking account. Our online banking service, Columbia OnlineTM, provides our personal
banking customers with the ability to safely and securely conduct their banking business 24 hours a day, 7 days a week.
Personal banking customers are also provided with a variety of borrowing products including fixed and variable rate home
equity loans and lines of credit, home mortgages for purchases and refinances, personal loans, and other consumer loans.
Eligible personal banking customers with checking accounts are provided a Visa® Debit Card which can be used both to make
purchases and as an ATM card. A variety of Visa® Credit Cards are also available to eligible personal banking customers.
Online Banking
Columbia Bank’s Premier Personal Online Banking provides simple navigation, access to important information and
frequently used features, as well as the foundation for a best-in-class mobile banking solution.
3
Business Banking: We offer our business banking customers the foundation of a variety of checking, savings, interest
bearing money market and certificate of deposit accounts to satisfy all their banking needs. In addition to these core banking
products we provide a breadth of services to support the complete financial needs of small and middle market businesses
including Cash Management, Professional Banking, International Banking, VISA Credit Cards, Merchant Services and
Commercial Lending.
Cash Management
Columbia Bank’s diversified Cash Management Programs are tailored to meet specific banking needs of each individual
business. We combine technology with integrated operations and local expertise for safe, powerful, flexible solutions.
Columbia customers, of all sizes, choose from a full range of transaction and Cash Management tools to gain more control over
and make more from their money. Services include Commercial Online Banking, Positive Pay fraud protection, Automated
Clearing House (ACH) payments, and Remote Deposit Capture.
Our Cash Management professionals work with businesses to find the best combination of services to meet their
needs. This customized, modular approach ensures their business banking operations are cost-effective now, with flexibility for
future growth.
International Banking
Columbia Bank’s International services division offers a range of financial services to help forward-thinking independent
businesses explore global markets and conduct international trade smoothly and expediently. We are proud to provide small and
mid-size business with the same caliber of expertise and personalized service that national banks usually limit to large
businesses. Our experience with foreign currency exchange, letters of credit, foreign collections and trade finance services can
help independent companies open the door to new markets and suppliers overseas.
Commercial Lending
We offer a variety of loan products tailored to meet the various needs of business banking customers. Commercial loan
products include accounts receivable and inventory financing as well as Small Business Administration ("SBA") financing. We
also offer commercial real estate loan products for construction and development or permanent financing. Real estate lending
activities have been focused on construction and permanent loans for both owner occupants and investor oriented real estate
properties. Commercial banking has been directed toward meeting the credit and related deposit needs of various sized
businesses and professional practice organizations operating in our primary market areas.
Business VISA® Credit and Debit Cards
We offer our business banking customers a selection of Visa® Cards including the Business Debit Card that works like a
check wherever Visa® is accepted. We partner with First National Bank of Omaha to offer Visa® Credit Cards such as the
Corporate Card which can be used all over the world as well as the Business Edition® and Business Edition Plus® that earns
reward points with every purchase.
Merchant Card Services
Business clients that use Columbia’s Merchant Card Services have the ability to accept Visa®, MasterCard® and
Discover® sales drafts for deposit directly into their business checking account. Merchants are provided with a comprehensive
accounting system tailored to their needs, which includes month-to-date credit card deposit information on a transaction
statement. Internet access is available, allowing business customers to review merchant statements, authorized, captured,
cleared and settled transactions.
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Wealth Management: We offer tailored solutions to high net-worth individuals, families and professional businesses in
the areas of private banking, professional banking, financial services and trust and estate services.
CB Financial Services
Located at Columbia State Bank, CB Financial Services(1), offers a comprehensive array of financial solutions designed
to grow, protect and transition wealth by delivering an unprecedented level of personalized service and expertise.
Comprehensive solutions include:
Financial Planning: Asset Allocation, Net Worth Analysis, Estate Planning, Retirement Planning, Education
•
Planning, Insurance Analysis, Wealth Transfer.
Investment Management Solutions: Professional Asset Management(1), Strategic Asset Allocation, Fixed
•
Income (Bond) Investing (Municipal, Corporate, Government), Exchange Traded Funds (ETFs), Annuities, Mutual
Funds, Equities.
Insurance Solutions: Long-Term Care, Disability, Life Insurance (Key Man Life Insurance, Buy-Sell
•
Agreements).
Retirement Solutions: 401(k) plans, SEPs, IRAs, SIMPLE, Profit Sharing, Non-Qualified Deferred
•
Compensation Plans, Money Pension Plan.
Private Banking
Columbia Private Banking offers affluent clientele and their businesses complex financial solutions, such as deposit and
cash management services, credit services, and wealth management strategies. Each private banker provides advisory
services(2) and coordinates a relationship team of experienced financial professionals to meet the unique needs of each
discerning customer.
Trust Services
Columbia Bank Trust Services offer a wide range of high quality fiduciary, investment and administrative trust services,
coupled with local, personalized attention to the unique requirements of each trust. Services include Personal Trusts, Special
Needs (Supplemental) Trusts, Estate Settlement Services, Investment Agency and Charitable Management Services.
Our highly skilled and experienced professionals are fully dedicated to providing the information, diligence and care to
help our customers achieve their financial goals and plan for a better future.
Professional Banking
Columbia Professional Bankers are uniquely qualified to help medical and dental professionals acquire, build and grow
their practice. We offer tailored banking and investment solutions delivered by experienced bankers with the industry
knowledge necessary to meet their business’s unique needs. No matter what the needs are now or in the years to come, we
guide professionals through all their financial options to make their banking as easy and personal as possible.
__________
(1) Securities, insurance products and advisory services are offered through Cetera Investment Financial Services, Inc., an
independent, registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for Cetera. *
Investment products are Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal
government agency * May lose value.
(2) Advisory services may only be offered by Investment Adviser Representatives in connection with an appropriate
Cetera Advisory Services Agreement and disclosure brochure as provided.
5
Competition
Our industry remains highly competitive despite challenging economic conditions. Several other financial institutions
with greater resources compete for banking business in our market areas. These competitors have the ability to make larger
loans, finance extensive advertising and promotion campaigns, access international financial markets and allocate their
investment assets to regions of highest yield and demand. In addition to competition from other banking institutions, we
continue to compete with non-banking companies such as credit unions, brokerage houses and other financial services
companies. We compete for deposits, loans, and other financial services by offering our customers similar breadth of products
as our larger competitors while delivering a more personalized service level with faster transaction turnaround time.
Market Areas
Washington: Approximately 30%, or 22, of our Washington branches are located in Pierce County, with an estimated
2012 population of 808,000 residents. At June 30, 2012 our Pierce County branch locations’ share of the county’s total deposit
market was 18%(1), ranking first among our competition. Also located in Pierce County is our Company headquarters in the city
of Tacoma and one nearby operational facility. Some of the most significant contributors to the Pierce County economy are the
Port of Tacoma whose activities are related to more than 40,000 jobs in the county and well over 100,000 in the state of
Washington, Joint Base Lewis-McChord which accounts for nearly 20% of the County’s total employment, and the
manufacturing industry which supplies the Boeing Company.
We operate 13 branch locations in King County, including Seattle, Bellevue and Redmond. King County, which is
Washington’s most highly populated county at close to two million residents, is a market that has significant growth potential
for our Company. At June 30, 2012 we ranked 14th in our share of the King County deposit market or just over 1%(1); however,
we continue to make inroads within this market through the strategic expansion of our banking team. The north King County
economy is primarily made up of the aerospace, construction, computer software and biotechnology industries. South King
County, with its close proximity to Pierce County, is considered a natural extension of our primary market area. The economy
of south King County is predominantly comprised of residential communities supported by light industrial, retail, aerospace
and distributing and warehousing industries.
Some other market areas served by the Company include Cowlitz County where we rank second, or 17% (1), in deposit
market share, operating two branch locations; and Kitsap County, where we operate six branches with 8%(1) of the deposit
market share. We also have locations in Adams, Asotin, Benton, Clallam, Clark, Franklin, Grant, Jefferson, Klickitat, Skagit,
Snohomish, Spokane, Thurston, Walla Walla, Whatcom, Whitman, and Yakima counties.
Oregon: With the acquisition of Columbia River Bank in January 2010, we significantly expanded our market area in
western Oregon, and entered the eastern Oregon market area, bringing our total to 25 branch locations in the state. Oregon
counties include Clackamas, Clatsop, Deschutes, Hood River, Jefferson, Marion, Multnomah, Tillamook, Umatilla, Wasco and
Yamhill. Columbia Bank ranks fourteenth(1) in total deposit market share in Oregon, with just over 1% of the deposit market
share. We are first(1) in deposit market share in Clatsop County (29%), Hood River (23%) and Wasco counties (30%). Oregon
market areas provide a significant opportunity for expansion in the future, particularly after the acquisition of West Coast.
For additional information regarding our branches, see Item 2. Properties of this report.
Employees
As of December 31, 2012 the Company and its banking subsidiary employed approximately 1,198 full-time equivalent
employees, a 5% decrease from 1,256 employees at December 31, 2011. We value our employees and pride ourselves on
providing a professional work environment accompanied by comprehensive benefit programs. We are committed to providing
flexible and value-added benefits to our employees through a “Total Compensation Philosophy” which incorporates all
compensation and benefits. Our continued commitment to employees contributed to Columbia Bank being again awarded one
of the Puget Sound Business Journal’s “Washington’s Best Workplaces 2012”.
___________
(1) Source: FDIC Annual Summary of Deposit Report as of June 30, 2012.
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Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K, proxy statements
and other information with the United States Securities and Exchange Commission (“SEC”). The public may obtain copies of
these reports and any amendments at the SEC’s Internet site, www.sec.gov.
Additionally, reports filed with the SEC can be obtained through our website at www.columbiabank.com. These reports
are available through our website as soon as reasonably practicable after they are filed electronically with the SEC. Information
contained on our website is not intended to be incorporated by reference into this report.
Supervision and Regulation
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to
the Company and Columbia State Bank, which operates under the names Columbia Bank in Washington, and Columbia State
Bank and Bank of Astoria in Oregon (collectively, referred to herein as “Columbia Bank”). This regulatory framework is
primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather
than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory framework, our costs of
compliance continue to increase in order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those
provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and
federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including the interpretation
or implementation thereof, could have a material effect on our business or operations. In light of the recent financial crisis,
numerous changes to the statutes, regulations or regulatory policies applicable to us have been made or proposed. The full
extent to which these changes will impact our business is not yet known. However, our continued efforts to monitor and
comply with new regulatory requirements add to the complexity and cost of our business.
Federal Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended
(“BHCA”), and is therefore subject to regulation, supervision and examination by the Federal Reserve. In general, the BHCA
limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to
banking. The Company must file reports with and provide the Federal Reserve such additional information as it may require.
Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become
a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed
financial in nature, such as securities and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or
bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank
holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from
acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not
a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or
controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-
bank activities that, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the
business of banking or of managing or controlling banks.
Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the
Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company's
ability to obtain funds from Columbia Bank for its cash needs, including funds for payment of dividends, interest and
operational expenses.
Tying Arrangements. We are prohibited from engaging in certain tie-in arrangements in connection with any extension
of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its
subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional
services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.
7
Support of Subsidiary Banks. Under Federal Reserve policy and the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank Act”), the Company is expected to act as a source of financial and managerial strength to
Columbia Bank. This means that the Company is required to commit, as necessary, resources to support Columbia Bank. Any
capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other
indebtedness of those subsidiary banks.
State Law Restrictions. As a Washington corporation, the Company is subject to certain limitations and restrictions under
applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions
relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested
shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.
Federal and State Regulation of Columbia Bank
General. The deposits of Columbia Bank, a Washington chartered commercial bank with branches in Washington and
Oregon, are insured by the FDIC. As a result, Columbia Bank is subject to supervision and regulation by the Washington
Department of Financial Institutions' Division of Banks and the FDIC. With respect to branches of Columbia Bank in Oregon,
the Bank is also subject to supervision and regulation by the Oregon Department of Consumer and Business Services, as well
as the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or
unsound banking practices.
Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that
govern its relationship with consumers including laws and regulations that impose certain disclosure requirements and regulate
the manner in which we take deposits, make and collect loans, and provide other services. Failure to comply with these laws
and regulations may subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines,
civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.
Community Reinvestment. The Community Reinvestment Act ("CRA") of 1977 requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the record of the
financial institution in meeting the credit needs of its local communities, including low and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. A bank's community reinvestment record is also considered by
the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on
extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions
of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting
procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not related to
the lending bank; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks
are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in
the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory sanctions.
Regulation of Management. Federal law (i) sets forth circumstances under which officers or directors of a bank may be
removed by the institution's federal supervisory agency; (ii) places restraints on lending by a bank to its executive officers,
directors, principal shareholders, and their related interests; and (iii) generally prohibits management personnel of a bank from
serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or
which has an office within a specified geographic area.
Safety and Soundness Standards. Certain non-capital safety and soundness standards are also imposed upon banks.
These standards cover internal controls, information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An
institution that fails to meet these standards may be subject to regulatory sanctions.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) together with the Dodd-
Frank Act relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state
and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such states
to establish branches. The Interstate Act requires regulators to consult with community organizations before permitting an
interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from using their
interstate branches primarily for deposit production and the federal banking agencies have implemented a loan-to-deposit ratio
screen to ensure compliance with this prohibition.
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Dividends
The principal source of the Company's cash is from dividends received from Columbia Bank, which are subject to
government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying
dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital
below that necessary to meet minimum applicable regulatory capital requirements. Washington law also limits a bank's ability
to pay dividends that are greater than the bank's retained earnings without approval of the applicable banking agency.
Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the
Company's common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and
regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make
capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution's capital is divided into two broad categories, Tier I capital
and Tier II capital. Tier I capital generally consists of common stockholders' equity (including surplus and undivided profits),
qualifying non-cumulative perpetual preferred stock, and qualified minority interests in the equity accounts of consolidated
subsidiaries. Tier I capital generally excludes goodwill and intangible assets, net unrealized gains and losses on available for
sale securities and accumulated net gains and losses on cash flow hedges. Tier II capital generally consists of the allowance for
loan losses, hybrid capital instruments and qualifying subordinated debt. The sum of Tier I capital and Tier II capital represents
an institution's total capital. The guidelines require that at least 50% of an institution's total capital consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution's capital is gauged primarily with reference to the institution's
risk-weighted assets. The guidelines assign risk weightings to an institution's assets in an effort to quantify the relative risk of
each asset and to determine the minimum capital required to support that risk. An institution's risk-weighted assets are then
compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively.
The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based
ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total
assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank
holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly
rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at
least 1% to 2%.
Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on
its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The
categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are
subject to certain mandatory supervisory corrective actions. At each successively lower capital category, an insured bank is
subject to increased restrictions on its operations. During these challenging economic times, the federal banking regulators have
actively enforced these provisions.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and
offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding
company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a
holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets,
the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company's
rating at its last inspection.
9
Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on
transaction testing in assessing a bank's condition to a risk-focused approach. These examinations are extensive and cover the
entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks
under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise.
Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The
frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA
ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them
to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain
triggering events.
Corporate Governance and Accounting
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other things, corporate
governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-
compliance. Generally, the Act (i) requires chief executive officers and chief financial officers to certify to the accuracy of
periodic reports filed with the SEC; (ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the
time frame for reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt
and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for
senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and (v)
requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.
Anti-terrorism
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot
Act”). The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell
banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or
wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and
(iv) eliminates civil liability for persons who file suspicious activity reports. The Act also includes provisions providing the
government with power to investigate terrorism, including expanded government access to bank account records.
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought
about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (i) repeals historical
restrictions on preventing banks from affiliating with securities firms; (ii) provides a uniform framework for the activities of
banks, savings institutions and their holding companies; (iii) broadens the activities that may be conducted by national banks
and banking subsidiaries of bank holding companies; (iv) provides an enhanced framework for protecting the privacy of
consumer information and requires notification to consumers of bank privacy policies; and (v) addresses a variety of other legal
and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding
companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities
than permitted under previous law, particularly with respect to insurance and securities underwriting activities.
Deposit Insurance
The Bank's deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are
subject to deposit insurance assessments designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-
Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total
assets less tangible equity capital of a financial institution. In addition, the Dodd-Frank Act raised the minimum designated
reserve ratio (the FDIC is required to set the reserve ratio each year) of the Deposit Insurance Fund ("DIF") from 1.15% to
1.35%; required that the DIF meet that minimum ratio of insured deposits by 2020; and eliminates the requirement that the
FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The FDIC has
established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. The deposit insurance
assessments to be paid by Columbia Bank could increase as a result.
Insurance of Deposit Accounts. The Emergency Economic Stabilization Act of 2008 (the EESA") included a provision
for a temporary increase from $100,000 to $250,000 per depositor in deposit insurance. The temporary increase was made
permanent under the Dodd-Frank Act. The FDIC insurance coverage limit applies per depositor, per insured depository
institution for each account ownership category. EESA also temporarily raised the limit on federal deposit insurance coverage
to an unlimited amount for non-interest or low-interest bearing demand deposits. Unlimited coverage for non-interest
transaction accounts expired December 31, 2012.
10
Recent Legislation
As a result of the recent financial crises, on July 21, 2010 the Dodd-Frank Act was signed into law. The Dodd-Frank Act
significantly changed the bank regulatory structure and is affecting the lending, deposit, investment, trading and operating
activities of financial institutions and their holding companies, including the Company and Columbia Bank. The full impact of
the Dodd-Frank Act may not be known for years. Some of the provisions of the Dodd-Frank Act that may impact our business
are summarized below.
Corporate Governance. The Dodd-Frank Act requires publicly traded companies to provide their shareholders with (i) a
non-binding shareholder vote on executive compensation, (ii) a non-binding shareholder vote on the frequency of such vote,
(iii) disclosure of “golden parachute” arrangements in connection with specified change in control transactions, and (iv) a non-
binding shareholder vote on golden parachute arrangements in connection with these change in control transactions.
Prohibition Against Charter Conversions of Troubled Institutions. The Dodd-Frank Act generally prohibits a depository
institution from converting from a state to federal charter, or vice versa, while it is the subject to an enforcement action unless
the bank seeks prior approval from its regulator and complies with specified procedures to ensure compliance with the
enforcement action.
Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent federal agency called the
Bureau of Consumer Financial Protection (“CFPB”). The CFPB has broad rulemaking, supervision and enforcement authority
for a wide range of consumer protection laws applicable to banks and thrifts with greater than $10 billion in assets. Smaller
institutions are subject to certain rules promulgated by the CFPB but will continue to be examined and supervised by their
federal banking regulators for compliance purposes.
Repeal of Demand Deposit Interest Prohibition. The Dodd-Frank Act repeals the federal prohibitions on the payment of
interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other
accounts.
Proposed Legislation
General. Proposed legislation is introduced in almost every legislative session. Certain of such legislation could
dramatically affect the regulation of the banking industry. We cannot predict if any such legislation will be adopted or if it is
adopted how it would affect the business of Columbia Bank or the Company. Recent history has demonstrated that new
legislation or changes to existing laws or regulations usually results in a greater compliance burden and therefore generally
increases the cost of doing business.
Basel III. Basel III updates and revises significantly the current international bank capital accords (so-called “Basel I”
and “Basel II”). Basel III is intended to be implemented by participating countries for large, internationally active banks.
However, standards consistent with Basel III will be formally implemented in the United States through a series of regulations,
some of which may apply to other banks. Among other things, Basel III creates “Tier 1 common equity,” a new measure of
regulatory capital closer to pure tangible common equity than the present Tier 1 definition. Basel III also increases minimum
capital ratios. Capital buffers are added to each capital ratio to enable banks to absorb losses during a stressed period while
remaining above their regulatory minimum ratios. The full impact of the Basel III rules cannot be determined at this time as
many regulations are still being written and the implementation date has not yet been finalized.
Effects of Government Monetary Policy
Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of
the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such
purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of
the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain
deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on
deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with
certainty.
11
ITEM 1A.
RISK FACTORS
Our business exposes us to certain risks. The following is a discussion of what we currently believe are the most
significant risks and uncertainties that may affect our business, financial condition and future results.
A continued slow or fragile economic recovery could adversely affect our future results of operations or market price of
our stock.
The national and global economy and the financial services sector in particular continue to face significant challenges,
including the current uncertainty regarding sequestration. We cannot accurately predict how quickly or strongly the economy
will recover from the recent recession, which has adversely impacted the markets we serve. The U.S. economy has also
experienced substantial volatility in the financial markets. Any further deterioration in the economies of the nation as a whole
or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of
operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how
long challenging economic conditions may exist, a slow or fragile recovery could continue to present risks into the future for
the industry and our company.
Economic conditions in the market areas we serve may adversely impact our earnings and could increase our credit risk
associated with our loan portfolio and the value of our investment portfolio.
Substantially all of our loans are to businesses and individuals in Washington and Oregon, and continuing soft economies
in these market areas could have a material adverse effect on our business, financial condition, results of operations and
prospects. While housing prices have stabilized, unemployment remains relatively high in both Washington and Oregon. A
deterioration in the market areas we serve could result in the following consequences, any of which could have an adverse
impact, which could be material, on our business, financial condition, results of operations and prospects:
•
•
•
•
•
•
loan delinquencies may increase;
problem assets and foreclosures may increase;
collateral for loans made may decline further in value, in turn reducing customers’ borrowing power,
reducing the value of assets and collateral associated with existing loans;
certain securities within our investment portfolio could become other than temporarily impaired, requiring a
write-down through earnings to fair value, thereby reducing equity;
low cost or non-interest bearing deposits may decrease; and
demand for our loan and other products and services may decrease.
Our loan portfolio mix, which has loans secured by real estate, could result in increased credit risk in a challenging
economy.
Our loan portfolio is concentrated in commercial real estate and commercial business loans. These types of loans
generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or
investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy loan concentrations.
Because our loan portfolio contains commercial real estate and commercial business loans with relatively large balances, the
deterioration of one or a few of these loans may cause a significant increase in our non-performing loans. An increase in non-
performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase
in loan charge-offs, any of which could have a material adverse impact on our results of operations and financial condition.
Any downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both
borrowers’ ability to repay their loans and the value of the real property securing such loans. Our ability to recover on defaulted
loans would then be diminished, and we would be more likely to suffer losses on defaulted loans.
12
Our Allowance for Loan and Lease Losses (“ALLL”) may not be adequate to cover future loan losses, which could
adversely affect earnings.
We maintain an ALLL in an amount that we believe is adequate to provide for losses inherent in our loan portfolio. While
we strive to carefully monitor credit quality and to identify loans that may become non-performing, at any time there are loans
in the portfolio that could result in losses, but that have not been identified as non-performing or potential problem loans. We
cannot be sure that we will be able to identify deteriorating loans before they become non-performing assets, or that we will be
able to limit losses on those loans that have been identified. Additionally, the process for determining the ALLL requires
different, subjective and complex judgments about the future impact from current economic conditions that might impair the
ability of borrowers to repay their loans. As a result, future significant increases to the ALLL may be necessary.
Future increases to the ALLL may be required based on changes in the composition of the loans comprising the portfolio,
deteriorating values in underlying collateral (most of which consists of real estate) and changes in the financial condition of
borrowers, such as may result from changes in economic conditions, or as a result of actual future events differing from
assumptions used by management in determining the ALLL. Additionally, banking regulators, as an integral part of their
supervisory function, periodically review our ALLL. These regulatory agencies may require us to increase the ALLL. Any
increase in the ALLL would have an adverse effect, which could be material, on our financial condition and results of
operations.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial
condition.
Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions
improve to pre-recession levels, we expect to continue to incur additional losses relating to elevated levels of nonperforming
loans. We do not record interest income on nonaccrual loans, thereby adversely affecting our income, and increasing loan
administration costs. Assets acquired by foreclosure or similar proceedings are recorded at the lower of carrying value or fair
value less estimated costs to sell. The valuation of these foreclosed assets is periodically updated and resulting losses, if any,
are charged to earnings in the period in which they are identified. An increase in the level of nonperforming assets also
increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize
various techniques such as loan sales, workouts, and restructurings to manage our problem assets. Decreases in the value of
these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect
our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires
significant commitments of time from management and staff, which can be detrimental to performance of their other
responsibilities. We may experience further increases in nonperforming loans in the future.
The pending acquisition of West Coast Bancorp ("West Coast") is subject to closing conditions that, if not satisfied or
waived, could result in our inability to consummate the transaction, which may cause the price of our stock to decline.
On September 25, 2012, we entered into an Agreement and Plan of Merger with West Coast. The closing of the
transaction is subject to the satisfaction of certain customary conditions, including the receipt of required regulatory approvals
and the approval of West Coast's and our respective shareholders. No assurance can be given as to when or whether these
approvals will be received. If we do not complete this acquisition, the trading price of our stock may decline to the extent that
the current prices reflect a market assumption that the acquisition will be completed.
Furthermore, if the merger agreement is terminated (i) due to our failure to obtain requisite approval from our
shareholders or (ii) due to our failure to obtain regulatory approval, we will be required to pay West Coast a termination fee of
$5 million. In that regard, special shareholder meetings have been called by both Columbia and West Coast to be held March
18, 2013 to act on the transaction and the requisite applications have been filed with the Federal and State bank regulators, with
an anticipated closing date of April 1, 2013.
We may fail to realize all of the anticipated benefits of our pending acquisition of West Coast.
The success of our pending acquisition of West Coast will depend on, among other things, the ability to successfully
combine Columbia and the West Coast organizations. If we are not able to achieve this objective, the anticipated benefits of the
acquisition may not be realized fully or at all, or may take longer than expected to be realized.
Columbia and West Coast have operated and, until the completion of the acquisition, will continue to operate,
independently. The companies may have challenges integrating different standards, procedures and policies. It is also possible
that clients, customers, depositors and counterparties of West Coast could choose to discontinue their relationships with the
combined company post-acquisition, which could adversely affect our future anticipated performance. These transition matters
could have an adverse effect on us during the pre-acquisition period and for an undetermined time after the completion of the
acquisition.
13
Our acquisitions and the integration of acquired businesses may not result in all of the benefits anticipated, and future
acquisitions may be dilutive to current shareholders.
We have in the past and may in the future seek to grow our business by acquiring other businesses. Our acquisitions may
not have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being
acquired; the total cost of integration including management attention and resources; the time required to complete the
integration successfully; the amount of longer-term cost savings; being able to profitably deploy funds acquired in an
acquisition; or the overall performance of the combined entity.
We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can
arise from the businesses we acquire. Integration of an acquired business can be complex and costly, sometimes including
combining relevant accounting and data processing systems and management controls, as well as managing relevant
relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management
attention and resources, which could adversely affect our operations or results.
Given the continued market volatility and uncertainty, notwithstanding our loss-sharing arrangements with the FDIC, we
may experience increased credit costs or need to take additional markdowns and allowances for loan losses on the assets and
loans acquired that could adversely affect our financial condition and results of operations in the future.
We may also experience difficulties in complying with the technical requirements of our loss-sharing agreements with the
FDIC, which could result in some assets which we acquire in FDIC-assisted transactions losing their coverage under such
agreements.
Acquisitions may also result in business disruptions that cause us to lose customers or cause customers to remove their
accounts from us and move their business to competing financial institutions. It is possible that the integration process related
to acquisitions could result in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and
policies that could adversely affect our ability to maintain relationships with clients, customers, depositors and employees. The
loss of key employees in connection with an acquisition could adversely affect our ability to successfully conduct our business.
We may engage in future acquisitions involving the issuance of additional common stock and/or cash. Any such
acquisitions and related issuances of stock may have a dilutive effect on earnings per share, book value per share or the
percentage ownership of current shareholders. The use of cash as consideration in any such acquisitions could impact our
capital position and may require us to raise additional capital.
Furthermore, notwithstanding our pending and recent acquisitions, we cannot provide any assurance as to the extent to
which we can continue to grow through acquisitions as this will depend on the availability of prospective target opportunities at
valuations we find attractive and the competition for such opportunities from other parties.
Our decisions regarding the fair value of assets acquired, including the FDIC loss-sharing assets, could be inaccurate,
which could materially and adversely affect our business, financial condition, results of operations, and future
prospects.
Management makes various assumptions and judgments about the collectability of the acquired loans, including the
creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured
loans. In FDIC-assisted acquisitions that include loss-sharing agreements, we may record a loss-sharing asset which is
accounted for on the same basis as the assets covered under the loss-sharing agreements. The FDIC loss-sharing asset
primarily represents the present value of the cash flows the Company expects to collect from the FDIC under the loss-sharing
agreements.
If our assumptions are incorrect, significant earnings volatility can occur and credit loss provisions may be needed to
respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future loan
losses could have a material adverse effect on our operating results.
14
Our management of capital could adversely affect profitability measures, the market price of our common stock, and
dilute the holders of our outstanding common stock.
Our capital ratios are significantly higher than regulatory minimums. We may lower our capital ratios through either
selective acquisitions that meet our disciplined criteria, organic loan growth, investment in securities, or a combination of all
three. Although we are periodically engaged in discussions with other potential acquisition candidates, we are not currently a
party to any purchase or merger agreement other than our pending acquisition of West Coast. Following our pending
acquisition of West Coast, there can be no assurance that we will be able to negotiate future acquisitions on terms acceptable to
us.
Conversely, there may be circumstances under which it would be prudent to consider alternatives for raising capital to
take advantage of significant acquisition opportunities or in response to changing economic conditions. Our ability to raise
additional capital, if needed, will depend on, among other things, conditions in the capital markets at the time, which are
outside our control, and our financial performance. Any capital raising alternatives could dilute the holders of our outstanding
common stock and may adversely affect the market price of our common stock.
If the goodwill we have recorded in connection with acquisitions becomes impaired, it could have an adverse impact on
our earnings and shareholders' equity.
Accounting standards require that we account for acquisitions using the acquisition method of accounting. Under
acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is
carried on the acquirer’s balance sheet as goodwill. In accordance with generally accepted accounting principles, our goodwill
is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential
impairment exists. Such evaluation may be based on a variety of factors, including the quoted price of our common stock,
market prices of common stock of other banking organizations, common stock trading multiples, discounted cash flows, and
data from comparable acquisitions. Future evaluations of goodwill may result in impairment and ensuing write-down, which
could be material, resulting in an adverse impact on our earnings and shareholders' equity.
Fluctuating interest rates could adversely affect our business.
Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect
both our ability to originate new loans and our ability to grow. Conversely, decreases in interest rates could result in an
acceleration of loan prepayments. An increase in market interest rates could also adversely affect the ability of our floating-rate
borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and
charge offs, which could adversely affect our business.
Further, our profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”)
between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings,
and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-
earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income
earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could
adversely affect our interest rate spread, and, in turn, our profitability.
The expiration of unlimited FDIC insurance on certain noninterest-bearing transaction accounts may increase our interest
expense and reduce our liquidity.
On December 31, 2012, unlimited FDIC insurance on certain noninterest-bearing transaction accounts under the
Transaction Account Guarantee (“TAG”) program expired. Prior to its expiration, all funds under TAG in a noninterest-bearing
transaction account were insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary
unlimited coverage was in addition to, and separate from, the coverage of at least $250,000 available to depositors under the
FDIC's general deposit insurance rules. The reduction in FDIC insurance on these noninterest-bearing transaction accounts to
the standard $250,000 maximum may cause depositors to move funds previously held in such noninterest-bearing accounts to
interest-bearing accounts, which could increase our costs of funds and negatively impact our results of operations, or may cause
depositors to withdraw their deposits and invest funds in other investments. This could reduce the Company's liquidity, or
require us to pay higher interest rates to retain deposits in order to maintain our liquidity and could adversely affect the
Company's earnings.
15
We operate in a highly regulated environment and changes of or increases in, or supervisory enforcement of, banking or
other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition,
as a publicly-traded company, we are subject to regulation by the Securities and Exchange Commission. Any change in
applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to
compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our
operations. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions
on our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations
may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of
operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory
agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of
operations.
In that regard, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010. Among other
provisions, the legislation (i) created a new Bureau of Consumer Financial Protection with broad powers to regulate consumer
financial products such as credit cards and mortgages, (ii) created a Financial Stability Oversight Council comprised of the
heads of other regulatory agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places new
limits on electronic debit card interchange fees and (v) requires the Securities and Exchange Commission and national stock
exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and
regulations are expected to increase the overall costs of regulatory compliance.
Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or
violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and
enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local
economic conditions we are facing. The exercise of regulatory authority may have a negative impact on our financial condition
and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S.
federal government and its agencies, including the Federal Reserve Board.
We cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary
and fiscal initiatives which have been and may be enacted on the financial markets, on the Company and on the Bank. The
terms and costs of these activities, or any worsening of current financial market and economic conditions, could materially and
adversely affect our business, financial condition, results of operations, and the trading price of our common stock.
We may be required, in the future, to recognize impairment with respect to investment securities.
Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declines in
the fair market value of these securities. Securities issued by certain states and municipalities have recently come under
scrutiny due to concerns about credit quality. Although management believes the credit quality of the Company’s state and
municipal securities portfolio to be good, there can be no assurance that the credit quality of these securities will not decline in
the future. We evaluate the securities portfolio for any other than temporary impairment each reporting period, as required by
generally accepted accounting principles in the United States of America. There can be no assurance, however, that future
evaluations of the securities portfolio will not require us to recognize further impairment charges with respect to these and other
holdings. For example, it is possible that government-sponsored programs to allow mortgages to be refinanced to lower rates
could materially adversely impact the yield on our portfolio of mortgage-backed securities, since a significant portion of our
investment portfolio is composed of such securities.
Substantial competition in our market areas could adversely affect us.
Commercial banking is a highly competitive business. We compete with other commercial banks, savings and loan
associations, credit unions, finance, insurance and other non-depository companies operating in our market areas. We also
experience competition, especially for deposits, from Internet-based banking institutions, which have grown rapidly in recent
years. We are subject to substantial competition for loans and deposits from other financial institutions. Some of our
competitors are not subject to the same degree of regulation and restriction as we are and/or have greater financial resources
than we do. Some of our competitors have severe liquidity issues, which could impact the pricing of deposits in our
marketplace. If we are unable to effectively compete in our market areas, our business, results of operations and prospects
could be adversely affected.
16
Changes in accounting standards could materially impact our financial statements.
From time to time the Financial Accounting Standards Board and the SEC change the financial accounting and reporting
standards that govern the preparation of our financial statements. These changes can be very difficult to predict and can
materially impact how we record and report our financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.
There can be no assurance as to the level of dividends we may pay on our common stock.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of
funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are
not required to do so and there may be circumstances under which we would eliminate our common stock dividend in the
future. This could adversely affect the market price of our common stock.
Significant legal or regulatory actions could subject us to substantial uninsured liabilities and reputational harm and
have a material adverse effect on our business and results of operations.
We are from time to time subject to claims and proceedings related to our operations. These claims and legal actions,
which could include supervisory or enforcement actions by our regulators, or criminal proceedings by prosecutorial authorities,
could involve large monetary claims, including civil money penalties or fines imposed by government authorities, and
significant defense costs. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with
deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil
money penalties or fines imposed by government authorities and may not cover all other claims that might be brought against
us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities,
which could adversely affect our business, prospects, results of operations and financial condition. Substantial legal liability or
significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to
us, which in turn could seriously harm our business prospects.
We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk
of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations.
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud
or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or
record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or
misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or
misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the
information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise
inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be
repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated
systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or
employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to
disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer
viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or
physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further
exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same
risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business
continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished
ability of us to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well
as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business,
financial condition and results of operations, perhaps materially.
17
A failure in or breach of our operational or security systems, or those of our third party service providers, including as a
result of cyber attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary
information, damage our reputation, increase our costs and cause losses.
As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential
and other information on our computer systems and networks. Any failure, interruption or breach in security or operational
integrity of these systems could result in failures or disruptions in our online banking system, customer relationship
management, general ledger, deposit and loan servicing and other systems. The security and integrity of our systems could be
threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber
attacks, electronic fraudulent activity or attempted theft of financial assets. We cannot assure you that any such failures,
interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed. While we have
certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. We may be
required to expend significant additional resources in the future to modify and enhance our protective measures.
Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third
parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial
intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures,
interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer
business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by
insurance.
We have various anti-takeover measures that could impede a takeover.
Our articles of incorporation include certain provisions that could make it more difficult to acquire us by means of a
tender offer, a proxy contest, merger or otherwise. These provisions include certain non-monetary factors that our board of
directors may consider when evaluating a takeover offer, and a requirement that any “Business Combination” be approved by
the affirmative vote of no less than 66 2/3% of the total shares attributable to persons other than a “Control Person.” These
provisions may have the effect of lengthening the time required for a person to acquire control of us through a tender offer,
proxy contest or otherwise, and may deter any potentially hostile offers or other efforts to obtain control of us. This could
deprive our shareholders of opportunities to realize a premium for their Columbia common stock, even in circumstances where
such action is favored by a majority of our shareholders.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
18
ITEM 2.
PROPERTIES
The Company’s principal Columbia Bank properties include our corporate headquarters which is located at 13th & A
Street, Tacoma, Washington, and an operations facility in Lakewood, Washington.
The Company’s branch network as of December 31, 2012 is made up of 99 branches located throughout several
Washington and Oregon counties compared to 102 branches at December 31, 2011. The number of branches per county, as well
as whether it is owned or operated under a lease agreement is detailed in the following table.
County
Pierce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
King . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kitsap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Snohomish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Skagit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Washington counties . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Washington branches. . . . . . . . . . . . . . . . . . . . . . . .
Clatsop (dba Bank of Astoria). . . . . . . . . . . . . . . . . . . . . . . . .
Tillamook (dba Bank of Astoria). . . . . . . . . . . . . . . . . . . . . . .
Clackamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multnomah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deschutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Oregon counties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Oregon branches . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Columbia Bank branches . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Branches
Occupancy Type
Owned
Leased
22
13
6
5
3
25
74
4
2
4
2
4
9
25
99
16
8
3
5
3
20
55
4
2
—
1
3
7
17
72
6
5
3
—
—
5
19
—
—
4
1
1
2
8
27
For additional information concerning our premises and equipment and lease obligations, see Note 8 and 15, respectively,
to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
ITEM 3.
LEGAL PROCEEDINGS
The Company and its banking subsidiary are parties to routine litigation arising in the ordinary course of business.
Management believes that, based on the information currently known to them, any liabilities arising from such litigation will
not have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable
19
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Quarterly Common Stock Prices and Dividends
Our common stock is traded on the NASDAQ Global Select Market under the symbol “COLB”. Quarterly high and low
sales prices and dividend information for the last two years are presented in the following table. The prices shown do not
include retail mark-ups, mark-downs or commissions:
2012
High
Low
Regular
Special
Total Cash
Dividends Declared
Cash Dividends Declared
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
23.35
23.52
19.85
19.15
23.52
High
22.14
19.95
18.14
19.76
22.14
$
$
$
$
$
$
$
$
$
$
19.65
17.38
17.22
16.18
16.18
$
$
0.08
0.08
0.09
0.09
0.34
$
$
0.29
0.14
0.21
—
0.64
$
$
0.37
0.22
0.30
0.09
0.98
Cash Dividends Declared
Low
Regular
Special
Total Cash
Dividends Declared
17.91
16.56
14.01
13.46
13.46
$
$
0.03
0.05
0.06
0.08
0.22
$
$
— $
—
—
0.05
0.05
$
0.03
0.05
0.06
0.13
0.27
On December 31, 2012, the last sale price for our stock on the NASDAQ Global Select Market was $17.94. At
January 31, 2013, the number of shareholders of record was 2,135. This figure does not represent the actual number of
beneficial owners of common stock because shares are frequently held in “street name” by securities dealers and others for the
benefit of individual owners who may vote the shares.
At December 31, 2012, a total of 25,952 stock options were outstanding. Additional information about stock options and
other equity compensation plans is included in Note 19 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data” of this report.
The payment of future cash dividends is at the discretion of our Board and subject to a number of factors, including
results of operations, general business conditions, growth, financial condition and other factors deemed relevant to capital
management strategies by the Board of Directors. In addition, the payment of cash dividends is subject to Federal regulatory
requirements for capital levels and other restrictions. In this regard, current guidance from the Federal Reserve provides, among
other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share,
measured over the previous four fiscal quarters.
Subsequent to year end, on January 24, 2013 the Company declared a quarterly cash dividend of $0.10 per share payable
on February 20, 2013, to shareholders of record at the close of business on February 6, 2013.
20
Equity Compensation Plan Information
Year ended December 31, 2012
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights (1)(2)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Equity compensation plans approved by security holders . . . .
Equity compensation plans not approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,952
$
—
20.13
—
Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (3)
1,026,135
—
__________
(1)
Includes shares to be issued upon exercise of options under plans of Bank of Astoria, Mountain Bank Holding Company and Town Center Bancorp,
which were assumed as a result of their acquisitions.
(2) Consists of shares that are subject to outstanding options.
(3)
Includes 417,625 shares available for future issuance under the stock option and equity compensation plan and 608,510 shares available for
purchase under the Employee Stock Purchase Plan as of December 31, 2012.
Five-Year Stock Performance Graph
The following graph shows a five-year comparison of the total return to shareholders of Columbia’s common stock,
the Nasdaq Composite Index (which is a broad nationally recognized index of stock performance by companies listed on the
Nasdaq Stock Market) and the Columbia Peer Group (comprised of banks with assets of $1 billion to $5 billion, all of which
are located in the western United States). The definition of total return includes appreciation in market value of the stock as
well as the actual cash and stock dividends paid to shareholders. The graph assumes that the value of the investment in
Columbia’s common stock, the Nasdaq and the Columbia Peer Group was $100 on December 31, 2007, and that all dividends
were reinvested.
Index
Columbia Banking System, Inc. . . . .
NASDAQ Composite. . . . . . . . . . . .
SNL Columbia Peer Group . . . . . . .
12/31/2007
100.00
100.00
100.00
12/31/2008
41.29
60.02
70.80
Source: SNL Financial LC, Charlottesville, VA
21
Period Ending
12/31/2009
56.38
87.24
61.43
12/31/2010
73.53
103.08
66.94
12/31/2011
68.32
102.26
56.80
12/31/2012
66.87
120.42
70.48
ITEM 6.
SELECTED FINANCIAL DATA
Five-Year Summary of Selected Consolidated Financial Data (1)
2012
2011
2010
2009
2008
(dollars in thousands except per share amounts)
For the Year
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses, excluding covered loans . . . . . . . . . . . . . . .
Noninterest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) applicable to common shareholders . . . . . . . . . . . . . . . . . . . .
Per Common Share
Earnings (loss) (Basic) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) (Diluted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
$
248,504
9,577
238,927
13,475
27,058
162,913
46,143
46,143
1.16
1.16
19.25
$
$
$
$
$
$
$
$
$
$
$
251,271
14,535
236,736
7,400
(9,283)
155,759
48,037
48,037
1.22
1.21
19.23
$
$
$
$
$
$
$
$
$
$
$
185,879
21,092
164,787
41,291
52,781
137,147
30,784
25,837
0.73
0.72
17.97
$
$
$
$
$
$
$
$
$
$
$
143,035
27,683
115,352
63,500
29,690
94,488
(3,968)
(8,371)
(0.38)
(0.38)
16.13
$
$
$
$
$
$
$
$
$
$
$
175,060
55,547
119,513
41,176
14,850
92,125
5,968
5,498
0.30
0.30
18.82
Averages
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,826,283
$ 4,509,010
$ 4,248,590
$ 3,084,421
$ 3,134,054
Interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,246,724
$ 3,871,424
$ 3,583,728
$ 2,783,862
$ 2,851,555
Loans, including covered loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,900,520
$ 2,607,266
$ 2,485,650
$ 2,124,574
$ 2,264,486
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,011,294
$
928,891
$
720,152
$
584,028
$
565,299
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,875,666
$ 3,541,399
$ 3,270,923
$ 2,378,176
$ 2,382,484
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,609,467
$ 3,218,425
$ 2,828,246
$ 1,945,039
$ 1,911,897
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
761,185
$
730,726
$
668,469
$
462,127
$
354,387
Financial Ratios
Net interest margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (tax equivalent) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.77%
0.96%
6.06%
69.17%
15.77%
6.27%
1.07%
6.57%
70.68%
16.21%
4.76%
0.72%
4.15%
67.56%
15.73%
4.33 %
(0.13)%
(2.16)%
61.53 %
14.98 %
4.38%
0.19%
1.59%
59.88%
11.31%
At Year End
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,906,335
$ 4,785,945
$ 4,256,363
$ 3,200,930
$ 3,097,079
Covered assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
407,648
$
560,055
$
531,504
$
—
$
—
Loans, excluding covered loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,525,710
$ 2,348,371
$ 1,915,754
$ 2,008,884
$ 2,232,332
Allowance for noncovered loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . .
$
52,244
$
53,041
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,023,484
$ 1,050,325
$
$
60,993
781,774
$
$
53,478
631,645
$
$
42,747
540,525
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,042,085
$ 3,815,529
$ 3,327,269
$ 2,482,705
$ 2,382,151
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,802,366
$ 3,510,435
$ 2,998,482
$ 2,072,821
$ 1,941,047
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
764,008
759,338
706,878
528,139
415,385
Nonperforming Assets, Excluding Covered Assets
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned and other personal property owned . . . . . . . . . . . . . . . .
Total nonperforming assets, excluding covered assets. . . . . . . . . . . . . . . . . . . . .
$
Nonperforming loans to year end loans, excluding covered loans . . . . . . . . . . .
Nonperforming assets to year end assets, excluding covered assets . . . . . . . . . .
Allowance for loan and lease losses to year end loans, excluding covered
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses to nonperforming loans, excluding
covered loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,395
11,108
48,503
1.48%
1.08%
2.07%
53,483
31,905
85,388
$
89,163
30,991
110,431
19,037
106,163
2,874
$
120,154
$
129,468
$
109,037
2.28%
2.02%
2.26%
4.65%
3.23%
3.18%
5.50 %
4.04 %
2.66 %
4.76%
3.52%
1.91%
139.71%
99.17%
68.41%
48.43 %
40.27%
Net loan charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
14,272
$
15,352
$
33,776
$
52,769
$
25,028
Other nonfinancial data
Full-time equivalent employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking branches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,198
99
1,256
102
1,092
84
715
52
735
53
__________
(1) These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of this report.
(2) Noninterest expense, excluding net cost of operation of other real estate, FDIC clawback liability expense and acquisition related expenses, divided by the sum of net interest
income, excluding incremental accretion income on the acquired loan portfolio and prepayment expenses on FHLB advances, and noninterest income on a tax equivalent basis,
excluding gain/loss investment securities, gain on bank acquisition, and the change in FDIC loss-sharing asset.
22
Consolidated Five-Year Financial Data (1)
Interest Income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities. . . . . . . . . . . . . . . . . . . . .
Federal funds sold and deposits with banks . . . .
Total interest income. . . . . . . . . . . . . . . . . .
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances. . . . . . . . . .
Prepayment charge on Federal Home Loan
Bank advances . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . .
Provision for noncovered loan and lease
losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for losses on covered
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision . . . . . . .
Noninterest income (loss). . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes. . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . .
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . .
Less: Dividends on preferred stock. . . . . . .
Net Income (Loss) Applicable to Common
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . .
Per Common Share
Earnings (loss) basic . . . . . . . . . . . . . . . . . .
Earnings (loss) diluted . . . . . . . . . . . . . . . .
Average number of common shares
outstanding (basic) . . . . . . . . . . . . . . . . . . . . .
Average number of common shares
outstanding (diluted). . . . . . . . . . . . . . . . . . . .
Total assets at year end. . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . .
Years ended December 31,
2012
2011
2010
2009
2008
(in thousands, except per share amounts)
$ 219,433
18,276
9,941
854
248,504
$ 218,420
21,870
10,142
839
251,271
$ 157,292
18,276
9,348
963
185,879
$ 117,062
17,300
8,458
215
143,035
$ 147,830
18,852
7,976
402
175,060
5,887
2,608
603
—
479
9,577
238,927
10,478
2,980
—
579
498
14,535
236,736
16,733
2,841
—
1,029
489
21,092
164,787
23,250
2,759
—
1,197
477
27,683
115,352
45,307
7,482
—
1,800
958
55,547
119,513
13,475
7,400
41,291
63,500
41,176
25,892
199,560
27,058
162,913
63,705
17,562
46,143
—
46,143
1.16
1.16
$
$
$
$
(1,648)
230,984
(9,283)
155,759
65,942
17,905
48,037
—
48,037
1.22
1.21
$
$
$
$
6,055
117,441
52,781
137,147
33,075
2,291
30,784
4,947
25,837
0.73
0.72
$
$
$
$
—
51,852
29,690
94,488
(12,946)
(8,978)
(3,968)
4,403
(8,371)
(0.38)
(0.38)
$
$
$
$
$
$
$
$
—
78,337
14,850
92,125
1,062
(4,906)
5,968
470
5,498
0.30
0.30
39,260
39,103
35,209
21,854
17,914
39,263
39,180
35,392
21,854
18,010
$ 4,906,335
$
$
0.98
— $
$
$ 4,785,945
$ 4,256,363
25,735
0.04
— $
$
0.27
$ 3,200,930
25,669
$
0.07
$
$ 3,097,079
25,603
$
0.58
$
__________
(1) These unaudited schedules provide selected financial information concerning the Company that should be read in
conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this
report.
23
Selected Quarterly Financial Data (1)
The following table presents selected unaudited consolidated quarterly financial data for each quarter of 2012 and 2011.
The information contained in this table reflects all adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods.
First
Quarter
Second
Quarter
Fourth
Quarter
(in thousands, except per share amounts)
Third
Quarter
Year Ended
December 31,
2012
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for noncovered loan and lease losses. . . . .
Provision (recapture) for losses on covered loans . . .
Noninterest income (loss) . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . .
Provision for income taxes. . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Common Share (2)
Earnings (basic) . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (diluted). . . . . . . . . . . . . . . . . . . . . . . .
2011
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for noncovered loan and lease losses. . . . .
Provision (recapture) for losses on covered loans . . .
Noninterest income (loss) . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . .
Provision for income taxes. . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Common Share (2)
Earnings (basic) . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (diluted). . . . . . . . . . . . . . . . . . . . . . . .
$
69,712
$
62,114
$
59,469
$
57,209
$
248,504
2,649
67,063
4,500
15,685
9,574
44,352
12,100
3,198
8,902
0.22
0.22
54,611
4,162
50,449
—
(422)
(5,419)
37,346
8,106
2,327
5,779
0.15
0.15
$
$
$
$
$
$
$
2,413
59,701
3,750
11,688
11,828
39,825
16,266
4,367
11,899
0.30
0.30
53,309
3,934
49,375
2,150
2,301
3,542
37,164
11,302
2,670
8,632
0.22
0.22
2,204
57,265
2,875
(3,992)
(911)
40,936
16,535
4,655
11,880
0.30
0.30
68,432
3,644
64,788
500
433
2,196
39,935
26,116
7,244
18,872
0.48
0.48
$
$
$
$
$
$
$
2,311
54,898
2,350
2,511
6,567
37,800
18,804
5,342
13,462
0.34
0.34
74,919
2,795
72,124
4,750
(3,960)
(9,602)
41,314
20,418
5,664
14,754
0.37
0.37
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,577
238,927
13,475
25,892
27,058
162,913
63,705
17,562
46,143
1.16
1.16
251,271
14,535
236,736
7,400
(1,648)
(9,283)
155,759
65,942
17,905
48,037
1.22
1.21
__________
(1) These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report.
(2) Due to averaging of shares, quarterly earnings per share may not add up to the totals reported for the full year.
24
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
This discussion should be read in conjunction with our Consolidated Financial Statements and related notes in “Item 8.
Financial Statements and Supplementary Data” of this report. In the following discussion, unless otherwise noted, references to
increases or decreases in average balances in items of income and expense for a particular period and balances at a particular
date refer to the comparison with corresponding amounts for the period or date for the previous year.
Critical Accounting Policies
We have established certain accounting policies in preparing our Consolidated Financial Statements that are in
accordance with accounting principles generally accepted in the United States. Our significant accounting policies are
presented in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this
report. Certain of these policies require the use of judgments, estimates and economic assumptions which may prove inaccurate
or are subject to variation that may significantly affect our reported results of operations and financial position for the periods
presented or in future periods. Management believes that the judgments, estimates and economic assumptions used in the
preparation of the Consolidated Financial Statements are appropriate given the factual circumstances at the time. We consider
the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated
financial statements.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) is established to absorb known and inherent losses in our loan and
lease portfolio. Our methodology in determining the appropriate level of the ALLL includes components for a general valuation
allowance in accordance with the Contingencies topic of the Financial Accounting Standards Board Accounting Standards
Codification (“FASB ASC”), a specific valuation allowance in accordance with the Receivables topic of the FASB ASC and an
unallocated component. Both quantitative and qualitative factors are considered in determining the appropriate level of the
ALLL. Quantitative factors include historical loss experience, delinquency and charge-off trends and the evaluation of specific
loss estimates for problem loans. Qualitative factors include existing general economic and business conditions in our market
areas as well as the duration of the current business cycle. Changes in any of the factors mentioned could have a significant
impact on our calculation of the ALLL. Our ALLL policy and the judgments, estimates and economic assumptions involved are
described in greater detail in the “Allowance for Noncovered Loan and Lease Losses and Unfunded Commitments and Letters
of Credit” section of this discussion and in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements
and Supplementary Data” of this report.
Business Combinations
The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the
acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their
acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being
measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired,
including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets
acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related
costs are expensed as incurred.
Acquired Impaired Loans
Loans acquired at a discount for which it is probable that all contractual payments will not be received are generally
accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).
In addition, certain acquired loans with evidence of deteriorated credit quality may be accounted for under this topic even if it
is not yet probable that all contractual payments will not be received. These loans are recorded at fair value at the time of
acquisition. Estimated credit losses are included in the determination of fair value, therefore, an allowance for loan losses is not
recorded on the acquisition date. The excess of expected cash flows at acquisition over the initial investment in acquired loans
(“accretable yield”) is recorded as interest income over the life of the loans if the timing and amount of the future cash flows is
reasonably estimable. Subsequent to acquisition, the Company aggregates individual loans with common risk characteristics
into pools of loans. Increases in estimated cash flows over those expected at the acquisition date are recognized as interest
income, prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for
loan losses.
25
Loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete
interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired
loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future
cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and the purchase price discount on those
loans is not recorded as interest income until the timing and amount of future cash flows can be reasonably estimated.
FDIC Loss-sharing Asset
In conjunction with certain of the FDIC-assisted acquisitions, the Bank entered into loss-sharing agreements with the
FDIC. At the date of the acquisitions, the Company elected to account for amounts receivable under the loss-sharing
agreements as an indemnification asset in accordance with the Business Combinations topic of the FASB ASC. Subsequent to
initial recognition, the FDIC loss-sharing 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 assets. Any decrease in expected cash flows due to an
increase in expected credit losses will increase the FDIC loss-sharing asset and any increase in expected future cash flows due
to a decrease in expected credit losses will decrease the FDIC loss-sharing asset. Increases and decreases to the FDIC loss-
sharing asset are recorded as adjustments to noninterest income.
Valuation and Recoverability of Goodwill
Goodwill represented $115.6 million of our $4.91 billion in total assets and $764.0 million in total shareholders’ equity as
of December 31, 2012. The Company has one, single reporting unit. We review goodwill for impairment annually, during the
third quarter, and also test for impairment between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of our reporting unit below its carrying amount. Such events and circumstances may
include among others: a significant adverse change in legal factors or in the general business climate; significant decline in our
stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group
within the reporting unit; and an adverse action or assessment by a regulator. Any adverse change in these factors could have a
significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.
Under the Intangibles – Goodwill and Other topic of the FASB ASC, the testing for impairment may begin with an
assessment of qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. When required, the goodwill impairment test involves a two-step process. We first test goodwill for
impairment by comparing the fair value of the reporting unit with its carrying amount. If the fair value of the reporting unit
exceeds the carrying amount of the reporting unit, goodwill is not deemed to be impaired, and no further testing is necessary. If
the carrying amount of the reporting unit were to exceed the fair value of the reporting unit, we would perform a second test to
measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we would determine the
implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination.
Specifically, we would allocate the fair value of the reporting unit to all of the assets and liabilities of the reporting unit in a
hypothetical calculation that would determine the implied fair value of goodwill. If the implied fair value of goodwill is less
than the recorded goodwill, we would record an impairment charge for the difference.
The accounting estimates related to our goodwill require us to make considerable assumptions about fair values. Our
assumptions regarding fair values require significant judgment about economic and industry factors, as well as our views
regarding the growth and earnings prospects of the bank. Changes in these judgments, either individually or collectively, may
have a significant effect on the estimated fair values.
Based on the results of the annual goodwill impairment test, we determined that no goodwill impairment charges were
required and our single reporting unit was not at risk of failing step one. As of December 31, 2012 we determined there were no
events or circumstances which would more likely than not reduce the fair value of our reporting unit below its carrying amount.
Even though we determined that there was no goodwill impairment during 2012, additional adverse changes in the
operating environment for the financial services industry may result in a future impairment charge.
Please refer to Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary
Data” of this report for further discussion.
26
2012 Highlights
• Consolidated net income for 2012 was $46.1 million, or $1.16 per diluted common share, compared with a net income
of $48.0 million, or $1.21 per diluted common share, in 2011.
• Net interest income for 2012 increased 1% to $238.9 million compared to $236.7 million for 2011. Interest income
was $248.5 million in 2012, compared to $251.3 million in 2011. The decrease was due to the lower average yield on
the noncovered loan portfolio. Interest expense decreased $5.0 million due to the average cost of interest-bearing
deposits falling 19 basis points.
•
Provision expense on noncovered loans was $13.5 million in 2012, compared to $7.4 million in 2011, an increase of
82%. Provision expense on covered loans was $25.9 million in 2012, compared to a provision recapture of $1.6
million in 2011. The noncovered loan provision for the current year approximates current year net charge-offs. The
noncovered loan provision in 2011 approximated net charge-offs partially offset by an improvement in credit quality.
The increase in the provision on covered loans was due to incremental loan losses incurred in the current period which
were in excess of those expected from the remeasurement of cash flows during the prior period.
• Noninterest income was $27.1 million for 2012, an increase from a loss of $9.3 million for 2011. The increase was
primarily due to the decrease of $25.0 million in the change in the FDIC loss-sharing asset, $6.5 million in additional
investment securities gains, and $3.4 million in additional service charges and other fees.
• Noninterest expense increased 5% to $162.9 million for 2012 due to increases in staffing and occupancy costs related
to the three FDIC-assisted transactions that occurred during mid 2011 as well as additional legal and professional
expenses incurred in 2012 related to the pending acquisition of West Coast.
• Total assets at December 31, 2012 were $4.91 billion, up 3% from $4.79 billion at the end of 2011. The increase from
December 31, 2011 reflects the Company's noncovered loan growth as well as the increase in cash and cash
equivalents in anticipation of payment of the cash portion of the West Coast Bancorp acquisition consideration.
•
Investment securities available for sale totaled $1.00 billion at December 31, 2012 compared to $1.03 billion at
December 31, 2011.
• Loans, excluding covered loans, were $2.53 billion, up 8% from $2.35 billion at the end of 2011. The increase from
December 31, 2011 reflects additional loan volume arising from the Company's organic loan growth. Noncovered
loan growth during 2012 was $177.3 million and was centered mainly in commercial business and commercial and
multifamily residential loans.
• The allowance for noncovered loan and lease losses decreased to $52.2 million at December 31, 2012 from $53.0
million at December 31, 2011 due to improved loan quality. The Company’s allowance amounts to 2.07% of total
noncovered loans, compared with 2.26% at the end of 2011.
• Nonperforming assets totaled $48.5 million at December 31, 2012, significantly down from $85.4 million at
December 31, 2011. Net loan charge-offs were $14.3 million in 2012, compared with $15.4 million in 2011.
Nonaccrual loans decreased $16.1 million to $37.4 million and other real estate owned and other personal property
owned decreased $20.8 million to $11.1 million.
• Deposits totaled $4.04 billion at December 31, 2012 compared to $3.82 billion at December 31, 2011. Core deposits
totaled $3.80 billion at December 31, 2012, comprising 94% of total deposits compared to $3.51 billion, or 92%, of
total deposits at December 31, 2011.
• The Company is well capitalized with a total risk-based capital ratio of 20.62% at December 31, 2012 compared to
21.05% at December 31, 2011.
• The number of branches decreased by 3 from December 31, 2011 to December 31, 2012 as part of the Company's
ongoing effort to improve efficiencies.
27
Business Combinations
On August 5, 2011, the Bank acquired certain assets and assumed certain liabilities of the Bank of Whitman from the
FDIC in an FDIC-assisted transaction. The Bank and the FDIC entered into a modified whole bank purchase and assumption
agreement without loss share. The bank acquired approximately $437.5 million in assets, including $200.0 million in loans
measured at fair value, and approximately $401.1 million in deposits located in nine branches in eastern Washington. The Bank
participated in a competitive bid process in which the accepted bid included no deposit premium on non-brokered deposits and
a negative bid of $30.0 million on net assets acquired.
On May 27, 2011, the Bank acquired certain assets and assumed certain liabilities of First Heritage Bank from the FDIC
in an FDIC-assisted transaction. The Bank acquired approximately $165.0 million in assets and approximately $159.5 million
in deposits located in five branches in the King and Snohomish counties of Washington. First Heritage Bank's loans and other
real estate assets acquired of approximately $89.7 million are subject to a loss-sharing agreement with the FDIC. The Bank
participated in a competitive bid process in which the accepted bid included a 0.75% deposit premium on non-brokered
deposits and a negative bid of $10.5 million on net assets acquired.
On May 20, 2011, the Bank acquired certain assets and assumed certain liabilities of Summit Bank from the FDIC, in an
FDIC-assisted transaction. The Bank acquired approximately $131.1 million in assets and approximately $123.3 million in
deposits located in three branches in in the northern Puget Sound region of Washington. Summit Bank's loans and other real
estate assets acquired of approximately $71.9 million are subject to a loss-sharing agreement with the FDIC. The Bank
participated in a competitive bid process in which the accepted bid included a 0.75% deposit premium on non-brokered
deposits and a negative bid of $9.5 million on net assets acquired.
On January 29, 2010, the Bank acquired substantially all of the deposits and assets of American Marine Bank from the
FDIC, which was appointed receiver of American Marine Bank. The Bank acquired approximately $307.8 million in assets and
approximately $254.0 million in deposits located in 11 branches in the western Puget Sound region. American Marine Bank’s
loans and other real estate assets acquired of approximately $257.5 million are subject to a loss-sharing agreement with the
FDIC. In addition, Columbia State Bank will continue to operate the Trust Division of American Marine Bank. The Bank
participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits
and a negative bid of $23.0 million on net assets acquired.
On January 22, 2010, the Bank acquired all of the deposits and certain assets of Columbia River Bank from the FDIC, in
an FDIC-assisted transaction. The Bank acquired approximately $912.9 million in assets and approximately $893.4 million in
deposits located in 21 branches in Oregon and Washington. Columbia River Bank’s loans and other real estate assets acquired
of approximately $696.1 million are subject to a loss-sharing agreement with the FDIC. The Bank participated in a competitive
bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $43.9
million on net assets acquired.
28
RESULTS OF OPERATIONS
Summary
A summary of the Company’s results of operations for each of the last five years ended December 31 follows:
Year
ended
2012
Increase
(Decrease)
Amount
%
Year
ended
2011
Increase
(Decrease)
Years ended December 31,
Amount
%
2010
2009
2008
(dollars in thousands, except per share amounts)
Interest income . . . . . . . . . . .
$ 248,504
$
(2,767)
(1)
$ 251,271
$
65,392
35
$ 185,879
$ 143,035
$ 175,060
Interest expense. . . . . . . . . . .
Net interest income . . . . . . . .
Provision for loan and
lease losses . . . . . . . . . . . .
Provision (recapture) for
losses on covered loans . .
Noninterest income (loss) . . .
Noninterest expense:
Compensation and
employee
benefits . . . . . . . . . .
Other expense. . . . . . . .
Total . . . . . . . . . .
Income (loss) before
income taxes . . . . . . . . . . .
Provision (benefit) for
income taxes . . . . . . . . . . .
9,577
238,927
(4,958)
2,191
13,475
6,075
(34)
1
82
14,535
236,736
(6,557)
71,949
7,400
(33,891)
25,892
27,058
27,540
36,341
(1,671)
(391)
(1,648)
(9,283)
(7,703)
(62,064)
85,434
77,479
162,913
3,882
3,272
7,154
63,705
(2,237)
17,562
(343)
5
4
5
(3)
(2)
(4)
81,552
74,207
155,759
11,772
6,840
18,612
65,942
32,867
17,905
15,614
$
48,037
$
17,253
(31)
44
(82)
(127)
(118)
17
10
14
99
682
56
21,092
164,787
27,683
115,352
55,547
119,513
41,291
63,500
41,176
6,055
52,781
—
—
29,690
14,850
69,780
67,367
137,147
47,275
47,213
94,488
49,315
42,810
92,125
33,075
(12,946)
1,062
2,291
(8,978)
(4,906)
$
30,784
$
(3,968)
$
5,968
Net income (loss) . . . . .
$
46,143
$
(1,894)
Less:
Dividends
on preferred
stock . . . . . . . .
Net income (loss)
applicable to
common
shareholders. . . . . . .
Earnings (loss) per
common share,
diluted . . . . . . . . . . .
Net Interest Income
—
—
—
—
(4,947)
(100)
4,947
4,403
470
$
46,143
$
1.16
$
$
(1,894)
(4)
$
48,037
$
22,200
86
$
25,837
$
(8,371)
(0.05)
(4)
$
1.21
$
0.49
68
$
0.72
$
(0.38)
$
$
5,498
0.30
Net interest income is the difference between interest income and interest expense. Net interest income on a fully taxable-
equivalent basis expressed as a percentage of average total interest-earning assets is referred to as the net interest margin, which
represents the average net effective yield on interest-earning assets.
29
The following table sets 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, net interest spread, net interest margin and the ratio of average interest-earning assets to
interest-earning liabilities:
Net Interest Income Summary
2012
Interest
Earned/
Paid
Average
Balances (1)
Average
Rate
Average
Balances (1)
(3)
2011
Interest
Earned/
Paid (3)
Average
Rate
Average
Balances (1)
(3)
2010
Interest
Earned/
Paid (3)
Average
Rate
(dollars in thousands)
ASSETS
Loans, excluding covered loans, net (1)(2).
Covered loans, net (1) . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . .
Tax exempt securities (2) . . . . . . . . . . . . .
Interest-earning deposits with banks
and federal funds sold . . . . . . . . . . . . .
$ 2,413,307
$131,413
5.45% $ 2,064,568
$126,520
6.13% $ 2,103,964
$109,039
487,213
740,418
270,876
88,785
18,276
15,423
18.22%
2.47%
5.69%
542,698
675,010
253,881
92,467
21,870
15,736
17.04%
3.24%
6.20%
381,686
491,306
228,846
48,796
18,276
14,505
334,910
854
0.26%
335,267
839
0.25%
377,926
963
Total interest-earning assets . . . . . .
4,246,724
254,751
6.00% 3,871,424
257,432
6.65% 3,583,728
191,579
Other earning assets. . . . . . . . . . . . . . . . .
Noninterest-earning assets. . . . . . . . . . . .
76,327
503,232
Total assets . . . . . . . . . . . . . . . . . . .
$ 4,826,283
57,518
580,068
$ 4,509,010
51,446
613,416
$ 4,248,590
LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit . . . . . . . . . . . . . . .
$ 543,349
$
3,257
Savings accounts . . . . . . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . . . . . . .
298,223
790,887
Money market accounts. . . . . . . . . . . . . .
1,051,171
Total interest-bearing deposits . . . .
2,683,630
Federal Home Loan Bank
advances (4) . . . . . . . . . . . . . . . . . . . . .
Long-term subordinated debt . . . . . . . . .
100,337
—
Other borrowings and interest-
bearing liabilities. . . . . . . . . . . . . . . . .
25,000
Total interest-bearing liabilities . . .
2,808,967
Noninterest-bearing deposits. . . . . . . . . .
1,192,036
Other noninterest-bearing liabilities . . . .
Shareholders’ equity . . . . . . . . . . . . . . . .
64,095
761,185
Total liabilities & shareholders’
equity. . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,826,283
77
869
1,684
5,887
3,211
—
479
9,577
0.60% $ 636,074
247,073
0.03%
0.11%
0.16%
704,484
969,548
$
5,093
0.80% $
763,829
$
8,705
152
1,393
3,840
0.06%
0.20%
0.40%
199,117
637,983
851,673
287
2,157
5,584
0.22% 2,557,179
10,478
0.41% 2,452,602
16,733
3.20%
—%
120,419
14,746
2,980
579
2.47%
3.93%
122,860
25,701
2,841
1,029
1.92%
24,899
498
2.00%
24,881
489
0.34% 2,717,243
14,535
0.53% 2,626,044
21,092
984,220
76,821
730,726
818,321
135,756
668,469
$ 4,509,010
$ 4,248,590
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$245,174
$242,897
$170,487
Net interest spread. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.66%
5.77%
Average interest-earning assets to average interest-bearing
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151.18%
6.12%
6.27%
142.48%
5.18%
12.78%
3.72%
6.34%
0.25%
5.35%
1.14%
0.14%
0.34%
0.66%
0.68%
2.31%
4.00%
1.96%
0.80%
4.55%
4.76%
136.47%
__________
(1) Nonaccrual loans were included in loans. 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 $2.1 million in 2012, $1.3 million in 2011 and $2.1 million in 2010. The
amortization of net unearned discounts on certain acquired loans was $5.9 million in 2012 and $14.3 million in 2011. There was no amortization of net
unearned discounts in 2010.
(2) Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%. The tax equivalent yield adjustment to interest earned on noncovered loans
was $765 thousand, $567 thousand and $543 thousand for the years ended December 31, 2012, 2011, and 2010, respectively. The tax equivalent yield
adjustment to interest earned on tax exempt securities was $5.5 million, $5.6 million and $5.2 million for the years ended December 31, 2012, 2011, and
2010, respectively.
(3) Reclassified to conform to the current period’s presentation.
(4) Federal Home Loan Bank advances includes prepayment charge of $603 thousand in 2012.
30
Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate
multiplied by prior volume) and the mix of interest-earning assets and interest-bearing liabilities. The following table shows
changes in net interest income on a fully taxable-equivalent basis between 2012 and 2011, as well as between 2011 and 2010
broken down between volume and rate. 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:
Changes in Net Interest Income
2012 Compared to 2011
Increase (Decrease) Due to
2011 Compared to 2010
Increase (Decrease) Due to
Volume
Rate
Total
Volume (1)
Rate (1)
Total
(in thousands)
$ 19,937
(9,845)
1,973
1,015
$ (15,044)
6,163
(5,567)
(1,328)
$
4,893
(3,682)
(3,594)
(313)
$ (2,076)
24,412
6,178
1,558
$ 19,558
19,258
(2,584)
(327)
$ 17,482
43,670
3,594
1,231
(1)
$ 13,079
16
$ (15,760)
15
$ (2,681)
(107)
$ 29,965
(17)
$ 35,888
(124)
$ 65,853
Interest Income
Loans, excluding covered loans, net . . . . . .
Covered loans, net . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities. . . . . . . . . . . . . . . . . .
Interest earning deposits with banks and
federal funds sold . . . . . . . . . . . . . . . . . . .
Interest income. . . . . . . . . . . . . . . .
Interest Expense
Deposits:
Certificates of deposit . . . . . . . . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . .
Total interest on deposits . . . . . . . .
$
Federal Home Loan Bank and Federal
Reserve Bank borrowings. . . . . . . . . . . . .
Long-term subordinated debt . . . . . . . . . . . .
Other borrowings and interest-bearing
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
(674)
27
155
299
(193)
(550)
(579)
$ (1,162)
(102)
(679)
(2,455)
(4,398)
$ (1,836)
(75)
(524)
(2,156)
(4,591)
$ (1,300)
57
206
694
(343)
$ (2,312)
(192)
(970)
(2,438)
(5,912)
$ (3,612)
(135)
(764)
(1,744)
(6,255)
781
—
231
(579)
(57)
(431)
196
(19)
139
(450)
—
$ (1,322)
$ 14,401
(19)
$ (3,636)
$ (12,124)
(19)
$ (4,958)
2,277
$
2
(829)
$
$ 30,794
7
$ (5,728)
$ 41,616
9
$ (6,557)
$ 72,410
____________
(1) Reclassified to conform to the current period’s presentation.
Comparison of 2012 with 2011
Taxable-equivalent net interest income totaled $245.2 million in 2012, compared with $242.9 million for 2011. The
increase in net interest income during 2012 resulted from the increase in the size of the noncovered loan portfolio as well as
lower rates paid on deposits. These increases were partially offset by lower incremental accretion on covered loans and lower
yields on the loan and securities portfolios. The incremental accretion income represents the amount of income recorded on the
acquired loans above the contractual rate stated in the individual loan rates. The additional income stems from the discount
established at the time these loan portfolios were acquired, and increases net interest income and the net interest margin. The
incremental accretion income had a positive impact of approximately 144 basis points on the 2012 net interest margin
compared to a positive impact of 174 basis points on the 2011 net interest margin.
31
The following table shows the effect on the net interest income resulting from accretion of income on acquired impaired
loans and loans acquired in the Bank of Whitman transaction:
Year ended
December 31, 2012
Year ended
December 31, 2011
Interest income as recorded. . . . . . . . . . . . . . . . . . . .
Interest income at stated note rate. . . . . . . . . . . . . . .
Incremental accretion income . . . . . . . . . . . . . . .
Incremental accretion income due to:
Acquired impaired loans . . . . . . . . . . . . . . . . . . .
Other acquired loans. . . . . . . . . . . . . . . . . . . . . . .
Incremental accretion income . . . . . . . . . . . . . . . . . .
$
$
$
$
(in thousands)
98,583
37,406
61,177
55,305
5,872
61,177
$
$
$
$
109,580
42,220
67,360
53,079
14,281
67,360
For discussion over the methodologies used by management in recording interest income on loans please see "Critical
Accounting Policies" section of this discussion and Note 1 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data” of this report.
Comparison of 2011 with 2010
Taxable-equivalent net interest income totaled $242.9 million in 2011, compared with $170.5 million for 2010. The
significant increase in net interest income during 2011 resulted primarily from income accretion on the acquired loan portfolios.
The incremental accretion income represents the amount of income recorded on the acquired loans above the contractual rate
stated in the individual loan rates. The additional income increases net interest income and the net interest margin.
Provision for Loan and Lease Losses
The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease
losses and provision for loan and lease losses. The provision is the expense recognized in the consolidated statements of income
to adjust the allowance to the levels deemed appropriate by management, as determined through its application of the
Company’s allowance methodology procedures. Impairment valuation adjustments and allowance for loan and lease losses on
acquired loans, including those subject to the Company’s loss-share agreements with the FDIC, are accounted for separately
from the allowance for loan and lease losses. For discussion over the methodology used by management in determining the
adequacy of the ALLL see the following “Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of
Credit” and “Critical Accounting Policies” sections of this discussion.
For noncovered loans, the Company recorded expense of $13.5 million and $7.4 million through the provision for loan
and lease losses in 2012 and 2011, respectively. The provision recorded in 2012 reflects management’s ongoing assessment of
the credit quality of the Company’s noncovered loan portfolio, which is impacted by various economic trends, including the
slow recovery of the Pacific Northwest economy. Additional factors affecting the provision include credit quality migration,
size and composition of the loan portfolio and changes in the economic environment during the period. See “Allowance for
Loan and Lease Losses and Unfunded Commitments and Letters of Credit” section of this discussion for further information on
factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for loan
and lease losses.
The Company recorded expense of $25.9 million through the provision for losses on covered loans in 2012 compared to a
recapture of $1.6 million through the provision for losses on covered loans in 2011. The provision recorded in 2012 was due to
incremental loan losses incurred in the current period which were in excess of those expected from the remeasurement of cash
flows during the prior period. These incremental loan losses reduced expected future cash flows and, when discounted at
current yields, resulted in impairment. The $25.9 million in provision expense is partially offset by a $20.7 million favorable
adjustment to the change in FDIC loss-sharing asset.
For the years ended December 31, 2012, 2011 and 2010, net noncovered loan charge-offs amounted to $14.3 million,
$15.4 million, and $33.8 million, respectively. Loans in the commercial business portfolio accounted for 60% of the 2012 net
charge-offs, while loans in the commercial and multifamily residential real estate portfolio accounted for 27% of the 2012 net
charge-offs compared to 35% and 21%, respectively, in 2011.
32
Noninterest Income (Loss)
The following table presents the significant components of noninterest income (loss) and the related dollar and
percentage change from period to period:
Years ended December 31,
2012
$
Change
%
Change
2011
$
Change
%
Change
2010
$ 29,998
$
3,366
(dollars in thousands)
$
13 % $ 26,632
1,934
8 % $ 24,698
Service charges and other fees. . . . . .
Gain on bank acquisitions, net of
tax . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant services fees. . . . . . . . . . . .
Investment securities gains
(losses) . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance (BOLI) . .
Change in FDIC loss-sharing asset . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
—
8,154
3,733
2,861
(24,467)
6,779
Total noninterest income . . . . . . . . . .
$ 27,058
$ 36,341
Comparison of 2012 with 2011
(1,830)
769
(100)%
10 %
1,830
7,385
(7,988)
(117)
(81)%
(2)%
6,549
673
25,029
1,785
(233)%
(2,816)
31 %
2,188
(51)% (49,496)
4,994
36 %
(391)% $ (9,283)
(2,874)
147
(54,404)
1,238
$ (62,064)
(4,955)%
7 %
(1,108)%
33 %
(118)% $ 52,781
9,818
7,502
58
2,041
4,908
3,756
The increase in noninterest income from the prior year was primarily due to the decrease of $25.0 million in the change
in the FDIC loss-sharing asset, the $6.5 million in additional investment securities gains, and the $3.4 million in additional
service charges and other fees. These increases were partially offset by the net of tax gain on bank acquisition of $1.8 million
recorded in 2011, with no gain recorded in 2012.
The change in the FDIC loss-sharing asset recognizes the decreased amount that Columbia expects to collect from the
FDIC under the terms of its loss-sharing agreements. The Company remeasures contractual and expected cash flows of covered
loans on a quarterly basis. 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 accretable yield of the related loan pool is
increased and recognized as interest income over the life of the loan portfolio. As a result of the improved expected cash flows,
the FDIC loss-sharing asset is reduced first by the amount of any impairment previously recorded and, second, by increased
amortization over the remaining life of the related loan portfolio. For additional information on the FDIC loss-sharing asset,
please see the “Loss-sharing Asset” section of Management’s Discussion and Analysis and Note 7 to the Consolidated Financial
Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
The increase in investment securities gains was primarily due to the $3.0 million impairment charge recorded during
2011 on a single municipal obligation for which we received full repayment during 2012, resulting in a gain of approximately
$3.0 million. The increase in service charges and other fees was primarily due to a larger customer base.
33
Other Noninterest Income: The following table presents selected items of “other noninterest income” and the related
dollar and percentage change from period to period:
2012
$
Change
%
Change
2011 (1)
$
Change
%
Change
2010 (1)
Years ended December 31,
Gain on disposal of assets . . . . . . . . . . . . . . . . .
Mortgage banking . . . . . . . . . . . . . . . . . . . . . . .
Small Business Administration premiums . . . . .
Cash management 12b-1 fees. . . . . . . . . . . . . . .
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . .
Late charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency exchange income . . . . . . . . . . . . . . . .
New Markets Tax Credit dividend . . . . . . . . . . .
Miscellaneous fees on loans . . . . . . . . . . . . . . . .
Interest rate swap income . . . . . . . . . . . . . . . . . .
Credit card fees. . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other noninterest income . . . . . . . . . .
$
91
1,226
607
5
392
457
364
2
1,854
522
325
934
$ 6,779
_______________
(1) Reclassified to conform to the current period’s presentation.
$
2
497
556
—
(23)
95
18
(50)
180
189
65
256
$ 1,785
(dollars in thousands)
89
2 % $
$
729
68 %
51
1,090 %
5
— %
415
(6)%
362
26 %
346
5 %
52
(96)%
1,674
11 %
333
57 %
260
25 %
38 %
678
36 % $ 4,994
(29)
460
(130)
(6)
(17)
(94)
(14)
(19)
690
(95)
77
415
$ 1,238
(25)% $ 118
269
171 %
181
(72)%
11
(55)%
432
(4)%
456
(21)%
360
(4)%
71
(27)%
984
70 %
428
(22)%
183
42 %
263
158 %
33 % $ 3,756
The increase in other noninterest income was due in part to the increases in mortgage banking income and Small
Business Administration premiums. We have grown our mortgage services division and had increased volume in our mortgage
loan sales during 2012. During 2012, we had a large increase in the volume of our Small Business Association loan sales.
Comparison of 2011 with 2010
Noninterest income for the year ended December 31, 2011 was a loss of $9.3 million, a decrease of $62.1 million from
2010. The decrease in noninterest income from the prior year was primarily due to the $54.4 million decrease in the change in
FDIC loss-sharing asset and the $3.0 million impairment charge on investment securities. In addition, in 2011 the Company
recorded a gain on bank acquisition of $1.8 million compared to a gain on acquisition of $9.8 million in the prior year. For
additional information on the FDIC loss-sharing asset, please see the “Loss-sharing Asset” section of Management’s Discussion
and Analysis and Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”
of this report.
Noninterest Expense
Noninterest expense was $162.9 million in 2012, an increase of $7.2 million, or 5%, over 2011. Noninterest expense
increased $18.6 million, or 14%, in 2011 over 2010.
34
The following table presents the significant components of noninterest expense and the related dollar and percentage
change from period to period:
2012
$
Change
%
Change
2011
$
Change
%
Change
2010
Years ended December 31,
Compensation and employee benefits . . . .
$ 85,434
$
3,882
All other noninterest expense:
(dollars in thousands)
5 % $ 81,552
$11,772
17 % $ 69,780
Occupancy . . . . . . . . . . . . . . . . . . . . . .
Merchant processing . . . . . . . . . . . . . .
Advertising and promotion . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . .
Legal and professional services. . . . . .
Taxes, license and fees. . . . . . . . . . . . .
Regulatory premiums . . . . . . . . . . . . .
Net cost of operation of noncovered
other real estate owned. . . . . . . . . . .
Net benefit of operation of covered
other real estate owned. . . . . . . . . . .
Amortization of intangibles. . . . . . . . .
FDIC clawback expense (recovery) . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total all other noninterest
expense . . . . . . . . . . . . . . . . . . .
Total noninterest expense . .
20,031
3,612
3,650
9,714
8,915
4,736
3,384
1,068
(86)
(36)
1,230
2,429
290
(953)
6 %
(2)%
(1)%
14 %
37 %
7 %
(22)%
18,963
3,698
3,686
8,484
6,486
4,446
4,337
2,149
(666)
605
(285)
802
1,588
(2,148)
13 %
(15)%
20 %
(3)%
14 %
56 %
(33)%
16,814
4,364
3,081
8,769
5,684
2,858
6,485
4,766
(2,650)
(36)%
7,416
1,721
30 %
5,695
(6,735)
4,445
(54)
21,015
77,479
$ 162,913
$
1,703
(20)%
126
(3,710)
3,861
3 %
(101)%
23 %
(8,438)
4,319
3,656
17,154
(3,530)
397
3,656
2,551
72 %
10 %
100 %
17 %
(4,908)
3,922
—
14,603
3,272
7,154
4 %
74,207
6,840
10 %
67,367
5 % $155,759
$18,612
14 % $ 137,147
Comparison of 2012 with 2011
Compensation and employee benefits expense increased to $85.4 million, or 5%, in 2012 from $81.6 million in 2011
reflecting a full year of staffing increases in the current year related to the three FDIC-assisted acquisitions that occurred in
2011.
The remaining noninterest expense categories increased $3.3 million, or 4%, between 2011 and 2012. The increase was
primarily due to the $2.4 million increase in legal and professional, which includes $1.8 million of costs related to the recently
announced acquisition of West Coast. Occupancy and data processing increased $1.1 million and $1.2 million due to the
increase in number of branch locations in operation during 2012 compared to 2011. Though the period end number of branches
decreased slightly between 2011 and 2012, the number of branches in operation throughout the year was larger in 2012 due to
the three acquisitions that occurred in mid 2011. These increases were partially offset by a reduction of $3.7 million in the
FDIC clawback expense. The Company's Purchase & Assumption agreements with the FDIC require the Company to
reimburse the FDIC at the conclusion of the loss share agreement period, February 2020 for the Columbia River Bank and
American Marine Bank transactions, a calculated amount if total losses on the acquired loan portfolios fail to reach a minimum
threshold level. The $3.7 million recorded in 2011 represented the net present value of management's clawback liability
estimate of $5.5 million at December 31, 2011. There has not been a material change in this estimate during 2012.
35
Other Noninterest Expense: The following table presents selected items of “other noninterest expense” and the related
dollar and percentage change from period to period:
2012
$
Change
%
Change
2011
$
Change
%
Change
2010
Years ended December 31,
CRA partnership investment expense . . . . . .
$
609
$
11
(dollars in thousands)
2 % $
598
$
Software support & maintenance . . . . . . . . . .
Federal Reserve Bank processing fees . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsorships & charitable contributions . . . .
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investor relations . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director expenses . . . . . . . . . . . . . . . . . . . . . .
Employee expenses . . . . . . . . . . . . . . . . . . . .
ATM Network . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . .
Total other noninterest expense. . . . . . . .
1,574
216
1,132
2,088
780
1,368
178
1,030
551
739
1,131
9,619
212
(118)
(144)
(43)
(343)
120
4
194
94
103
73
3,698
16 %
(35)%
(11)%
(2)%
(31)%
10 %
2 %
23 %
21 %
16 %
7 %
62 %
1,362
334
1,276
2,131
1,123
1,248
174
836
457
636
1,058
5,921
329
305
6
(171)
362
359
286
(6)
55
16
164
216
630
122 % $
269
29 %
2 %
(12)%
20 %
47 %
30 %
(3)%
7 %
4 %
35 %
26 %
12 %
1,057
328
1,447
1,769
764
962
180
781
441
472
842
5,291
$21,015
$
3,861
23 % $17,154
$ 2,551
17 % $14,603
Other noninterest expense increased $3.9 million primarily due to the increase of $3.7 million in miscellaneous
noninterest expense, which was primarily driven by $2.0 million recorded in other personal property ("OPPO") costs in 2012
compared to $1.1 million recorded in OPPO benefit in 2011.
Comparison of 2011 with 2010
Compensation and employee benefits expense increased to $81.6 million, or 17% in 2011 from $69.8 million in 2010
reflecting staffing increases in 2011 related to the three FDIC-assisted acquisitions. Full-time equivalent staff increased to 1,256
at December 31, 2011 from 1,092 at December 31, 2010.
The remaining noninterest expense categories increased $6.8 million, or 10%, between 2010 and 2011. Occupancy
increased $2.1 million due to the increase in branch locations during 2011. Also contributing to the remaining increase in
noninterest expense was the Company recording $3.7 million to FDIC clawback expense to create the FDIC clawback liability.
The remaining noninterest expense increase was partially offset by a decrease in regulatory premiums of $2.1 million due to a
decrease in the assessment rate utilized in calculating premiums due.
Income Tax
For the years ended December 31, 2012, 2011 and 2010 we recorded income tax provisions of $17.6 million, $17.9
million and $2.3 million, respectively. The effective tax rate was 28% in 2012, 27% in 2011 and 7% in 2010. For additional
information, see Note 20 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”
of this report. Our effective tax rate continues to be less than our federal statutory rate of 35% primarily due to the amount of
tax-exempt municipal securities held in the investment portfolio, tax-exempt earnings on bank owned life insurance, and tax
credits received on investments in affordable housing partnerships.
36
Financial Condition
Our total assets increased 3% to $4.91 billion at December 31, 2012 from $4.79 billion at December 31, 2011. Interest-
earning deposits with banks increased $186.4 million as the Company accumulated cash in overnight funds in anticipation of
payment of the cash portion of the West Coast acquisition consideration. Our investment portfolio decreased $26.4 million or
3%. Though the net loan portfolio increased only 1% or $37.5 million to $2.86 billion, the noncovered loan portfolio increased
$177.3 million or 8%. The increase in the noncovered loan portfolio can be attributed to increases in commercial business loans
of $123.4 million and commercial and multifamily residential real estate loans of $63.0 million. The FDIC loss-sharing asset
decreased $78.7 million or 45% to $96.4 million at December 31, 2012. The decrease in the FDIC loss-sharing asset was due to
$54.6 million in cash received from the FDIC as well as $42.9 million in amortization, partially offset by $20.7 million in loan
impairment. Premises and equipment, net increased $10.8 million or 10%, as we purchased 6 branch buildings in 2012 that we
had previously leased nearby locations. Deposit balances increased $226.6 million or 6% to $4.04 billion and FHLB advances
decreased 94% to $6.6 million. The decrease in FHLB advances is due to the early repayment of $106.4 million during the
fourth quarter of 2012.
Investment Portfolio
We invest in securities to generate revenues for the Company, to manage liquidity while minimizing interest rate risk and
to provide collateral for certain public deposits and short-term borrowings. The amortized cost amounts represent the
Company’s original cost for the investments, adjusted for accumulated amortization or accretion of any yield adjustments
related to the security. The estimated fair values are the amounts we believe the securities could be sold for as of the dates
indicated. As of December 31, 2012 we had 38 available for sale securities in an unrealized loss position. Based on past
experience with these types of securities and our own financial performance, we do not currently intend to sell any impaired
securities nor does available evidence suggest it is more likely than not that management will be required to sell any impaired
securities before the recovery of the amortized cost basis. We review these investments for other-than-temporary impairment on
an ongoing basis.
During the fourth quarter of 2012, the Company received full payment on a municipal bond that was determined to be
other-than-temporarily impaired during December 2011. The $2.95 million gain related to this security was recorded in the line
item Investment securities gains (losses), net in the Consolidated Statements of Income.
Purchases during 2012 totaled $322.3 million while maturities, repayments and sales totaled $328.2 million compared to
purchases of $453.0 million and maturities, repayments and sales of $221.0 million during 2011. At December 31, 2012 U.S.
government agency and government-sponsored enterprise mortgage-backed securities (“MBS”) and collateralized mortgage
obligations (“CMO”) comprised 57% of our investment portfolio, state and municipal securities were 29%, government agency
and government-sponsored enterprise securities were 12%, and government securities were 2%. Our entire investment portfolio
is categorized as available for sale and carried on our balance sheet at fair value. The average duration of our investment
portfolio was approximately 3 years and 8 months at December 31, 2012.
37
The following table presents the contractual maturities and weighted average yield of our investment portfolio:
December 31, 2012
Amortized
Cost
Fair
Value
Yield
(dollars in thousands)
U.S. government agency and government-sponsored enterprise
mortgage-backed securities & collateralized mortgage obligations (1)
Over 1 through 5 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 through 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities (2)
Due through 1 year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 1 through 5 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 through 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agency and government-sponsored enterprise
securities (1)
Over 1 through 5 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 through 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government securities (1)
Over 5 through 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
18,044
85,280
457,752
561,076
25,063
36,836
56,953
146,218
265,070
73,091
46,994
120,085
19,804
19,804
$
$
$
$
$
$
$
$
18,825
89,070
464,474
572,369
25,440
38,954
59,917
161,264
285,575
73,925
46,576
120,501
19,828
19,828
4.41%
3.27%
2.60%
2.77%
6.14%
4.52%
4.82%
6.22%
5.69%
0.84%
1.13%
0.96%
1.15%
1.15%
__________
(1) The maturities reported for mortgage-backed securities, collateralized mortgage obligations, government agency,
government-sponsored enterprise, and government securities are based on contractual maturities and principal
amortization.
(2) Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%.
For further information on our investment portfolio see Note 3 of the Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” of this report.
FHLB Stock
As a condition of membership in the Federal Home Loan Bank of Seattle (“FHLB”), the Company is required to
purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding
principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. Our FHLB
stock has a par value of $100 and is redeemable at par for cash.
FHLB stock is carried at cost and is subject to recoverability testing per the Financial Services – Depository and Lending
topic of the FASB ASC. The FHLB is currently classified as adequately capitalized by the Federal Housing Finance Agency
(“Finance Agency”). Accordingly, as of December 31, 2012 we did not recognize an impairment charge related to our FHLB
stock holdings. We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the
recoverability of our investment.
38
Loan Portfolio
We are 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 our loan portfolio by type of
loan for the dates indicated:
2012
% of
Total
2011
% of
Total
2010
% of
Total
2009
% of
Total
2008
% of
Total
(dollars in thousands)
$ 1,155,158
45.7 % $ 1,031,721
43.9 % $ 795,369
41.5 % $ 744,440
37.1 % $ 810,922
36.3 %
December 31,
43,922
1.7 %
64,491
2.8 %
49,383
2.6 %
63,364
3.1 %
57,237
2.6 %
1,061,201
42.0 %
998,165
42.5 %
794,329
41.5 %
856,260
42.6 %
862,595
38.6 %
1,105,123
43.7 %
1,062,656
45.3 %
843,712
43.9 %
919,624
45.7 %
919,832
41.2 %
50,602
2.0 %
50,208
2.1 %
67,961
3.5 %
107,620
5.4 %
209,682
9.4 %
65,101
115,703
157,493
2.7 %
4.7 %
6.2 %
36,768
86,976
183,235
1.6 %
3.7 %
7.8 %
30,185
98,146
182,017
1.6 %
5.2 %
9.5 %
41,829
149,449
2.1 %
7.5 %
81,176
3.6 %
290,858
13.0 %
199,987
10.0 %
214,753
9.7 %
2,533,477
100.3 %
2,364,588
100.7 %
1,919,244
100.2 %
2,013,500
100.2 %
2,236,365
100.2 %
(7,767)
(0.3)%
(16,217)
(0.7)%
(3,490)
(0.2)%
(4,616)
(0.2)%
(4,033)
(0.2)%
2,525,710
100.0 %
2,348,371
100.0 %
1,915,754
100.0 %
2,008,884
100.0 %
2,232,332
100.0 %
Commercial business. . . . . . . . . .
Real estate:
One-to-four family residential. . . .
Commercial and multifamily
residential . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential. . . .
Commercial and multifamily
residential . . . . . . . . . . . . . . . . .
Total real estate construction. . . . .
Consumer . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . .
Less deferred loan fees and other .
Total loans not covered under
FDIC loss-share agreements,
net of deferred fees . . . . . . . . . .
Loans covered under FDIC
loss-share agreements
Covered loans . . . . . . . . . . . .
391,337
531,929
517,061
—
—
Total loans, net (before
Allowance for Loan and
Lease Losses) . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . .
$ 2,917,047
$
2,563
$ 2,880,300
$
2,148
$ 2,432,815
$
754
$ 2,008,884
$
—
$ 2,232,332
$
1,964
At December 31, 2012, total loans were $2.92 billion compared with $2.88 billion in the prior year, an increase of $36.7
million or 1%. The noncovered loan portfolio increased $177.3 million, or 8% from the previous year. The increase in the
noncovered loan portfolio was primarily due to increases in commercial business loans of $123.4 million and commercial and
multifamily residential real estate loans of $63.0 million. Net covered loans were $391.3 million at December 31, 2012
compared with $531.9 million in the prior year, a decrease of $140.6 million or 27%. Total loans represented 58% and 59% of
total assets at December 31, 2012 and 2011, respectively.
Commercial Business Loans: Commercial business loans increased $123.4 million, or 12%, to $1.16 billion from year-
end 2011, representing 46% of total loans at year end. 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.
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
39
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 and Oregon.
Covered Loans: Covered 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. These loans are generically referred to as covered because they are
generally subject to one of the loss-sharing agreements between the Company and the FDIC. The loss-sharing agreements
relating to the 2010 FDIC-assisted transactions limit the Company’s losses to 20% of the contractual balance outstanding up to
a stated threshold amount of $206.0 million for Columbia River Bank and $66.0 million for American Marine Bank. If losses
exceed the stated threshold, the Company’s share of the remaining losses decreases to 5%. The loss-sharing agreements
relating to the 2011 FDIC-assisted transactions limit the Company's losses to 20% of the contractual balance outstanding. The
loss-sharing provisions of the 2011 agreements for commercial and single family residential mortgage loans are in effect for
five years and ten years, respectively, from the acquisition dates and the loss recovery provisions for such loans are in effect for
eight years and ten years, respectively, from the acquisition dates.
The following table is a rollforward of acquired, impaired loans accounted for under ASC 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality for the year ended December 31, 2012:
Contractual
Nonaccretable
Accretable
Cash Flows
Difference
Yield
Carrying
Amount
Balance at January 1, 2012 . . . . . . . . . . . . . . . . .
Principal reductions and interest payments . . . .
Accretion of loan discount . . . . . . . . . . . . . . . . .
Changes in contractual and expected cash flows
due to remeasurement . . . . . . . . . . . . . . . . . . .
Reduction due to removals . . . . . . . . . . . . . . . . .
Balance at December 31, 2012 . . . . . . . . . . . . . .
$
$
835,556
(175,837)
—
(73,483)
(30,128)
556,108
$
$
(in thousands)
(91,317)
—
—
51,084
2,862
(37,371)
$
$
(259,669)
—
86,671
(6,746)
12,856
(166,888)
$
$
484,570
(175,837)
86,671
(29,145)
(14,410)
351,849
For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 4 and
Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the maturity distribution of our covered and noncovered commercial and real estate
construction loan portfolios and the sensitivity of these loans due after one year to changes in interest rates as of December 31,
2012:
Maturing
Due
Through 1
Year
Over 1
Through 5
Years
Over 5
Years
Total
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
510,755
75,247
586,002
Fixed rate loans due after 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable rate loans due after 1 year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(in thousands)
$
$
$
$
296,309
23,795
320,104
151,557
168,547
320,104
$
$
$
$
345,385
16,660
362,045
204,688
157,357
362,045
$ 1,152,449
115,702
$ 1,268,151
356,245
$
325,904
682,149
$
40
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, 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 and Unfunded Commitments and Letters of Credit” section
and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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. 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
independent 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 on-site examination to ensure continued performance and proper risk assessment.
Nonperforming Loans: The Consolidated Financial Statements are prepared according to the accrual basis of accounting.
This includes the recognition of interest income on the loan portfolio, unless a loan is placed on 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. Covered 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, covered impaired loans contractually past due are
still considered to be accruing and performing loans.
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) in most cases restructured loans, for which concessions, including
the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been
granted due to the borrower’s weakened financial condition (interest on restructured loans is accrued at the restructured rates
when it is anticipated that no loss of original principal will occur); (iii) other real estate owned; and (iv) other personal property
owned, if applicable. Nonperforming assets totaled $48.5 million, or 1.08% of year-end assets at December 31, 2012, compared
to $85.4 million, or 2.02% of year end assets at December 31, 2011.
41
The following table sets forth information with respect to our noncovered, nonperforming loans, other real estate owned,
other personal property owned, total nonperforming assets, accruing loans past-due 90 days or more, and potential problem
loans:
Nonaccrual:
Commercial business . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
One-to-four family residential . . . . . . . . . . . . .
Commercial and multifamily residential. . . . . .
Real estate construction:
One-to-four family residential . . . . . . . . . . . . .
Commercial and multifamily residential. . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans: . . . . . . . . . . . . . . . . . . .
Noncovered real estate owned and other personal
property owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . .
Accruing loans past-due 90 days or more . . . . . . . . . . . .
Forgone interest on nonperforming loans . . . . . . . . . . . .
Interest recognized on nonperforming loans . . . . . . . . . .
Potential problem loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . .
Allowance for loan and lease losses to
nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loans to year end loans. . . . . . . . . . . . . .
Nonperforming assets to year end assets. . . . . . . . . . . . .
December 31,
2012
2011
2010
2009
2008
(dollars in thousands)
$ 9,299
$ 10,243
$ 32,367
$ 18,979
$
2,976
2,349
19,204
4,900
—
1,643
37,395
2,696
19,485
10,785
7,067
3,207
53,483
2,996
23,192
18,004
7,584
5,020
89,163
1,860
24,354
47,653
16,230
1,355
110,431
905
5,710
69,668
25,752
1,152
106,163
— $
11,108
$ 48,503
$
$ 3,388
$ 1,114
$ 5,915
$ 52,244
31,905
$ 85,388
30,991
$ 120,154
19,037
$ 129,468
— $
6,389
$
2,035
$
$
3,793
$ 60,993
— $
7,637
$
$
2,437
$ 11,423
$ 53,478
$ 5,326
$ 1,017
$ 10,618
$ 53,041
2,874
$ 109,037
—
— $
4,072
$
$
4,550
$ 17,736
$ 42,747
139.71%
1.48%
1.08%
99.17%
2.28%
2.02%
68.41%
4.65%
3.23%
48.43%
5.50%
4.04%
40.27%
4.76%
3.52%
At December 31, 2012 nonperforming loans decreased to 1.48% of year end loans, down from 2.28% of year end loans at
December 31, 2011. Nonperforming commercial business loans declined from $10.2 million, or 19% of nonperforming loans at
December 31, 2011 to $9.3 million or 25% of nonperforming loans at year end 2012. The nonperforming residential
construction loan sector declined to $4.9 million during 2012, down from $10.8 million, or 20% of nonperforming loans at
December 31, 2011. Nonperforming commercial real estate loans improved as well, declining from $26.6 million at
December 31, 2011 to $19.2 million at year end 2012.
Other Real Estate Owned: As of December 31, 2012 there was $10.7 million in noncovered other real estate owned
(“OREO”) which is comprised of property from foreclosed real estate loans, a decrease of $12.2 million from $22.9 million at
December 31, 2011. Additionally, as of December 31, 2012 the Company held $16.3 million in OREO covered under FDIC
loss-sharing agreements which are excluded from nonperforming assets. Properties acquired by foreclosure or deed in lieu of
foreclosure are transferred to OREO and are recorded at fair value less estimated costs to sell, at the date of transfer of the
property. If the carrying value exceeds the fair value at the time of the transfer, the difference is charged to the allowance for
loan and lease losses. The fair value of the OREO property is based upon current appraisal. Subsequent losses that result from
the ongoing periodic valuation of these properties are charged to the net cost of operation of OREO expense in the period in
which they are identified. In general, improvements to the OREO are capitalized and holding costs are charged to the net cost
of operation of OREO as incurred.
Potential Problem Loans: Potential problem loans are loans which are currently performing and are not on nonaccrual
status, restructured or impaired, but about which there are significant doubts as to the borrower’s future ability to comply with
repayment terms and which may later be included in nonaccrual, past due, restructured or impaired loans. Potential problem
loans totaled $5.9 million at year end 2012, compared to $10.6 million at year end 2011.
42
The following table summarizes activity in noncovered, nonperforming loans for the period indicated:
Balance, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans placed on nonaccrual or restructured. . . . . . . . . . . . . . . . . . . . .
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans returned to accrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments (including interest applied to principal) . . . . . . . . . . . . .
Transfers to OREO/OPPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2012
2011
(in thousands)
53,483
32,325
827
(12,572)
(6,700)
(23,452)
(6,516)
37,395
$
$
89,163
34,747
1,687
(15,107)
(7,840)
(26,168)
(22,999)
53,483
Loans are considered impaired when based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement or when a loan has been modified in
a troubled debt restructuring. A loan is classified as a troubled debt restructuring when a borrower is experiencing financial
difficulties that lead to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that
it would not otherwise consider. These concessions may include interest rate reductions, principal forgiveness, extension of
maturity date and other actions intended to minimize potential losses. Generally, a nonaccrual loan that is restructured remains
on nonaccrual status for a period of six months to demonstrate that the borrower can meet the restructured terms. If the
borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan.
The assessment for impairment occurs when and while such loans are designated as classified per the Company’s internal
risk rating system or when and while such loans are on nonaccrual. All nonaccrual loans greater than $500,000 are considered
impaired and analyzed individually on a quarterly basis. Classified loans with an outstanding balance greater than $500,000 are
evaluated for potential impairment on a quarterly basis. The Company’s policy is to record cash receipts on impaired loans first
as reductions in principal and then as interest income.
The following table summarizes noncovered, impaired loan financial data at December 31, 2012 and 2011:
December 31,
2012
2011
(in thousands)
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with specific allocations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount of the specific allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
34,661
4,405
1,395
$
$
$
58,288
5,226
1,484
Impaired loans with a carrying amount of $34.7 million at December 31, 2012 were subject to specific allocations of
allowance for loan and lease losses of $1.4 million and partial charge-offs of $3.1 million during the year. Collateral dependent
impaired loans without specific allocations at December 31, 2012 and 2011 either had collateral which exceeded the carrying
value of the loans or reflected a partial charge-off to the market value of collateral (less costs to sell), as of the most recent
appraisal date. Restructured loans accruing interest totaled $8.5 million and $8.4 million at December 31, 2012 and 2011,
respectively.
When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be
measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of
repayment for the loan is the operation or liquidation of the underlying collateral. In these cases, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash flows. As a final alternative, the observable market
price of the debt may be used to assess impairment. Predominately, the Company uses the fair value of collateral approach
based upon a reliable valuation.
When a loan secured by real estate migrates to nonperforming and impaired status and it does not have a market
valuation less than one year old, the Company secures an updated market valuation by a third-party appraiser that is reviewed
by the Company’s on-staff appraiser. Subsequently, the asset will be appraised annually by a third-party appraiser or the
Company’s on-staff appraiser. The evaluation may occur more frequently if management determines that there has been
increased market deterioration within a specific geographical location. Upon receipt and verification of the market valuation,
43
the Company will record the loan at the lower of cost or market (less costs to sell) by recording a charge-off to the allowance
for loan and lease losses or by designating a specific reserve in accordance with accounting principles generally accepted in the
United States.
For additional information on our nonperforming loans see Note 5 to our Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” of this report.
Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit
We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan portfolio. The size of
the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology
for making such assessments and determining the adequacy of the ALLL includes the following key elements:
1. General valuation allowance consistent with the Contingencies topic of the FASB 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 credit losses 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 periodically 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. 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 in “Item 8. Financial Statements and Supplementary Data” of this
report.
44
Analysis of the ALLL
The following table provides an analysis of our noncovered loan loss experience by loan type for the last five years:
Changes in Allowance for Loan and Lease Losses and
Unfunded Commitments and Letters of Credit
Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
53,041
$
60,993
Charge-offs:
2012
2011
December 31,
2010
(dollars in thousands)
$
53,478
$
2009
2008
42,747
$
26,599
Commercial business . . . . . . . . . . . . . . . . . . . . .
(10,173)
(7,909)
(14,879)
(12,930)
(2,819)
Real estate:
One-to-four family residential . . . . . . . . . .
Commercial and multifamily residential . .
Real estate construction:
One-to-four family residential . . . . . . . . . .
Commercial and multifamily residential . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs. . . . . . . . . . . . . . . . . . . . .
Recoveries:
(549)
(5,474)
(1,606)
(93)
(2,534)
(20,429)
(717)
(3,687)
(2,487)
(2,213)
(3,918)
(20,931)
(406)
(6,173)
(10,856)
(3,107)
(3,982)
(39,403)
Commercial business . . . . . . . . . . . . . . . . . . . . .
1,548
2,598
2,389
Real estate:
One-to-four family residential . . . . . . . . . .
Commercial and multifamily residential . .
Real estate construction:
One-to-four family residential . . . . . . . . . .
Commercial and multifamily residential . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries. . . . . . . . . . . . . . . . . . . . . .
Net charge-offs. . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . .
285
1,599
1,488
66
1,171
6,157
(14,272)
13,475
80
459
2,091
—
351
5,579
(15,352)
7,400
15
125
1,673
775
650
5,627
(33,776)
41,291
(395)
(1,309)
(27,711)
(9,297)
(2,879)
(54,521)
750
68
25
833
—
76
1,752
(52,769)
63,500
(46)
(966)
(18,340)
(2,169)
(1,647)
(25,987)
272
—
304
16
—
367
959
(25,028)
41,176
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
52,244
$
53,041
$
60,993
$
53,478
$
42,747
Loans outstanding at end of period (1) . . . . . . . . . . . .
$ 2,525,710
$ 2,348,371
$ 1,915,754
$ 2,008,884
$ 2,232,332
Average amount of loans outstanding (1). . . . . . . . . .
$ 2,411,493
$ 2,065,014
$ 2,102,863
$ 2,124,574
$ 2,264,486
Allowance for loan and lease losses to period-end
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs to average loans outstanding. . . . . . .
Allowance for unfunded commitments and
letters of credit
2.07%
0.59%
2.26%
0.74%
3.18%
1.61%
2.66%
2.48%
1.91%
1.11%
Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in the allowance for unfunded
commitments and letters of credit. . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,535
380
1,915
$
$
1,165
370
1,535
$
$
775
390
1,165
$
$
500
275
775
$
$
349
151
500
__________
(1) Excludes loans held for sale and covered loans.
45
We have used the same methodology for ALLL calculations during 2012, 2011 and 2010. 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
loan class. The Bank reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments
when appropriate. The Bank maintains a conservative approach to credit quality and will continue to prudently add to our
ALLL as necessary in order to maintain adequate reserves. The Bank carefully monitors the loan portfolio and continues to
emphasize the importance of credit quality while continuously strengthening loan monitoring systems and controls.
Allocation of the ALLL
The table below sets forth the allocation of the ALLL by loan category:
2012
2011
December 31,
2010
2009
2008
Balance at End of
Period Applicable to:
% of
Total
Loans*
Amount
% of
Total
Loans*
% of
Total
Loans*
Amount
Amount
% of
Total
Loans*
Amount
% of
Total
Loans*
Amount
$ 28,023
45.6% $ 25,434
43.9% $ 22,549
41.5% $ 21,969
37.1% $ 12,759
36.3%
(dollars in thousands)
2,500
3.7%
3,849
4.9%
7,161
6.1%
9,087
8.5%
16,781
12.0%
Commercial business. . . . . . . .
Real estate and
construction: . . . . . . . . . . . .
One-to-four family
residential. . . . . . . . . .
Commercial and
multifamily
residential. . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . .
2,437
1,011
6.2%
—%
2,719
694
7.8%
—%
2,120
3,283
9.5%
—%
1,282
1,437
18,273
44.5%
20,345
43.4%
25,880
42.8%
19,703
44.4%
10.0%
—%
11,983
42.1%
935
289
9.6%
—%
Total. . . . . . . . . . . . . . . . . . . . .
$ 52,244
100.0% $ 53,041
100.0% $ 60,993
100.0% $ 53,478
100.0% $ 42,747
100.0%
__________
* Represents the total of all outstanding loans in each category as a percent of total loans outstanding.
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 December 31, 2012, the FDIC loss-sharing asset was $96.4 million which was comprised of a $87.8 million FDIC
indemnification asset and a $8.6 million FDIC receivable. The FDIC receivable represents amounts due from the FDIC for
claims related to covered losses the Company has incurred less amounts due back to the FDIC relating to shared recoveries.
46
The following table summarizes the activity related to the FDIC loss-sharing asset for the twelve months ended
December 31, 2012 and 2011:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . .
Adjustments not reflected in income:
Established through acquisitions. . . . . . . . . . . . . . . . . . . .
Cash received from the FDIC . . . . . . . . . . . . . . . . . . . . . .
FDIC reimbursable losses, net . . . . . . . . . . . . . . . . . . . . .
Adjustments reflected in income:
Amortization, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan impairment (recapture). . . . . . . . . . . . . . . . . . . . . . .
Sale of other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs of other real estate . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2012
2011
(in thousands)
$
175,071
$
205,991
—
(54,649)
399
(42,940)
20,714
(7,789)
5,190
358
68,734
(54,200)
4,042
(46,049)
(1,318)
(4,346)
1,474
743
$
96,354
$
175,071
For additional information on the FDIC loss-sharing asset, please see Note 7 to the Consolidated Financial Statements in
“Item 8. Financial Statements and Supplementary Data” of this report.
Deposits
The following table sets forth the composition of the Company’s deposits by significant category:
December 31,
2012
2011
2010
Core deposits:
Demand and other noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit less than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . .
Total core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit greater than $100,000 . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit insured through CDARS® . . . . . . . . . . . . . . . . . . .
Wholesale certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium resulting from acquisition date fair value adjustment . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,321,171
870,821
1,043,459
314,371
252,544
3,802,366
212,924
26,720
—
4,042,010
75
$ 4,042,085
(in thousands)
$ 1,156,610
735,340
1,031,664
283,416
303,405
3,510,435
262,731
42,080
—
3,815,246
283
$ 3,815,529
$
895,671
672,307
920,831
210,995
298,678
2,998,482
266,708
38,312
23,155
3,326,657
612
$ 3,327,269
Deposits totaled $4.04 billion at December 31, 2012 compared to $3.82 billion at December 31, 2011. Core deposits,
which include noninterest-bearing deposits and interest-bearing deposits excluding time deposits of $100,000 and over, provide
a stable source of low cost funding. Core deposits increased to $3.80 billion at December 31, 2012 compared with $3.51 billion
at December 31, 2011. We anticipate continued growth in our core deposits through both the addition of new customers and our
current client base.
At December 31, 2012 brokered and other wholesale deposits (excluding public deposits) totaled $26.7 million or 1% of
total deposits compared to $42.1 million or 1% of total deposits, at year-end 2011. The decrease in brokered deposits is
attributed to a decrease in participation 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 certificates of deposit.
Unlike traditional brokered deposits, the Company generally makes CDARS® available only to existing customers who desire
additional deposit insurance coverage rather than as a means of generating additional liquidity.
47
At December 31, 2012 public deposits held by the Company totaled $297.8 million compared to $229.5 million at
December 31, 2011. Uninsured public deposit balances increased from $179.5 million at December 31, 2011 to $232.7 million
at December 31, 2012. The Company is required to fully collateralize Washington state public deposits and 50% of Oregon
state public deposits.
The following table sets forth the amount outstanding of time certificates of deposit and other time deposits in amounts of
$100,000 or more by time remaining until maturity and percentage of total deposits:
Amounts maturing in:
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 3 through 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 6 through 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2012
Time Certificates of Deposit
of $100,000 or More
Other Time Deposits of
$100,000 or More
Amount
$
61,585
47,559
48,518
55,262
$ 212,924
Percent of
Total
Deposits
Amount
(dollars in thousands)
Percent of
Total
Deposits
1.5% $
1.2%
1.2%
1.4%
5.3% $
21,767
805
3,275
—
25,847
0.5%
—%
0.1%
—%
0.6%
Other time deposits of $100,000 or more set forth in the table above represent CDARS®. We use CDARS®, brokered and
other wholesale deposits as part of our strategy for funding growth. In the future, we anticipate continuing the use of such
deposits to fund loan demand or treasury functions.
The following table sets forth the average amount of and the average rate paid on each significant deposit category:
Years ended December 31,
2012
2011
2010
Average
Deposits
Rate
Average
Deposits
Rate
Average
Deposits
Interest bearing demand . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . .
Total interest-bearing deposits. . . . . . . . . . . .
Demand and other non-interest bearing . . . .
Total average deposits . . . . . . . . . . . . . .
$
790,887
1,051,171
298,223
543,349
2,683,630
1,192,036
$ 3,875,666
(dollars in thousands)
0.11% $
0.16%
0.03%
0.60%
0.22%
704,484
969,548
247,073
636,074
2,557,179
984,220
$ 3,541,399
0.20% $
0.40%
0.06%
0.80%
0.41%
637,983
851,673
199,117
763,829
2,452,602
818,321
$ 3,270,923
Rate
0.34%
0.66%
0.14%
1.14%
0.68%
Borrowings
Borrowed funds provide an additional source of funding for loan growth. Our borrowed funds consist primarily of
borrowings from the Federal Home Loan (“FHLB”) and Federal Reserve Bank (“FRB”) as well as securities repurchase
agreements. FHLB and FRB borrowings are secured by our loan portfolio and investment securities. Securities repurchase
agreements are secured by investment securities and commercial loans.
48
The Company has not had FRB borrowings in the last three years. The following table sets forth the details of FHLB
advances:
Years ended December 31,
2012
2011
2010
(dollars in thousands)
FHLB Advances
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum month-end balance during the year . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate during the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,644
$ 100,337
$ 118,967
$ 119,009
$ 120,419
$ 127,426
$ 119,405
$ 123,685
$ 154,916
2.79%
5.42%
2.76%
2.81%
2.75%
2.81%
For additional information on our borrowings, including amounts pledged as collateral, see Notes 11 and 12 to the
Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
Off-Balance Sheet Arrangements
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These
financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount reflected in the consolidated balance sheets.
Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The Company evaluates each client's creditworthiness on a case-by-case basis.
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Company had off-balance sheet loan commitments aggregating $888.5 million at December 31, 2012, an increase
from $709.9 million at December 31, 2011. Standby letters of credit were $19.5 million and $30.9 million at December 31,
2012 and 2011, respectively. In addition, commitments under commercial letters of credit used to facilitate customers' trade
transactions amounted to $46 thousand and $243 thousand at December 31, 2012 and 2011, respectively.
Contractual Obligations & Commitments
We are party to many contractual financial obligations, including repayment of borrowings, operating and equipment
lease payments, and commitments to extend credit. The table below presents certain future financial obligations of the
Company:
Payments due within time period at December 31, 2012
0-12
Months
1-3
Years
Operating & equipment leases . . . . . . . . . . . .
Total deposits (1) . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances (1). . . . . .
Other borrowings (1) . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,309
3,928,679
—
—
$ 3,932,988
$
$
7,472
86,175
—
—
93,647
4-5
Years
(in thousands)
3,500
$
26,879
—
—
30,379
$
Due after
Five
Years
$
$
7,329
352
6,000
25,000
38,681
Total
$
22,610
4,042,085
6,000
25,000
$ 4,095,695
__________
(1) In the banking industry, interest-bearing obligations are principally used to fund interest-earning assets. As such, interest
charges on contractual obligations were excluded from reported amounts, as the potential cash outflows would have
corresponding cash inflows from interest-earning assets.
For additional information regarding future financial commitments, see Note 15 to our Consolidated Financial Statements
in “Item 8. Financial Statements and Supplementary Data” of this report.
49
Liquidity and Sources of Funds
In general, our primary sources of funds are net income, loan repayments, maturities and principal payments on
investment securities, customer deposits, advances from the FHLB, securities repurchase agreements and other borrowings.
These funds are used to make loans, purchase investments, meet deposit withdrawals and maturing liabilities and cover
operational expenses. Scheduled loan repayments and core deposits have proved to be a relatively stable source of funds while
other deposit inflows and unscheduled loan prepayments are influenced by interest rate levels, competition and general
economic conditions. We manage liquidity through monitoring sources and uses of funds on a daily basis and had unused credit
lines with the FHLB and the Federal Reserve Bank of $435.2 million and $59.5 million, respectively, at December 31, 2012,
that are available to us as a supplemental funding source. The holding company’s sources of funds are dividends from its
banking subsidiary which are used to fund dividends to shareholders and cover operating expenses.
Capital
Our shareholders’ equity increased to $764.0 million at December 31, 2012, from $759.3 million at December 31, 2011.
Shareholders’ equity was 15.57% and 15.87% of total assets at December 31, 2012 and 2011.
Regulatory Capital. Banking regulations require bank holding companies to maintain a minimum “leverage” ratio of core
capital to adjusted quarterly average total assets of at least 3%. In addition, banking regulators have adopted risk-based capital
guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a
risk-adjusted capital ratio. Tier I capital generally consists of common shareholders’ equity, less goodwill and certain
identifiable intangible assets, while Tier II capital includes the allowance for loan losses, subject to certain limitations.
Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital
(combined Tier I and Tier II) of 8% to be considered “adequately capitalized”.
Federal Deposit Insurance Corporation regulations set forth the qualifications necessary for a bank to be classified as
“well capitalized”, primarily for assignment of FDIC insurance premium rates. To qualify as “well capitalized,” banks must
have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at
least 5%. Failure to qualify as “well capitalized” can negatively impact a bank’s ability to expand and to engage in certain
activities. The Company and its banking subsidiary qualified as “well-capitalized” at December 31, 2012 and 2011.
The following table sets forth the Company’s and its banking subsidiary’s capital ratios at December 31, 2012 and
2011:
Total risk-based capital ratio . . . . . . . . . .
Tier 1 risk-based capital ratio. . . . . . . . . .
Leverage ratio. . . . . . . . . . . . . . . . . . . . . .
Stock Repurchase Program
Company
Columbia Bank
Requirements
2012
20.62%
19.35%
12.78%
2011
21.05%
19.79%
12.96%
2012
17.87%
16.60%
11.07%
2011
18.55%
17.29%
11.45%
Adequately
capitalized
Well-
Capitalized
8%
4%
4%
10%
6%
5%
In October 2011, the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up
to 2 million shares of its outstanding shares of common stock. The Company may purchase the shares from time to time in the
open market or in private transactions, under conditions which allow such repurchases to be accretive to earnings per share
while maintaining capital ratios that exceed the guidelines for a well-capitalized financial institution. This repurchase program
supersedes and replaces the prior stock repurchase program adopted in February 2002.
50
Dividends
The following table sets forth the dividends paid per common share and the dividend payout ratio (dividends paid per
common share divided by basic earnings per share):
Dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2012
2011
2010
$
0.98
$
0.27
$
0.04
84%
22%
6%
______________
(1) Dividends paid per common share as a percentage of earnings per diluted common share
For quarterly detail of dividends declared during 2012 and 2011, including special one-time dividends declared, see “Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this
report.
Subsequent to year end, on January 24, 2013 the Company declared a regular quarterly cash dividend of $0.10 per share
payable on February 20, 2013, to shareholders of record at the close of business on February 6, 2013.
Applicable federal, Washington state and Oregon state regulations restrict capital distributions, including dividends, by
the Company’s banking subsidiary. Such restrictions are tied to the institution’s capital levels after giving effect to distributions.
Our ability to pay cash dividends is substantially dependent upon receipt of dividends from our banking subsidiary. In addition,
the payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In this
regard, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s
common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
Reference “Item 6. Selected Financial Data” of this report for our return on average assets, return on average equity and
average equity to average assets ratios for all reported periods.
51
Non-GAAP Financial Measures
In addition to capital ratios defined by banking regulators, the Company considers various measures when evaluating
capital utilization and adequacy, including:
• Tangible common equity to tangible assets, and
• Tangible common equity to risk-weighted assets.
The Company believes these measures are important because they reflect the level of capital available to withstand
unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of the
Company’s capitalization to other organizations. These ratios differ from capital measures defined by banking regulators
principally in that the numerator excludes shareholders’ equity associated with preferred securities, the nature and extent of
which varies across organizations. Additionally, these measures present capital adequacy inclusive and exclusive of
accumulated other comprehensive income. These calculations are intended to complement the capital ratios defined by banking
regulators for both absolute and comparative purposes.
Because generally accepted accounting principles in the United States of America (“GAAP”) do not include capital ratio
measures, the Company believes there are no comparable GAAP financial measures to these tangible common equity ratios.
The following table reconciles the Company’s calculation of these measures to amounts reported under GAAP.
Despite the importance of these measures to the Company, there are no standardized definitions for them and, as a result,
the Company’s calculations may not be comparable with other organizations. Also, there may be limits in the usefulness of
these measures to investors. As a result, the Company encourages readers to consider its consolidated financial statements in
their entirety and not to rely on any single financial measure.
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible assets (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-weighted assets, determined in accordance with prescribed
regulatory requirements (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios
Tangible common equity to tangible assets (a)/(b) . . . . . . . . . . . . . . . . . . .
Tangible common equity to risk-weighted assets (a)/(c). . . . . . . . . . . . . . .
December 31,
2012
December 31,
2011
(dollars in thousands)
$
764,008
(115,554)
(15,721)
632,733
4,906,335
(115,554)
(15,721)
$ 4,775,060
$
759,338
(115,554)
(20,166)
623,618
4,785,945
(115,554)
(20,166)
$ 4,650,225
$ 3,165,528
$ 3,024,442
13.25%
19.99%
13.41%
20.62%
52
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We are exposed to interest rate risk, which is the risk that changes in prevailing interest rates will adversely affect assets,
liabilities, capital, income and expenses at different times or in different amounts. Generally, there are four sources of interest
rate risk as described below:
Repricing risk—Repricing risk is the risk of adverse consequences from a change in interest rates that arises
because of differences in the timing of when those interest rate changes affect an institution’s assets and liabilities.
Basis risk—Basis risk is the risk of adverse consequence resulting from unequal changes in the spread between
two or more rates for different instruments with the same maturity.
Yield curve risk—Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread
between two or more rates for different maturities for the same instrument.
Option risk—In banking, option risks are known as borrower options to prepay loans and depositor options to
make deposits, withdrawals, and early redemptions. Option risk arises whenever bank products give customers the right, but
not the obligation, to alter the quantity or the timing of cash flows.
We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk.
The guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. The
guidelines further provide that in the event of an increase in interest rate risk beyond pre-established limits, management will
consider steps to reduce interest rate risk to acceptable levels.
The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and
interest-bearing liabilities during a given period of time) is one standard tool for the measurement of the exposure to interest
rate risk. We believe that because interest rate gap analysis does not address all factors that can affect earnings performance. It
should be used in conjunction with other methods of evaluating interest rate risk.
The table on the following page sets forth the estimated maturity or repricing, and the resulting interest rate gap of our
interest-earning assets and interest-bearing liabilities at December 31, 2012. The amounts in the table are derived from our
internal data and are based upon regulatory reporting formats. Therefore, they may not be consistent with financial information
appearing elsewhere herein that has been prepared in accordance with accounting principles generally accepted in the United
States. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early
withdrawal of deposits and competition. For example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market interest rates, while other types may lag changes in
market interest rates.
Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes in the interest rates of
such assets both on a short-term basis and over the lives of such assets. Further, in the event of a change in market interest rates,
prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in the event of a substantial increase in market
interest rates.
53
December 31, 2012
Interest-Earning Assets . . . . . . . . . . . . . . .
Interest-earning deposits . . . . . . . . . . . .
Loans, net of deferred fees . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets. . . . . .
Estimated Maturity or Repricing
0-3
months
4-12
months
Over 1 year
through
5 years
(dollars in thousands)
Due after
5 years
Total
$ 389,353
1,292,849
2,563
85,756
$ 1,770,521
$
— $
— $
320,535
—
125,830
$ 446,365
1,127,010
—
481,294
$ 1,608,304
$
—
176,653
—
330,604
507,257
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-Bearing Liabilities
Interest-bearing non-maturity
deposits . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . .
$ 1,043,460
150,194
—
$ 1,193,654
$
— $
227,396
—
$ 227,396
$
— $ 1,185,191
1,619
31,644
$ 1,218,454
113,054
—
113,054
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing liabilities as a percent of
total interest-earning assets. . . . . . . . . . . .
27.55%
5.25%
2.61%
28.12 %
Rate sensitivity gap . . . . . . . . . . . . . . . . . . .
$ 576,867
$ 218,969
$ 1,495,250
$ (711,197)
Cumulative rate sensitivity gap . . . . . . . . . .
$ 576,867
$ 795,836
$ 2,291,086
$ 1,579,889
Rate sensitivity gap as a percentage of
interest-earning assets. . . . . . . . . . . . . . . .
Cumulative rate sensitivity gap as a
percentage of interest-earning assets . . . .
Interest Rate Sensitivity on Net Interest Income
13.32%
5.05%
34.51%
(16.42)%
13.32%
18.37%
52.88%
36.47 %
$
389,353
2,917,047
2,563
1,023,484
4,332,447
(52,244)
124,573
118,708
382,851
$ 4,906,335
$ 2,228,651
492,263
31,644
2,752,558
1,389,769
4,142,327
764,008
$ 4,906,335
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. Key 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 uncertain 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.
Based on the results of the simulation model as of December 31, 2012, we would expect a decrease in net interest income
of $1.7 million if interest rates gradually decrease from current rates by 100 basis points and an increase in net interest income
of $9.2 million if interest rates gradually increase from current rates by 200 basis points over a twelve-month period.
Impact of Inflation and Changing Prices
The impact of inflation on our operations is increased operating costs. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant
impact on a financial institution’s performance than the effect of general levels of inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates.
54
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Columbia Banking System, Inc.
Tacoma, Washington
We have audited the accompanying consolidated balance sheets of Columbia Banking System, Inc. and its subsidiary (the
“Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income,
changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Columbia Banking System, Inc. and its subsidiary as of December 31, 2012 and 2011, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 28, 2013 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 28, 2013
55
COLUMBIA BANKING SYSTEM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale at fair value (amortized cost of $969,359 and $987,560,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock at cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, excluding covered loans, net of unearned income of ($7,767) and ($16,217),
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, excluding covered loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covered loans, net of allowance for loan losses of ($30,056) and ($4,944), respectively . . .
Total loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC loss-sharing asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned ($16,311 and $28,126 covered by FDIC loss-share,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingent liabilities (Note 15)
Shareholders’ equity:
December 31,
2012
December 31,
2011
Common stock (no par value)
December 31,
2012
December 31,
2011
(in thousands)
$
124,573
389,353
513,926
$
91,364
202,925
294,289
1,001,665
21,819
2,563
2,525,710
52,244
2,473,466
391,337
2,864,803
96,354
14,268
118,708
1,028,110
22,215
2,148
2,348,371
53,041
2,295,330
531,929
2,827,259
175,071
15,287
107,899
26,987
115,554
15,721
113,967
$ 4,906,335
51,019
115,554
20,166
126,928
$ 4,785,945
$ 1,321,171
2,720,914
4,042,085
6,644
25,000
68,598
4,142,327
$ 1,156,610
2,658,919
3,815,529
119,009
25,000
67,069
4,026,607
Authorized shares . . . . . . . . . . . . . . . . . . . . . . . . .
Issued and outstanding . . . . . . . . . . . . . . . . . . . . .
63,033
39,686
63,033
39,506
Retained earnings
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
581,471
162,388
20,149
764,008
$ 4,906,335
579,136
155,069
25,133
759,338
$ 4,785,945
See accompanying Notes to Consolidated Financial Statements.
56
COLUMBIA BANKING SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
2012
2011
(in thousands except per share)
2010
Interest Income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and deposits in banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayment charge on Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for losses on covered loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision (recapture) for loan and lease losses. . . . . . . . .
Noninterest Income (Loss)
Service charges and other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on bank acquisitions, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant services fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in FDIC loss-sharing asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes, licenses and fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cost (benefit) of operation of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC clawback liability expense (recovery). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income Applicable to Common Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings Per Common Share
$
$
$
219,433
18,276
9,941
854
248,504
5,887
2,608
603
—
479
9,577
238,927
13,475
25,892
199,560
29,998
—
8,154
3,733
2,861
(24,467)
6,779
27,058
85,434
20,031
3,612
3,650
9,714
8,915
4,736
3,384
(1,969)
4,445
(54)
21,015
162,913
63,705
17,562
46,143
46,143
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of common shares outstanding. . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of diluted common shares outstanding. . . . . . . . . . . . . . . . . .
1.16
1.16
0.98
39,260
39,263
See accompanying Notes to Consolidated Financial Statements.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
218,420
21,870
10,142
839
251,271
10,478
2,980
—
579
498
14,535
236,736
7,400
(1,648)
230,984
26,632
1,830
7,385
(2,816)
2,188
(49,496)
4,994
(9,283)
81,552
18,963
3,698
3,686
8,484
6,486
4,446
4,337
(1,022)
4,319
3,656
17,154
155,759
65,942
17,905
48,037
48,037
1.22
1.21
0.27
39,103
39,180
157,292
18,276
9,348
963
185,879
16,733
2,841
—
1,029
489
21,092
164,787
41,291
6,055
117,441
24,698
9,818
7,502
58
2,041
4,908
3,756
52,781
69,780
16,814
4,364
3,081
8,769
5,684
2,858
6,485
787
3,922
—
14,603
137,147
33,075
2,291
30,784
25,837
0.73
0.72
0.04
35,209
35,392
57
COLUMBIA BANKING SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
2012
2011
2010
(in thousands)
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
46,143
$
48,037
$
30,784
Other comprehensive income, net of tax:
Unrealized gain from securities:
Net unrealized holding gain (loss) from available for sale securities
arising during the period, net of tax of $1,902, ($7,462) and
($1,047) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment of net gain from sale of available for
sale securities included in income, net of tax of $1,316, $48 and
$20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) from securities, net of reclassification
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedging instruments:
Reclassification adjustment of net gain included in income, net of
tax of $0, $79, and $625. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash flow hedging instruments. . . . . . . . . . . . . . . . . . . . .
Pension plan liability adjustment:
Unrecognized net actuarial gain (loss) during the period, net of tax
of $0, $154 and ($12). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: amortization of unrecognized net actuarial gains and losses
included in net periodic pension cost, net of tax of ($38), ($31)
and ($15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension plan liability adjustment, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(2,609)
13,285
1,587
(2,417)
(85)
(38)
(5,026)
13,200
1,549
—
—
—
42
42
(4,984)
41,159
(143)
(143)
(260)
55
(205)
12,852
(1,134)
(1,134)
23
27
50
465
$
60,889
$
31,249
See accompanying Notes to Consolidated Financial Statements.
58
COLUMBIA BANKING SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Preferred Stock
Common Stock
Number
of
Shares
Amount
Number
of
Shares
Amount
Retained
Earnings
(in thousands)
Accumulated
Other
Comprehensive
Income
Total
Shareholders’
Equity
$
74,301
28,129
$ 348,706
$ 93,316
$
11,816
$
528,139
(77)
(76,898)
Balance at January 1, 2010. . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . .
Redemption of preferred stock and
common stock warrant . . . . . . . . . . . . . .
Accretion of preferred stock discount . . . . .
Issuance of common stock, net of
offering costs. . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock - stock
option and other plans. . . . . . . . . . . . . . .
Issuance of common stock - restricted
stock awards, net of canceled awards . . .
Tax benefit associated with share-based
compensation . . . . . . . . . . . . . . . . . . . . .
Preferred dividends . . . . . . . . . . . . . . . . . . .
Cash dividends paid on common stock . . . .
77
—
—
—
—
—
—
—
—
—
Balance at December 31, 2010 . . . . . . . . .
— $
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . .
Issuance of common stock - stock
option and other plans. . . . . . . . . . . . . . .
Issuance of common stock - restricted
stock awards, net of canceled awards . . .
Tax benefit deficiency associated with
share-based compensation . . . . . . . . . . .
Purchase and retirement of common
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid on common stock . . . .
—
—
—
—
—
—
—
Balance at December 31, 2011 . . . . . . . . .
— $
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . .
Issuance of common stock - stock
option and other plans. . . . . . . . . . . . . . .
Issuance of common stock - restricted
stock awards, net of canceled awards . . .
Cash dividends paid on common stock . . . .
—
—
—
—
—
Balance at December 31, 2012 . . . . . . . . .
— $
—
—
2,597
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,302)
30,784
—
—
—
(2,597)
11,040
229,129
69
100
—
—
—
923
1,424
25
—
—
—
—
—
—
(2,350)
(1,461)
—
465
—
—
—
—
—
—
—
—
30,784
465
(80,200)
—
229,129
923
1,424
25
(2,350)
(1,461)
39,338
$ 576,905
$ 117,692
$
12,281
$
706,878
—
—
51
—
—
848
119
1,635
—
(2)
—
(220)
(32)
—
48,037
—
—
—
—
—
(10,660)
—
12,852
—
—
—
—
—
48,037
12,852
848
1,635
(220)
(32)
(10,660)
39,506
$ 579,136
$ 155,069
$
25,133
$
759,338
—
—
40
140
—
—
—
713
1,622
—
46,143
—
—
—
(38,824)
—
(4,984)
—
—
—
46,143
(4,984)
713
1,622
(38,824)
39,686
$ 581,471
$ 162,388
$
20,149
$
764,008
See accompanying Notes to Consolidated Financial Statements.
59
COLUMBIA BANKING SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan and lease losses and losses on covered loans . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on FDIC-assisted bank acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities (gain) loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized (gain) loss on sale of other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gain on sale of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on termination of cash flow hedging instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down on other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in:
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows From Investing Activities
Loans originated and acquired, net of principal collected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of:
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from:
FDIC reimbursement on loss-sharing asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal repayments and maturities of securities available for sale . . . . . . . . . . . . . . . . . . . .
Sales of loans held for investment and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of covered other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of other real estate and other personal property owned . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of trust subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital improvements on other real estate properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in Small Business Administration secured borrowings . . . . . . . . . . . . . . . . . . .
Net cash acquired in business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows From Financing Activities
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for:
Repayment of Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of Federal Reserve Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of preferred stock and common stock warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Information:
Cash paid during the year for:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash investing activities
Assets acquired in FDIC-assisted acquisitions (excluding cash and cash equivalents) . . . . . . . . . .
Liabilities assumed in FDIC-assisted acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred to other real estate owned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2011
2010
2012
(in thousands)
$
46,143
$
48,037
$
30,784
39,367
1,622
57,305
—
(3,733)
(456)
(11,634)
—
8,300
(3,656)
(415)
1,019
(629)
(2,113)
3,779
134,899
5,752
1,635
46,121
(1,830)
2,816
79
(9,310)
(222)
6,307
(3,783)
(1,394)
(1,243)
(403)
(19,248)
13,110
86,424
47,346
1,424
11,352
(9,818)
(58)
(33)
(5,253)
(1,759)
5,144
15,838
(754)
4,472
(784)
18,419
7,816
124,136
(92,088)
(110,577)
164,084
(322,342)
(17,137)
(453,043)
(15,088)
(179,332)
(36,503)
54,649
95,165
236,749
4,414
33,315
15,689
—
(11)
—
—
8,403
54,200
72,523
148,583
46
20,619
12,278
774
(735)
(642)
247,792
(23,270)
—
69,328
92,840
902
17,890
4,800
—
(1,720)
642
145,534
278,465
226,556
(204,586)
(302,758)
—
713
100
100
(112,210)
(100)
—
(38,824)
—
—
—
—
—
76,335
219,637
294,289
513,926
10,206
11,927
$
$
$
— $
— $
$
21,627
—
848
100
100
(42,989)
(100)
—
(10,660)
(25,774)
—
(32)
98
—
(282,995)
(219,841)
514,130
294,289
14,938
23,025
485,870
731,832
24,357
$
$
$
$
$
$
229,129
923
—
—
(36,276)
—
(2,841)
(1,461)
—
(80,200)
—
25
(86)
(193,545)
209,056
305,074
514,130
21,876
6,895
1,075,166
1,210,882
29,864
$
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
60
COLUMBIA BANKING SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2012, 2011 and 2010
1. Summary of Significant Accounting Policies
Organization
Columbia Banking System, Inc. (the “Corporation”) is the holding company for Columbia State Bank (the “Bank”). The
Bank provides a full range of financial services through 99 branch locations, including 74 in the State of Washington and 25 in
Oregon. Because the Bank comprises substantially all of the business of the Corporation, references to the “Company” mean
the Corporation and the Bank together. The Corporation is approved as a bank holding company pursuant to the Gramm-Leach-
Bliley Act of 1999.
The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United
States of America (“GAAP”) and practices in the financial services industry. To prepare the financial statements in conformity
with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and income and expenses during the reporting period. Circumstances and events that differ
significantly from those underlying our estimates and assumptions could cause actual financial results to differ from our
estimates. The most significant estimates included in the financial statements relate to the allowance for loan and lease losses,
business combinations, acquired impaired loans, Federal Deposit Insurance Corporation loss sharing asset and goodwill
impairment.
The Company has applied its accounting policies and estimation methods consistently in all periods presented in these
financial statements (to the periods in which they applied), except for certain estimates related to the measurement of expected
future cash flows on acquired impaired loans. For those certain estimates, in 2011 the Company began utilizing actual historical
loan data rather than industry data, which had been utilized in 2010. The results of operations reflect any adjustments, all of
which are of a normal recurring nature, and which, in the opinion of management, are necessary for a fair presentation of the
results of the periods presented.
Consolidation
The consolidated financial statements of the Company include the accounts of the Corporation and the Bank.
Intercompany balances and transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks, and interest bearing balances due from correspondent banks
and the Federal Reserve Bank. Cash and cash equivalents have a maturity of 90 days or less at the time of purchase.
Securities
Securities are classified based on management’s intention on the date of purchase. All securities are classified as available
for sale and are presented at fair value. Unrealized gains or losses on securities available for sale are excluded from net income
but are included as separate components of other comprehensive income, net of taxes. Purchase premiums or discounts on
securities available for sale are amortized or accreted into income using the interest method over the terms of the individual
securities. The Company performs a quarterly assessment to determine whether a decline in fair value below amortized cost is
other-than-temporary. Amortized cost includes adjustments made to the cost of an investment for accretion, amortization,
collection of cash and previous other-than temporary impairment recognized in earnings. Other-than-temporary impairment
exists when it is probable that the Company will be unable to recover the entire amortized cost basis of the security. If the
decline in fair value is judged to be other than temporary, the security is written down to fair value which becomes the new cost
basis and an impairment loss is recognized.
In performing the quarterly assessment for debt securities, management considers whether or not the Company expects to
recover the entire amortized cost basis of the security. In addition, management also considers whether it is more likely than not
that it will not have to sell the security before recovery of its cost basis. If the Company intends to sell a security or it is more
likely than not it will be required to sell a security prior to recovery of its cost basis, the entire amount of impairment is
recognized in earnings. If the Company does not intend to sell the security or it is not more likely than not it will be required to
sell the security prior to recovery of its cost basis, the credit loss component of impairment is recognized in earnings and
impairment associated with non-credit factors, such as market liquidity, is recognized in other comprehensive income net of
tax. A credit loss is the difference between the cost basis of the security and the present value of cash flows expected to be
collected, discounted at the security's effective interest rate at the date of acquisition. The cost basis of an other-than-
61
temporarily impaired security is written down by the amount of impairment recognized in earnings. The new cost basis is not
adjusted for subsequent recoveries in fair value. However, the difference between the new amortized cost basis and the cash
flows expected to be collected is accreted as interest income. The total other-than-temporary impairment is presented in the
consolidated statements of income with a reduction for the amount of other-than-temporary impairment that is recognized in
other comprehensive income, if any.
Realized gains or losses on sales of securities available for sale are recorded using the specific identification method.
Federal Home Loan Bank Stock
The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at par value because the shares can
only be redeemed with the FHLB at par. The Company is required to maintain a minimum level of investment in FHLB stock
based on specific percentages of its outstanding mortgages and FHLB advances. Stock redemptions are at the discretion of the
FHLB or of the Company, upon five years’ prior notice for FHLB Class B stock or six months notice for FHLB Class A stock
to the FHLB. FHLB stock is carried at cost and is subject to recoverability testing per the Financial Services—Depository and
Lending topic of the FASB Accounting Standards Codification (“ASC”).
Loans
Loans are generally carried at the unpaid principal balance, net of premiums, unearned discounts and net deferred loan
fees. Net deferred loan fees include deferred unamortized fees less direct incremental loan origination costs. Net deferred loan
fees, premiums and unearned discounts on loans are recognized in interest income using either the interest method or straight-
line method over the terms of the loans, adjusted for actual prepayments. Interest income is accrued as earned. Fees related to
lending activities other than the origination or purchase of loans are recognized as noninterest income during the period the
related services are performed.
Nonaccrual loans—Loans are placed on nonaccrual status when a loan becomes contractually past due 90 days with
respect to interest or principal unless the loan is both well secured and in the process of collection, or if full collection of
interest or principal becomes uncertain. When a loan is placed on nonaccrual status, any accrued and unpaid interest receivable
is reversed and the recognition of net deferred loan fees, premiums and unearned discounts ceases. Thereafter, interest collected
on the loan is accounted for on the cash collection or cost recovery method until qualifying for return to accrual status.
Generally, a loan may be returned to accrual status when the delinquent principal and interest are brought current in accordance
with the terms of the loan agreement for a minimum period of six months and future payments are reasonably assured.
Impaired loans—Loans are considered impaired when based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when a loan has
been modified in a troubled debt restructuring. The assessment for impairment occurs when and while such loans are
designated as classified per the Company’s internal risk rating system or when and while such loans are on nonaccrual. All
nonaccrual loans greater than $500,000 are considered impaired and analyzed individually on a quarterly basis. Classified loans
with an outstanding balance greater than $500,000 are evaluated for potential impairment on a quarterly basis.
When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be
measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of
repayment for the loan is the operation or liquidation of the underlying collateral. In these cases, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash flows. As a final alternative, the observable market
price of the debt may be used to assess impairment. Predominantly, the Company uses the fair value of collateral approach
based upon a reliable valuation.
When the measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by
recording a charge-off to the allowance for loan and lease losses or by designating a specific reserve. The Company’s policy is
to record cash receipts received on impaired loans first as reductions to principal and then to interest income.
Restructured Loans—A loan is classified as a troubled debt restructuring when a borrower is experiencing financial
difficulties that lead to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that
it would not otherwise consider. These concessions may include interest rate reductions, principal forgiveness, extension of
maturity date and other actions intended to minimize potential losses. Generally, a nonaccrual loan that is restructured remains
on nonaccrual status for a period of six months to demonstrate that the borrower can meet the restructured terms. If the
borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan.
Acquired Impaired Loans—Loans acquired with evidence of credit deterioration since origination for which it is probable
that all contractually required payments will not be collected are accounted for under Accounting Standards Codification
62
(“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly SOP 03-3 Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. In addition, because of the significant discounts associated with
certain of the acquired loan portfolios, the Company elected to account for those certain acquired loans under ASC 310-30.
In situations where such loans have similar risk characteristics, loans are aggregated into pools to estimate cash flows. A
pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. Expected cash
flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as
interest income over the life of the loan pool using a level yield method if the timing and amount of the future cash flows of the
pool is reasonably estimable. Subsequent to the acquisition date, any increases in cash flow over those expected at purchase
date in excess of fair value are recorded as interest income prospectively. Any subsequent decreases in cash flow over those
expected at purchase date due to credit deterioration are recognized by recording an allowance for losses on covered loans. Any
disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of the loan from the loan pool
at the carrying amount.
Covered Loans—The term covered loans refers to acquired loans that are covered under a loss-sharing agreement with
the FDIC. The bulk of covered loans are accounted for under ASC 310-30. See Acquired Impaired Loans for further
discussion.
Unfunded loan commitments—Unfunded commitments are generally related to providing credit facilities to clients of the
Bank and are not actively traded financial instruments. These unfunded commitments are disclosed as financial instruments
with off-balance sheet risk in Note 15 in the Notes to Consolidated Financial Statements.
Allowance for Loan and Lease Losses
The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease
losses and provision for loan and lease losses. The provision is the expense recognized in the consolidated statements of income
to adjust the allowance to the levels deemed appropriate by management, as determined through application of the Company’s
allowance methodology procedures. The provision for loan and lease losses reflects management’s judgment of the adequacy of
the allowance for loan and lease losses. Loan and lease losses are charged against the allowance when management believes the
collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan and lease losses is evaluated on a regular basis by management and is based upon management’s
periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
The allowance consists of general, specific, and unallocated components. The general component covers loans not
specifically measured for impairment and is based on historical loss experience adjusted for qualitative factors. The specific
component relates to loans that are impaired. For impaired loans an allowance is established when the discounted cash flows
(or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The
unallocated allowance provides for other credit losses inherent in the Company’s 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 periodically based on trends in credit losses, the results of credit
reviews and overall economic trends.
Allowance for Unfunded Commitments and Letters of Credit
The allowance for unfunded commitments is maintained at a level believed by management to be sufficient to absorb
estimated probable losses related to these unfunded credit facilities. The determination of the adequacy of the allowance is
based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage,
credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit
facilities. The allowance for unfunded commitments is included in other liabilities on the consolidated balance sheets, with
changes to the balance charged against noninterest expense.
Allowance for Loan Losses on Covered Loans
The Company updates its cash flow projections for covered loans accounted for under ASC 310-30 on a quarterly basis.
Assumptions utilized in this process include projections related to probability of default, loss severity, prepayment and recovery
lag. Projections related to probability of default and prepayment are calculated utilizing a loan migration analysis. The loan
migration analysis is a matrix of probability that is used to estimate the probability of a loan pool transitioning into a particular
delinquency state given its delinquency state at the remeasurement date. Loss severity factors are based upon either actual
63
charge-off data within the loan pools or industry averages and recovery lags are based upon the collateral within the loan pools.
Any decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by
recording a provision for loan losses. See Acquired Impaired Loans for further discussion.
Premises and Equipment
Land, buildings, leasehold improvements and equipment are stated at cost less accumulated depreciation and
amortization. Gains or losses on dispositions are reflected in current operations. Expenditures for improvements and major
renewals are capitalized, and ordinary maintenance, repairs and small purchases are charged to operating expenses.
Depreciation and amortization are computed based on the straight-line method over the estimated useful lives of the various
classes of assets. The ranges of useful lives for the principal classes of assets are as follows:
Buildings and building improvements. . . . . . . . . . . 5 to 39 years
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . Term of lease or useful life, whichever is shorter
Furniture, fixtures and equipment . . . . . . . . . . . . . . 3 to 7 years
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 5 years
Software
Capitalized software is stated at cost, less accumulated amortization. Amortization is computed on a straight-line basis
and charged to expense over the estimated useful life of the software which is generally three years. Capitalized software is
included in Premises and equipment, net in the Consolidated Balance Sheets.
Other Real Estate Owned
Other real estate owned (“OREO”) is composed of real estate acquired in satisfaction of loans. Properties acquired by
foreclosure or deed in lieu of foreclosure are transferred to OREO and are recorded at fair value less estimated costs to sell, at
the date of transfer of the property. If the carrying value exceeds the fair value at the time of the transfer, the difference is
charged to the allowance for loan and lease losses. The fair value of the OREO property is based upon current appraisal. Losses
that result from the ongoing periodic valuation of these properties are charged to the net cost of operation of OREO in the
period in which they are identified. Improvements to the OREO are capitalized and holding costs are charged to the net cost of
operation of OREO as incurred.
Covered OREO—Covered OREO includes acquired OREO that is covered under a loss-sharing agreement with the
FDIC. These assets were recorded at their fair value on acquisition date. Covered OREO is reported in Other real estate owned
in the Consolidated Balance Sheets. Covered OREO is reported exclusive of expected reimbursement cash flows from the
FDIC. Upon transferring covered loan collateral to covered OREO status, valuation adjustments arising from acquisition
accounting on the related loan are also transferred to covered OREO. Valuation adjustments arising from acquisition accounting
on covered OREO result in a reduction of the covered OREO carrying amount and a corresponding increase in the expected
FDIC reimbursement, with the estimated net loss to the Company, if any, charged against earnings.
FDIC Loss-sharing Asset
The acquisition date fair value of the reimbursement the Company expected to receive from the FDIC under loss-sharing
agreements was recorded in the FDIC loss-sharing asset on the Consolidated Balance Sheet. Subsequent to initial recognition,
the FDIC loss-sharing 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 assets. Any decrease in expected cash flows for the covered assets due to an
increase in expected credit losses will increase the FDIC loss-sharing asset and any increase in expected future cash flows for
the covered assets due to a decrease in expected credit losses will decrease the FDIC loss-sharing 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.
Goodwill and Intangibles
Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition. Identified
intangibles are amortized on an accelerated basis over the period benefited. Goodwill is not amortized but is reviewed for
potential impairment during the third quarter on an annual basis or, more frequently, if events or circumstances indicate a
64
potential impairment, at the reporting unit level. A reporting unit is an operating segment or one level below an operating
segment for which discrete financial information is available and regularly reviewed by management. The Company consists of
a single reporting unit. If the fair value of the reporting unit, including goodwill, is determined to be less than the carrying
amount of the reporting unit, a further test is required to measure the amount of impairment. If an impairment loss exists, the
carrying amount of goodwill is adjusted to a new cost basis. Subsequent reversal of a previously recognized goodwill
impairment loss is prohibited.
Intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Such
evaluation of other intangible assets is based on undiscounted cash flow projections. At December 31, 2012, intangible assets
included on the consolidated balance sheets consist of a core deposit intangible amortized using an accelerated method with an
original estimated life of approximately 10 years .
Income Taxes
The provision for income taxes includes current and deferred income tax expense on net income adjusted for permanent
and temporary differences such as interest income on state and municipal securities and affordable housing credits. Deferred
tax assets and liabilities are recognized for the expected future tax consequences of existing temporary differences between the
financial reporting and tax reporting basis of assets and liabilities using enacted tax laws and rates. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. On a
quarterly basis, management evaluates deferred tax assets to determine if these tax benefits are expected to be realized in future
periods. This determination is based on facts and circumstances, including the Company’s current and future tax outlook. To the
extent a deferred tax asset is no longer considered “more likely than not” to be realized, a valuation allowance is established.
Advertising
Advertising costs are generally expensed as incurred.
Earnings per Common Share
The Company calculates earnings per common share (“EPS”) using the two-class method in accordance with the
Earnings per Share topic of the FASB ASC. The two-class method requires the Company to present EPS as if all of the earnings
for the period are distributed to common shareholders and any participating securities, regardless of whether any actual
dividends or distributions are made. Under authoritative guidance, all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends are considered participating securities. The Company grants restricted shares under a
share-based compensation plan that qualifies as participating securities. Restricted shares issued under the Company’s share-
based compensation plan are entitled to dividends at the same rate as common stock.
Basic EPS are computed by dividing distributed and undistributed earnings available to common shareholders by the
weighted average number of common shares outstanding for the period. Distributed and undistributed earnings available to
common shareholders represent net income reduced by preferred stock dividends and distributed and undistributed earnings
available to participating securities. Common shares outstanding include common stock and vested restricted stock
awards. Diluted EPS reflect the assumed conversion of all potential dilutive securities.
Share-Based Payment
The Company accounts for stock options and stock awards in accordance with the Compensation—Stock Compensation
topic of the FASB ASC. Authoritative guidance requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments, such as stock options or stock awards, based on the fair value of the award on the
grant date. This cost must be recognized in the consolidated statements of income over the vesting period of the award.
The Company issues restricted stock awards which generally vest over a four- or five-year period during which time the
holder receives dividends and has full voting rights. Restricted stock is valued at the closing price of the Company’s stock on
the date of an award.
Derivatives and Hedging Activities
In accordance with the Derivatives and Hedging topic of the FASB ASC, the Company recognizes derivatives as assets or
liabilities on the consolidated balance sheets at their fair value. The treatment of changes in the fair value of derivatives
depends on the character of the transaction.
The Company enters into derivative contracts to add stability to interest income and to manage its exposure to changes in
interest rates. On the date the Company enters into a derivative contract, the derivative instrument is designated as: (1) a hedge
65
of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a “fair value” hedge); (2) a hedge of
the variability in expected future cash flows associated with an existing recognized asset or liability or a probable forecasted
transaction (a “cash flow” hedge); or (3) held for other economic purposes (an “economic” hedge) and not formally designated
as part of qualifying hedging relationships under authoritative guidance.
In a fair value hedge, changes in the fair value of the hedging derivative are recognized in earnings and offset by
recognizing changes in the fair value of the hedged item attributable to the risk being hedged. To the extent that the hedge is
ineffective, the changes in fair value will not offset and the difference is reflected in earnings.
In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in
accumulated other comprehensive income and is subsequently reclassified into earnings during the same period in which the
hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized
immediately in earnings. When a cash flow hedge is discontinued, the net derivative gain or loss continues to be reported in
accumulated other comprehensive income unless it is probable that the forecasted transactions will not occur by the end of the
originally specified time period. The net derivative gain or loss from a discontinued cash flow hedge is reclassified into
earnings during the originally specified time period in which the forecasted transactions were to occur.
The Company formally documents the relationship between the hedging instruments and hedged items, as well as its risk
management objective and strategy before initiating a hedge. To qualify for hedge accounting, the derivatives and related
hedged items must be designated as a hedge. For hedging relationships in which effectiveness is measured, the correlations
between the hedging instruments and hedged items are assessed at inception of the hedge and on an ongoing basis, which
includes determining whether the hedge relationship is expected to be highly effective in offsetting changes in fair value or cash
flows of hedged items.
Derivatives used for other economic purposes are used as economic hedges in which the Company has not attempted to
achieve the highly effective hedge accounting standard under authoritative guidance. The changes in fair value of these
instruments are recognized immediately in earnings.
Accounting Pronouncements
During the year ended December 31, 2012, the following Accounting Standards Updates (“ASU”) were issued or became
effective:
In October 2012, the FASB issued ASU 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the
Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. ASU 2012-06 clarifies that when
a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution
and there is a subsequent change in the amount of cash flows expected to be collected on the indemnified asset, the reporting
entity should subsequently measure the indemnification asset on the same basis as the underlying loans by taking into account
the contractual limitations of the Loss-Sharing Agreement ("LSA"). For amortization of changes in value, the reporting entity
should use the term of the LSA if it is shorter than the term of the acquired loans. ASU 2012-06 is effective for interim and
annual periods beginning after December 15, 2012. Early adoption is permitted. Based upon the most recent measurement of
expected losses covered under loss-sharing agreements, adoption of the new guidance is expected to result in an additional $6.2
million of indemnification asset amortization over the remaining life of the loss-sharing agreements.
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). ASU
2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial
statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for interim and
annual periods beginning on or after January 1, 2013 and should be applied retrospectively for all comparative periods
presented. Subsequent to December 31, 2012, the FASB issued ASU 2013-01 which clarifies the scope of ASU 2011-11.
Adoption of the new guidance is not expected to have a significant impact on the Company's consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). ASU 2011-05
attempts to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of
items reported in other comprehensive income. The effective date of ASU 2011-05 was the first interim or fiscal period
beginning after December 15, 2011 and should be applied retrospectively. Early adoption was permitted. In December 2011,
the FASB issued ASU 2011-11, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-11 deferred the
effective date for certain amendments related to the presentation of reclassification of items out of accumulated other
comprehensive income. The Company early adopted the remaining applicable amendments in ASU 2011-05 during 2011 and
the adoption of this ASU had no impact on the Company's financial condition or results of operations. Subsequent to December
31, 2012, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
66
Income. The Update requires an entity to provide information about the amounts reclassified out of accumulated other
comprehensive income by component and to present either on the face of the statement where net income is presented, or in the
notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net
income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting
period. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The
Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company's
consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards
(“IFRS”) (Topic 820). ASU 2011-04 developed common requirements between GAAP and IFRS for measuring fair value and
for disclosing information about fair value measurements. The effective date of ASU 2011-04 will be during interim or annual
period beginning after December 15, 2011 and should be applied prospectively to transactions or modifications of existing
transactions that occur on or after the effective date. Early adoption is not permitted. The Company adopted this ASU during
the current period with no impact on the Company's financial condition or results of operations.
2. Cash and Cash Equivalents
The Company is required to maintain an average reserve balance with the Federal Reserve Bank or maintain such reserve
balance in the form of cash. The average required reserve balance for the years ended December 31, 2012 and 2011 was
approximately $28.6 million and $27.0 million, respectively, and was met by holding cash and maintaining an average balance
with the Federal Reserve Bank.
3. Securities
At December 31, 2012 the Company's securities portfolio primarily consisted of securities issued by the U.S.
government, U.S. government agencies, U.S. government-sponsored enterprises and state and municipalities. All of the
Company’s mortgage-backed securities and collateralized mortgage obligations are issued by U.S. government agencies and
U.S. government-sponsored enterprises and are implicitly guaranteed by the U.S. government. The Company had no other
issuances in its portfolio which exceeded ten percent of shareholders’ equity.
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of
securities available for sale:
December 31, 2012
U.S. government agency and government-sponsored
enterprise mortgage-backed securities and collateralized
mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agency and government-sponsored
enterprise securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government securities. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(in thousands)
$
561,076
$
265,070
120,085
19,804
3,324
$
16,719
20,893
(5,426)
(388)
$
572,369
285,575
851
39
104
(435)
(15)
(36)
(6,300)
120,501
19,828
3,392
$ 1,001,665
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
969,359
$
38,606
$
December 31, 2011
U.S. government agency and government-sponsored
enterprise mortgage-backed securities and collateralized
mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
678,631
$
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . .
263,075
$
19,323
22,746
(2,000)
(58)
$
695,954
285,763
U.S. government agency and government-sponsored
enterprise securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,558
3,296
505
64
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
987,560
$
42,638
$
—
(30)
(2,088)
43,063
3,330
$ 1,028,110
67
Gross realized losses amounted to $714 thousand, $250 thousand, and $148 thousand for the years ended December 31,
2012, 2011 and 2010, respectively. Gross realized gains amounted to $4.4 million, $384 thousand, and $206 thousand for the
years ended December 31, 2012, 2011 and 2010, respectively. The following table summarizes the amortized cost and fair
value of securities available for sale by contractual maturity groups:
December 31, 2012
Amortized Cost
Fair Value
Due within one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities with no stated maturity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available-for-sale . . . . . . . . . . . . . . . . . . .
$
$
$
(in thousands)
25,062
$
127,971
209,031
603,971
3,324
969,359
$
$
25,440
131,704
215,390
625,739
3,392
1,001,665
The following table summarizes, as of December 31, 2012 and 2011, the carrying value of securities pledged as collateral
to secure public deposits, borrowings and other purposes as permitted or required by law:
To Washington and Oregon State to secure public deposits . . . . . . . . . . . . . .
$
281,006
$
225,345
To Federal Home Loan Bank to secure advances . . . . . . . . . . . . . . . . . . . . . .
To Federal Reserve Bank to secure borrowings . . . . . . . . . . . . . . . . . . . . . . .
Other securities pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
47,634
46,090
91,097
56,347
47,454
Total securities pledged as collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
374,730
$
420,243
December 31,
2012
December 31,
2011
(in thousands)
The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses
that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at December 31, 2012 and 2011:
December 31, 2012
U.S. government agency and government-
sponsored enterprise mortgage-backed securities
and collateralized mortgage obligations . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . .
U.S. government agency and government-
sponsored enterprise securities . . . . . . . . . . . . . . . . .
U.S. government securities . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011
U.S. government agency and government-
sponsored enterprise mortgage-backed securities
and collateralized mortgage obligations . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
$
167,739
$
(5,090)
$
12,204
$
(336)
$
179,943
20,413
56,600
9,914
—
(383)
(435)
(15)
—
210
—
—
964
(5)
—
—
(36)
20,623
56,600
9,914
964
(5,426)
(388)
(435)
(15)
(36)
$
254,666
$
(5,923)
$
13,378
$
(377)
$
268,044
$
(6,300)
$
238,875
$
(1,999)
$
3,820
—
(24)
—
196
950
970
$
(1)
$
239,071
$
(2,000)
(34)
(30)
(65)
4,770
970
(58)
(30)
$
244,811
$
(2,088)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
242,695
$
(2,023)
$
2,116
$
68
At December 31, 2012, there were 17 U.S. government agency and government-sponsored enterprise mortgage-backed
securities and collateralized mortgage obligations securities in an unrealized loss position, of which one was in a continuous
loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these
investments fall within the yield curve and their individual characteristics. Because the Company does not currently intend to
sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before
the recovery of amortized cost basis, which may be maturity, the Company does not consider these investments to be other-
than-temporarily impaired at December 31, 2012.
At December 31, 2012, there were 14 state and municipal government securities in an unrealized loss position, of which
one was in a continuous loss position for 12 months or more. The unrealized losses on state and municipal securities were
caused by interest rate changes or widening of market spreads subsequent to the purchase of the individual securities.
Management monitors published credit ratings of these securities for adverse changes. As of December 31, 2012 none of the
rated obligations of state and local government entities held by the Company had an adverse credit rating. Because the credit
quality of these securities are investment grade and the Company does not currently intend to sell these securities nor does the
Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost
basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at
December 31, 2012.
At December 31, 2012, there were five U.S. government agency and government-sponsored enterprise securities in an
unrealized loss position, of which none were in a continuous loss position for 12 months or more. The decline in fair value is
attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual
characteristics. Because the Company does not currently intend to sell these securities nor does the Company consider it more
likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be
maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2012.
At December 31, 2012, there was one U.S. government security in an unrealized loss position, which was not 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 this security nor does the Company consider it more likely than not that it will be required to sell this
security before the recovery of amortized cost basis, which may be maturity, the Company does not consider this investment to
be other-than-temporarily impaired at December 31, 2012.
At December 31, 2012, there was one other security, a mortgage-backed securities fund in a continuous unrealized loss
position for 12 months or more. The decline in fair value is attributable to changes in interest rates and the additional risk
premium investors are demanding for investment securities with these characteristics. The Company does not consider this
investment to be other-than-temporarily impaired at December 31, 2012 as it has the intent and ability to hold the investment
for sufficient time to allow for recovery in the market value.
Securities Deemed to be Other-Than-Temporarily Impaired
During the fourth quarter of 2012, the Company received full payment on a municipal bond that was determined to be
other-than-temporarily impaired during 2011 for which the Company recorded impairment of $3.0 million in 2011. The prior
year impairment and the current year gain related to this security are recorded in the line item Investment securities gains
(losses), net in the Consolidated Statements of Income.
69
4. Noncovered Loans
Noncovered loans include loans originated through our branch network and loan departments as well as acquired loans that
are not subject to FDIC loss-share agreements.
The following is an analysis of the noncovered loan portfolio by major types of loans (net of unearned income):
December 31,
2012
December 31,
2011
(in thousands)
Noncovered loans:
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,155,158
$
1,031,721
Real estate:
One-to-four family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and multifamily residential. . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and multifamily residential. . . . . . . . . . . . . . . . . . . .
Total real estate construction. . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noncovered loans, net of unearned income. . . . . . . . . . . . . . . . .
Less: Allowance for loan and lease losses . . . . . . . . . . . . . . . . . .
Total noncovered loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,922
1,061,201
1,105,123
50,602
65,101
115,703
157,493
(7,767)
2,525,710
(52,244)
2,473,466
2,563
$
$
64,491
998,165
1,062,656
50,208
36,768
86,976
183,235
(16,217)
2,348,371
(53,041)
2,295,330
2,148
$
$
At December 31, 2012 and 2011, the Company had no material foreign activities. Substantially all of the Company’s loans
and unfunded commitments are geographically concentrated in its service areas within the states of Washington and Oregon.
The Company has granted loans to officers and directors of the Company and related interests. These loans are made on the
same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons
and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was $14.2 million and
$9.0 million at December 31, 2012 and 2011, respectively. During 2012, advances on related party loans were $7.7 million and
repayments totaled $2.5 million.
At December 31, 2012 and 2011, $443.4 million and $462.0 million of commercial and residential real estate loans were
pledged as collateral on Federal Home Loan Bank advances. The Company has also pledged $13.8 million and $351.3 million of
commercial loans to the Federal Reserve Bank for additional borrowing capacity at December 31, 2012 and 2011, respectively.
Nonaccrual loans totaled $37.4 million and $53.5 million at December 31, 2012 and 2011, respectively. The amount of interest
income foregone as a result of these loans being placed on nonaccrual status totaled $3.4 million for 2012, $5.3 million for 2011 and
$6.4 million for 2010. There were no loans 90 days past due and still accruing interest as of December 31, 2012 and December 31,
2011. At December 31, 2012 and 2011, there were $346 thousand and $2.0 million, respectively, of commitments of additional
funds for loans accounted for on a nonaccrual basis.
70
The following is an analysis of noncovered, nonaccrual loans as of December 31, 2012 and 2011:
Noncovered loans:
Commercial business:
December 31, 2012
December 31, 2011
Recorded
Investment
Nonaccrual
Loans
Unpaid Principal
Balance
Nonaccrual
Loans
Recorded
Investment
Nonaccrual
Loans
Unpaid Principal
Balance
Nonaccrual
Loans
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,037
$
17,821
$
10,124
$
16,820
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
One-to-four family residential . . . . . . . . . . . . . . . . .
Commercial and multifamily residential:
Commercial land . . . . . . . . . . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . . . . . . . . . . .
Residential construction . . . . . . . . . . . . . . . . . .
Commercial and multifamily residential:
Income property . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
262
2,349
4,076
8,520
6,608
3,084
1,816
—
—
1,643
262
2,672
7,491
10,815
7,741
6,704
2,431
—
—
1,940
119
2,696
3,739
6,775
8,971
7,799
2,986
7,067
—
3,207
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
37,395
$
57,877
$
53,483
$
719
3,011
7,230
9,265
10,932
16,703
5,316
14,912
—
3,960
88,868
71
The following is an aging of the recorded investment of the noncovered loan portfolio as of December 31, 2012 and 2011:
December 31, 2012
Noncovered loans:
Commercial business:
Current
Loans
30 - 59
Days
Past Due
60 - 89
Days
Past Due
Total
Past Due
Nonaccrual
Loans
Total Loans
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,091,770
$
4,259
$
1,485
$
5,744
$
9,037
$
1,106,551
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . .
44,817
Real estate:
One-to-four family residential . . . . . . . . . . . . . .
41,508
Commercial and multifamily residential:
Commercial land. . . . . . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . . . . . . .
Residential construction . . . . . . . . . . . . . .
Commercial and multifamily residential:
Income property . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,818
603,339
387,525
15,412
29,848
28,342
36,211
155,207
252
193
311
2,726
1,040
—
—
—
—
387
12
142
122
227
—
—
—
—
—
362
264
335
433
2,953
1,040
—
—
—
—
749
262
45,343
2,349
44,192
4,076
8,520
6,608
3,084
1,816
—
—
1,643
47,327
614,812
395,173
18,496
31,664
28,342
36,211
157,599
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,476,797
$
9,168
$
2,350
$
11,518
$
37,395
$
2,525,710
December 31, 2011
Noncovered loans:
Commercial business:
Current
Loans
30 - 59
Days
Past Due
60 - 89
Days
Past Due
Total
Past Due
Nonaccrual
Loans
Total Loans
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
966,563
$
1,741
$
2,989
$
4,730
$
10,124
$
981,417
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . .
46,880
Real estate:
One-to-four family residential . . . . . . . . . . . . . .
60,764
Commercial and multifamily residential:
Commercial land. . . . . . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . . . . . . .
Residential construction . . . . . . . . . . . . . .
Commercial and multifamily residential:
Income property . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,161
524,225
394,691
17,249
19,555
13,810
12,790
179,753
407
603
781
2,872
829
153
1,390
—
—
141
—
—
—
121
298
—
—
—
—
122
407
603
781
2,993
1,127
153
1,390
—
—
263
119
47,406
2,696
64,063
3,739
6,775
8,971
7,799
2,986
7,067
—
3,207
50,681
533,993
404,789
25,201
23,931
20,877
12,790
183,223
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,282,441
$
8,917
$
3,530
$
12,447
$
53,483
$
2,348,371
72
The following is an analysis of impaired loans (see Note 1) as of December 31, 2012 and 2011:
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
(in thousands)
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
December 31, 2012
Noncovered loans:
Commercial business:
Secured . . . . . . . . . . . . . . . . . . . . . . . .
$
1,101,689
$
4,862
$
Unsecured . . . . . . . . . . . . . . . . . . . . . .
45,251
92
Real estate:
One-to-four family residential . . . . . . . . . . . .
42,103
2,089
Commercial and multifamily residential:
Commercial land . . . . . . . . . . . . . . . . .
Income property. . . . . . . . . . . . . . . . . .
Owner occupied. . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . . . .
Residential construction . . . . . . . . . . .
Commercial and multifamily residential:
Income property. . . . . . . . . . . . . . . . . .
Owner occupied. . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,672
606,656
383,269
15,677
29,707
28,342
36,211
157,472
2,655
8,156
11,904
2,819
1,957
—
—
127
690
92
345
—
2,670
608
—
—
—
—
—
$
1,994
$
92
364
—
2,727
610
—
—
—
—
—
113
92
112
—
1,040
38
—
—
—
—
—
$
4,172
$
6,769
—
—
1,744
1,902
2,655
5,486
11,296
5,727
7,860
14,642
2,819
1,957
—
—
127
4,813
2,570
—
—
127
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,491,049
$
34,661
$
4,405
$
5,787
$
1,395
$
30,256
$ 44,410
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
(in thousands)
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
December 31, 2011
Noncovered loans:
Commercial business:
Secured . . . . . . . . . . . . . . . . . . . . . . . .
$
972,531
$
8,886
$
2,926
$ 2,927
$
Unsecured . . . . . . . . . . . . . . . . . . . . . .
47,309
97
Real estate:
One-to-four family residential . . . . . . . . . . . .
61,584
2,479
Commercial and multifamily residential:
Commercial land . . . . . . . . . . . . . . . . .
Income property. . . . . . . . . . . . . . . . . .
Owner occupied. . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential
Land and acquisition . . . . . . . . . . . . . .
Residential construction . . . . . . . . . . .
Commercial and multifamily residential:
Income property. . . . . . . . . . . . . . . . . .
Owner occupied. . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,882
527,362
390,225
17,813
18,847
13,810
12,790
180,930
3,799
6,631
14,564
7,388
5,084
7,067
—
2,293
97
582
—
687
274
450
59
—
—
151
97
590
—
759
274
948
1,509
—
—
225
954
97
96
—
63
185
—
59
—
—
30
$
5,960
$ 12,109
—
—
1,897
2,136
3,799
5,944
6,773
7,700
14,290
18,524
6,938
5,025
7,067
—
2,142
11,978
5,116
14,947
—
2,639
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,290,083
$
58,288
$
5,226
$ 7,329
$
1,484
$
53,062
$ 81,922
73
The following table provides additional information on impaired loans for the years ended December 31, 2012 and 2011:
Noncovered loans:
Commercial business
Year ended December 31, 2012
Year Ended December 31, 2011
Average
Recorded
Investment
Impaired Loans
Interest
Recognized
on
Impaired Loans
Average
Recorded
Investment
Impaired Loans
Interest
Recognized
on
Impaired Loans
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Real estate:
One-to-four family residential . . . . . . . . . . . . . . . . . .
Commercial & multifamily residential
Commercial land. . . . . . . . . . . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential
Land and acquisition. . . . . . . . . . . . . . . . . . . . . .
Residential construction . . . . . . . . . . . . . . . . . . .
Commercial & multifamily residential
Income property . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,978
113
2,130
3,124
7,895
13,315
4,465
3,223
3,169
—
1,112
47,524
$
$
9
6
—
—
77
1,004
—
11
—
—
7
1,114
$
15,578
138
$
2,494
4,263
8,881
15,254
8,972
4,535
7,065
—
3,880
71,060
$
$
511
—
—
—
59
18
116
—
—
—
15
719
The average recorded investment in impaired loans for the year ended December 31, 2010 was $102.6 million. There was no
interest income recognized on impaired loans for the year ended December 31, 2010.
The following is an analysis of loans classified as Troubled Debt Restructurings ("TDR") for the years ended December 31,
2012 and 2011:
Year ended December 31, 2012
Year Ended December 31, 2011
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)
Noncovered loans:
Commercial business:
Secured . . . . . . . . . . . . . . . . . . . . . . . .
1
$
195
$
194
Real estate:
One-to-four family residential . . . . . .
Commercial and multifamily
residential:
Income property. . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Residential construction . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1
—
2
—
—
4,279
2,650
6
1
2
$
659
$
659
369
369
1,280
1,280
—
4,474
$
—
2,844
$
1
10
36
2,344
36
2,344
$
$
74
The Company's loans classified as TDR are loans that have been modified or the borrower has been granted special
concessions due to financial difficulties, that if not for the challenges of the borrower, the Company would not otherwise consider.
The Company had commitments to lend $236 thousand and $535 thousand of additional funds on loans classified as TDR as of
December 31, 2012 and 2011, respectively. The TDR modifications or concessions are made to increase the likelihood that these
borrowers with financial difficulties will be able to satisfy their debt obligations as amended. Credit losses for loans classified as
TDR are measured on the same basis as impaired loans. For impaired loans, an allowance is established when the collateral value
less selling costs (or discounted cash flows or observable market price) of the impaired loan is lower than the recorded investment
of that loan. The Company did not have any loans modified as TDR that have defaulted during the years ended December 31, 2012
and 2011.
5. Allowance for Noncovered Loan and Lease Losses and Unfunded Commitments and Letters of Credit
We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan portfolio. The size of
the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology
for making such assessments and determining the adequacy of the ALLL includes the following key elements:
1. General valuation allowance consistent with the Contingencies topic of the FASB ASC.
2. Classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in
accordance with the Receivables topic of the FASB ASC.
3. The unallocated allowance provides for other factors inherent in our loan portfolio that may not have been
contemplated in the general and specific components of the allowance. This unallocated amount generally
comprises less than 5% of the allowance. The unallocated amount is reviewed quarterly based on trends in credit
losses, the results of credit reviews and overall economic trends.
The general valuation allowance is systematically calculated quarterly using quantitative and qualitative information
about specific loan classes. The minimum required level an entity develops a methodology to determine its allowance for loan
and lease losses is by general categories of loans, such as commercial business, real estate, and consumer. However, the
Company’s methodology in determining its allowance for loan and lease losses is prepared in a more detailed manner at the
loan class level, utilizing specific categories such as commercial business secured, commercial business unsecured, real estate
commercial land, and real estate income property multifamily. The quantitative information uses historical losses from a
specific loan class and incorporates the loan’s risk rating migration from origination to the point of loss based upon the
consideration of an appropriate look back period.
A loan’s risk rating is primarily determined based upon the borrower’s ability to fulfill its debt obligation from a cash
flow perspective. In the event there is financial deterioration of the borrower, the borrower’s other sources of income or
repayment are also considered, including recent appraisal values for collateral dependent loans. The qualitative information
takes into account general economic and business conditions affecting our marketplace, seasoning of the loan portfolio,
duration of the business cycle, etc. to ensure our methodologies reflect the current economic environment and other factors as
using historical loss information exclusively may not give an accurate estimate of inherent losses within the Company’s loan
portfolio.
When a loan is deemed to be impaired, the Company has to determine if a specific valuation allowance is required for
that loan. The specific valuation allowance is a reserve, calculated at the individual loan level, for each loan determined to be
both, impaired and containing a value less than its recorded investment. The Company measures the impairment based on the
discounted expected future cash flows, observable market price, or the fair value of the collateral less selling costs if the loan is
collateral dependent or if foreclosure is probable. The specific reserve for each loan is equal to the difference between the
recorded investment in the loan and its determined impairment value.
The ALLL is increased by provisions for loan and lease losses (“provision”) charged to expense, and is reduced by loans
charged off, net of recoveries. 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 2012, 2011 and 2010. Adjustments to the percentages
of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each
class of loans. The Company reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes
adjustments when appropriate. The Company continues to strive towards maintaining a conservative approach to credit quality
and will continue to prudently adjust our ALLL as necessary in order to maintain adequate reserves. The Company carefully
monitors the loan portfolio and continues to emphasize the importance of credit quality.
75
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.
The following tables show a detailed analysis of the allowance for loan and lease losses for noncovered loans for the
years ended December 31, 2012, 2011 and 2010:
Year ended December 31, 2012
Noncovered loans:
Commercial business:
Beginning
Balance
Charge-offs
Recoveries
Provision
(Recovery)
Ending
Balance
Specific
Reserve
General
Allocation
(in thousands)
Secured. . . . . . . . . . . . . . . . . . . . .
$
24,745
$
(10,029) $
1,354
$
11,200
$
27,270
$
113
$
27,157
Unsecured . . . . . . . . . . . . . . . . . .
Real estate:
One-to-four family residential . . . . . . .
Commercial and multifamily
residential:
Commercial land . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . .
Residential construction. . . . . . . .
Commercial and multifamily
residential:
Income property . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . .
689
654
488
9,551
9,606
2,331
864
665
35
2,719
694
(144)
(549)
(526)
(4,030)
(918)
(989)
(617)
(93)
—
(2,534)
—
194
285
63
905
631
1,059
429
66
—
1,171
—
14
304
435
4,607
(2,957)
(1,230)
(41)
(322)
67
1,081
317
753
694
460
11,033
6,362
1,171
635
316
102
2,437
1,011
92
112
—
1,040
38
—
—
—
—
—
—
661
582
460
9,993
6,324
1,171
635
316
102
2,437
1,011
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
53,041
$
(20,429) $
6,157
$
13,475
$
52,244
$
1,395
$
50,849
Year Ended December 31, 2011
Noncovered loans:
Commercial business:
Beginning
Balance
Charge-offs
Recoveries
Provision
(Recovery)
Ending
Balance
Specific
Reserve
General
Allocation
(in thousands)
Secured. . . . . . . . . . . . . . . . . . . . .
$
21,811
$
(7,270) $
1,154
$
9,050
$
24,745
$
954
$
23,791
Unsecured . . . . . . . . . . . . . . . . . .
738
(639)
1,444
(854)
Real estate:
One-to-four family residential . . . . . . .
1,100
(717)
80
191
Commercial and multifamily
residential:
Commercial land . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . .
634
15,210
9,692
(660)
(1,407)
(1,620)
12
414
33
502
(4,666)
1,501
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . .
Residential construction. . . . . . . .
Commercial and multifamily
residential:
Income property . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . .
3,769
2,292
274
70
2,120
3,283
(1,419)
(1,068)
1,978
113
(1,997)
(473)
(2,213)
—
(3,918)
—
—
—
351
—
2,604
(35)
4,166
(2,589)
689
654
488
9,551
9,606
2,331
864
665
35
2,719
694
97
96
—
63
185
—
59
—
—
30
—
592
558
488
9,488
9,421
2,331
805
665
35
2,689
694
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
60,993
$
(20,931) $
5,579
$
7,400
$
53,041
$
1,484
$
51,557
76
Year ended December 31, 2010
Noncovered loans:
Commercial business:
Beginning
Balance
Charge-offs
Recoveries
Provision
(Recovery)
Ending
Balance
Specific
Reserve
General
Allocation
(in thousands)
Secured. . . . . . . . . . . . . . . . . . . . .
$
20,409
$
(12,779) $
1,218
$
12,963
$
21,811
$
600
$
21,211
Unsecured . . . . . . . . . . . . . . . . . .
1,560
(2,100)
1,171
Real estate:
One-to-four family residential . . . . . . .
1,072
(406)
15
Commercial and multifamily
residential:
Commercial land . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . .
Residential construction. . . . . . . .
Commercial and multifamily
residential:
Income property . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . .
664
9,860
6,690
5,711
2,304
2,453
36
1,282
1,437
(2,165)
(1,969)
(2,039)
—
124
2
(8,409)
(2,447)
1,199
474
(3,107)
—
(3,982)
—
775
—
649
—
107
419
2,135
7,195
5,039
5,268
1,961
153
34
4,171
1,846
738
1,100
634
15,210
9,692
3,769
2,292
274
70
2,120
3,283
75
—
—
59
—
3
62
175
—
—
—
663
1,100
634
15,151
9,692
3,766
2,230
99
70
2,120
3,283
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
53,478
$
(39,403) $
5,627
$
41,291
$
60,993
$
974
$
60,019
Changes in the allowance for unfunded commitments and letters of credit are summarized as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in the allowance for unfunded commitments and letters
of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,535
380
1,915
$
$
1,165
370
1,535
$
$
775
390
1,165
Years Ended December 31,
2012
2011
2010
(in thousands)
77
Risk Elements
The extension of credit in the form of loans to individuals and businesses is one of our principal commerce 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, type of
borrower and by limiting the aggregation of debt to a single borrower.
The monitoring process for the loan portfolio includes periodic reviews of individual loans with risk ratings assigned to
each loan. Based on the analysis, loans are given a risk rating of 1-10 based on the following criteria:
•
•
•
•
•
•
•
ratings of 1-3 indicate minimal to low credit risk,
ratings of 4-5 indicate an average credit risk with adequate repayment capacity when prolonged periods of adversity
do not exist,
rating of 6 indicates higher than average risk requiring greater than routine attention by bank personnel due to
conditions affecting the borrower, the borrower's industry or economic environment,
rating of 7 indicates 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,
rating of 8 indicates a loss is possible if loan weaknesses are not corrected,
rating of 9 indicates loss is highly probable; however, the amount of loss has not yet been determined,
and a rating of 10 indicates the loan is uncollectable, and when identified is charged-off.
Loans with a risk rating of 1-6 are considered Pass loans and loans with risk ratings of 7, 8, 9 and 10 are considered
Special Mention, Substandard, Doubtful and Loss, respectively. Loans with a risk rating of Substandard or worse are reported
as classified loans in our allowance for loan and lease losses 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. 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.
78
The following is an analysis of the credit quality of our noncovered loan portfolio as of December 31, 2012 and 2011:
December 31, 2012
Noncovered loans:
Commercial business:
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . .
$ 1,011,722
44,788
$ 29,222
26
$
65,607
529
$ — $ — $ 1,106,551
45,343
—
—
Real estate:
One-to-four family residential . . . . . . . . .
Commercial and multifamily residential:
Commercial land . . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . . .
Residential construction . . . . . . . . . .
Commercial and multifamily residential:
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
40,346
406
3,440
43,401
581,671
357,063
12,741
28,705
—
3,688
1,848
1,351
1,142
3,926
29,453
36,262
4,404
1,817
—
—
—
—
—
—
—
—
—
—
—
—
28,342
36,211
151,049
$ 2,336,039
—
—
75
$ 37,758
—
—
6,475
$ 151,913
—
—
—
—
—
—
$ — $ —
44,192
47,327
614,812
395,173
18,496
31,664
28,342
36,211
157,599
2,525,710
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncovered loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52,244
$ 2,473,466
December 31, 2011
Noncovered loans:
Commercial business:
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . .
$
908,883
46,732
$ 18,703
318
$
$
53,447
356
384
—
$ — $
—
981,417
47,406
Real estate:
One-to-four family residential . . . . . . . . .
Commercial and multifamily residential:
58,517
2,040
3,506
Commercial land . . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
44,166
492,922
351,928
5
16,002
13,590
6,510
25,069
39,266
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . . .
Residential construction . . . . . . . . . .
Commercial and multifamily residential:
12,349
16,764
2,684
1,649
10,168
5,518
—
—
—
—
—
—
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
12,812
12,790
176,304
$ 2,134,167
—
—
859
$ 55,850
8,065
—
6,060
$ 157,965
$
—
—
—
384
$
Less:
—
—
—
5
—
—
—
—
—
5
64,063
50,681
533,993
404,789
25,201
23,931
20,877
12,790
183,223
2,348,371
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncovered loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,041
$ 2,295,330
79
6. Noncovered Other Real Estate Owned
The following table sets forth activity in noncovered OREO for the period:
December 31,
2012
December 31,
2011
(in thousands)
Noncovered OREO:
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in, net of write-downs ($205 and $315, respectively) . . . . .
OREO improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional OREO write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of OREO property. . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noncovered OREO, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
22,893
7,461
11
(4,816)
(15,689)
816
10,676
$
$
30,991
8,834
730
(5,641)
(12,278)
257
22,893
7. Covered Assets and FDIC Loss-sharing Asset
Covered Assets
Covered assets consist of loans and OREO acquired in certain FDIC-assisted acquisitions during 2010 and 2011, for
which the Bank entered into loss-sharing agreements, whereby the FDIC will cover a substantial portion of future losses on
loans (and related unfunded loan commitments), OREO and certain accrued interest on loans during the terms of the
agreements. 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 commercial and single-family mortgage loans are in effect for five and ten years, respectively, from the
acquisition dates and the loss recovery provisions are in effect for eight and ten years, respectively, from the acquisition dates.
Ten years and forty-five days after the acquisition dates, the Bank shall 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 December 31, 2012 and 2011, the net present value of the Bank’s estimated clawback
liability is $3.6 million and $3.7 million, respectively, which is included in other liabilities on the Consolidated Balance Sheet.
The following is an analysis of our covered loans, net of related allowance for losses as of December 31, 2012 and 2011:
Covered loans:
December 31, 2012
December 31, 2011
(dollars in thousands)
Commercial business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
125,373
$
195,737
Real estate:
One-to-four family residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and multifamily residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and multifamily residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal of covered loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Valuation discount resulting from acquisition accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,150
233,106
290,256
25,398
15,251
40,649
44,516
500,794
79,401
30,056
Covered loans, net of valuation discounts and allowance for loan losses. . . . . . . . . . . . . . . . .
$
391,337
$
79,328
311,308
390,636
54,402
23,661
78,063
56,877
721,313
184,440
4,944
531,929
Acquired impaired 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. Acquired 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.
80
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.
Acquired impaired loans are also subject to the Company’s internal and external credit review and are risk rated using the
same criteria as loans originated by the Company. However, risk ratings are not a clear indicator of losses on acquired loans as
the loans were acquired with a significant discount and a majority of the losses are recoverable from the FDIC under the loss-
sharing agreements.
Losses attributable to draws on acquired loans, advanced subsequent to the loan acquisition date, are accounted for under
ASC 450-20 and those amounts are also subject to the Company’s internal and external credit review. An allowance for loan
losses is estimated in a similar manner as the originated loan portfolio, and a provision for loan losses is charged to earnings as
necessary.
The excess of cash flows expected to be collected over the initial fair value of acquired 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 table shows the changes in accretable yield for acquired loans for the years ended December 31, 2012,
2011, and 2010:
Years Ended December 31,
2012
2011
(in thousands)
2010
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions resulting from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications from nonaccretable difference. . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
259,669
—
(86,671)
(12,856)
6,746
166,888
$
$
256,572
59,810
(90,378)
(31,483)
65,148
259,669
$
$
—
122,705
(45,956)
(9,014)
188,837
256,572
During the year ended December 31, 2012, the Company recorded a provision for losses on covered loans of $25.9
million. Of this amount, $29.4 million was impairment calculated in accordance with ASC 310-30 and $3.5 million was a
provision recapture to adjust the allowance for loss calculated under ASC 450-20 for draws on acquired loans. The impact to
earnings of the $25.9 million of provision recapture for covered loans was substantially offset through noninterest income by an
increase in the FDIC loss-sharing asset. For the year ended December 31, 2011, the Company recorded a provision recapture
for loan losses of $1.6 million which was partially offset by a decrease to the FDIC loss-sharing asset and for the year ended
December 31, 2010, the Company recorded a provision for losses on covered loans of $6.1 million which was partially offset
by an increase to the FDIC loss-sharing asset.
The changes in the ALLL for covered loans for the years ended December 31, 2012, 2011, and 2010 are summarized as
follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
4,944
(5,112)
4,332
25,892
30,056
$
$
6,055
(1,488)
2,025
(1,648)
4,944
$
$
—
—
—
6,055
6,055
Years Ended December 31,
2012
2011
2010
(in thousands)
81
The following is an analysis of the credit quality of our covered loan portfolio as of December 31, 2012 and 2011:
December 31, 2012
Covered loans:
Commercial business:
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . .
Unsecured. . . . . . . . . . . . . . . . . . . . .
$
71,621
4,988
$
$
1,823
—
$
45,150
1,791
— $
—
— $ 118,594
6,779
—
Real estate:
One-to-four family residential. . . . . . . . .
Commercial and multifamily residential:
Commercial land . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . .
Residential construction . . . . . . . . . .
Commercial and multifamily residential:
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
44,782
1,344
11,024
16,336
81,205
82,222
4,817
6,050
—
864
3,318
3,273
—
10,292
23,315
15,554
5,743
5,515
—
—
—
—
—
—
4,419
1,107
38,973
$ 356,520
$
—
—
381
11,003
7,901
1,824
5,162
$ 133,271
$
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
57,150
26,628
105,384
101,094
13,833
11,565
12,320
2,931
44,516
500,794
Valuation discount resulting from acquisition accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covered loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79,401
30,056
$ 391,337
December 31, 2011
Covered loans:
Commercial business:
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
(in thousands)
Secured . . . . . . . . . . . . . . . . . . . . . . .
Unsecured. . . . . . . . . . . . . . . . . . . . .
$ 103,472
7,608
$
$
6,239
741
73,793
2,659
$
$
1,209
15
Real estate:
One-to-four family residential. . . . . . . . .
Commercial and multifamily residential:
Commercial land . . . . . . . . . . . . . . .
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
Real estate construction:
One-to-four family residential:
Land and acquisition . . . . . . . . . . . .
Residential construction . . . . . . . . . .
Commercial and multifamily residential:
Income property . . . . . . . . . . . . . . . .
Owner occupied . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
56,948
2,210
20,170
21,947
109,339
89,555
1,213
4,013
3,673
21,027
35,567
24,974
—
—
—
—
4,834
8,264
1,535
371
17,646
20,463
2,928
1,142
48,067
$ 454,104
$
2,779
—
255
23,029
13,657
3,155
8,150
$ 241,261
$
1,289
—
—
—
357
2,870
$
1
—
—
—
—
—
—
—
—
—
48
49
$ 184,714
11,023
79,328
44,187
148,919
118,202
25,304
29,098
19,364
4,297
56,877
721,313
Valuation discount resulting from acquisition accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covered loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184,440
4,944
$ 531,929
82
The Company did not acquire any loans accounted for under ASC 310-30 during 2012. The following table shows loans
acquired during 2011 for which it was probable at acquisition that all contractually required payments would not be collected:
First Heritage
Bank
Summit Bank
May 27, 2011
May 20, 2011
(in thousands)
Contractually required payments of interest and principal . . . . . . . . . . . . . . .
Nonaccretable difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows expected to be collected(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretable yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value of acquired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
151,611
(34,052)
117,559
(36,071)
81,488
$
$
127,823
(34,301)
93,522
(23,739)
69,783
_________
(1) Represents undiscounted expected principal and interest cash flows
The following table sets forth activity in covered OREO at carrying value for the years ended December 31, 2012 and
2011:
Covered OREO:
December 31,
2012
December 31,
2011
(in thousands)
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
28,126
$
Established through acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OREO improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional OREO write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of OREO property. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
14,166
—
(3,484)
(33,315)
10,818
Total covered OREO, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,311
$
14,443
10,387
15,522
5
(666)
(20,619)
9,054
28,126
The covered OREO is covered by loss-sharing agreements with the FDIC in which the FDIC will assume 80% of
additional write-downs and losses on covered OREO sales, or 95%, if applicable, of additional write-downs and losses on
covered OREO sales if the minimum loss share thresholds are met.
FDIC Loss-sharing Asset
At December 31, 2012 and 2011, the FDIC loss-sharing asset is comprised of an FDIC indemnification asset of $87.7
million and $157.5 million, respectively, and an FDIC receivable of $8.6 million and $17.6 million, respectively. The
indemnification represents the cash flows the Company expects to collect from the FDIC under the loss-sharing agreements and
the FDIC receivable represents the reimbursable amounts from the FDIC that have not yet been received.
For covered 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, 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, 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.
83
The following table shows a detailed analysis of the FDIC-loss sharing asset for the years ending December 31, 2012 and
2011:
2012
2011 (1)
(in thousands)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
175,071
$
205,991
Adjustments not reflected in income:
Established through acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from the FDIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC reimbursable losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments reflected in income:
Amortization, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan impairment (recapture) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs of other real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(54,649)
399
(42,940)
20,714
(7,789)
5,190
358
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
96,354
$
68,734
(54,200)
4,042
(46,049)
(1,318)
(4,346)
1,474
743
175,071
__________
(1) Reclassified to conform to the current period’s presentation.
8. Premises and Equipment
Land, buildings, and furniture and equipment, less accumulated depreciation and amortization, were as follows:
December 31,
2012
2011
(in thousands)
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
39,441
84,407
2,684
24,110
438
13,783
164,863
(46,155)
118,708
$
$
34,240
78,165
2,735
23,097
428
12,043
150,708
(42,809)
107,899
Total depreciation and amortization expense was $6.3 million, $5.7 million, and $5.2 million, for the years ended
December 31, 2012, 2011, and 2010, respectively.
9. Goodwill and 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 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.
During the third quarter of 2012, the Company changed its annual goodwill impairment testing date from September 30
to July 31, which did not result in any delay, acceleration or avoidance of impairment. The Company believes this date for the
annual goodwill impairment test is preferable because it provides more time to complete the impairment testing as it occurs
earlier within a quarterly reporting cycle. The additional time is preferable as it would allow more time before the quarterly
reporting deadline to estimate the implied fair value of goodwill for comparison with its carrying value, if necessary. This
change was applied prospectively beginning on July 31, 2012. Retrospective application to prior periods is impracticable as the
Company is unable to objectively determine, without the use of hindsight, the assumptions that would have been used in those
earlier periods. In connection with this change, the Company performed an impairment assessment as of July 31, 2012 and
84
concluded that there was no impairment.
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 approximately 10 years.
The following table sets forth activity for goodwill and intangible assets for the period:
Years Ended December 31,
2012
2011
2010
(in thousands)
Total goodwill, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
115,554
$
109,639
$
Established through acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total goodwill, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross core deposit intangible balance, beginning of period . . . . . . . . .
Accumulated amortization, beginning of period . . . . . . . . . . . . . . . . . .
Core deposit intangible, net, beginning of period . . . . . . . . . . . . . . . . .
Established through acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CDI current period amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total core deposit intangible, end of period . . . . . . . . . . . . . . . . . .
Total goodwill and intangible assets, end of period. . . . . . . . . . . . . . . .
—
115,554
32,441
(12,275)
20,166
—
(4,445)
15,721
5,915
115,554
26,652
(7,956)
18,696
5,789
(4,319)
20,166
95,519
14,120
109,639
8,896
(4,033)
4,863
17,755
(3,922)
18,696
$
131,275
$
135,720
$
128,335
The following table provides the estimated future amortization expense of core deposit intangibles for the succeeding five
years:
Years Ending December 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
3,964
3,397
2,645
2,184
1,627
10. Deposits
Year-end deposits are summarized in the following table:
Core deposits:
Demand and other noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit less than $100,000 . . . . . . . . . . . . . . . . . . . . . .
Total core deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit greater than $100,000 . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit insured through CDARS® . . . . . . . . . . . . . . . . . . .
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustment resulting from acquisition accounting . . . .
Total deposits
December 31,
2012
2011
(in thousands)
$
$
1,321,171
870,821
1,043,459
314,371
252,544
3,802,366
212,924
26,720
4,042,010
75
4,042,085
$
$
1,156,610
735,340
1,031,664
283,416
303,405
3,510,435
262,731
42,080
3,815,246
283
3,815,529
Overdrafts of $528 thousand and $10.1 million were reclassified as loan balances at December 31, 2012 and 2011,
respectively.
85
The following table shows the amount and maturity of time deposits that had balances of $100,000 or greater:
Years Ending December 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(in thousands)
183,509
26,989
14,245
10,399
3,524
105
238,771
11. Federal Home Loan Bank and Federal Reserve Bank Borrowings
FEDERAL HOME LOAN BANK
The Company has entered into borrowing arrangements with the FHLB of Seattle to borrow funds under a short-term
floating rate cash management advance program and fixed-term loan agreements. All borrowings are secured by stock of the
FHLB, certain pledged available for sale investment securities and a blanket pledge of qualifying loans receivable. At
December 31, 2012 FHLB advances were scheduled to mature as follows:
Federal Home Loan Bank Advances
Fixed rate advances
Wtd Avg Rate
Amount
(dollars in thousands)
5.66%
Over 5 through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.37%
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustment from acquisition accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,000
5,000
6,000
644
6,644
The maximum, average outstanding and year-end balances and average interest rates on advances from the FHLB were as
follows for the years ended December 31, 2012, 2011 and 2010:
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum month-end balance during the year . . . . . . . . . . . . . . . . . . .
Weighted average rate during the year. . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances are collateralized by the following:
Years ended December 31,
2012
2011
2010
(dollars in thousands)
$
$
$
6,644
100,337
118,967
$
$
$
119,009
120,419
127,426
$
$
$
119,405
123,685
154,916
2.79%
5.42%
2.76%
2.81%
2.75%
2.81%
Fair value of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recorded value of blanket pledge on loans receivable . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB borrowing capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
December 31,
2012
2011
(in thousands)
— $
443,419
443,419
435,189
$
$
77,414
462,040
539,454
419,115
86
FEDERAL RESERVE BANK
The Company is also eligible to borrow under the Federal Reserve Bank’s primary credit program, including the Term
Auction Facility auctions. All borrowings are secured by certain pledged available for sale investment securities.
Although the Company has not had FRB borrowings in the last three years, the Company pledges securities and loans for
borrowing capacity at the Federal Reserve Bank.
The following table shows amounts pledged to the Federal Reserve Bank:
December 31,
2012
2011
(in thousands)
Fair value of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recorded value of pledged commercial loans. . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Bank borrowing capacity . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
45,641
13,815
59,456
59,456
$
$
$
53,122
351,322
404,444
404,444
12. Other Borrowings
Securities Sold Under Agreements to Repurchase
The Company has entered into wholesale repurchase agreements with certain brokers. At December 31, 2012 and 2011,
the Company held $25.0 million in wholesale repurchase agreements with an interest rate of 1.88%. Securities available for
sale with a carrying amount of $28.1 million at December 31, 2012 were pledged as collateral for the repurchase agreement
borrowings. The broker holds the securities while the Company continues to receive the principal and interest payments from
the securities. Upon maturity of the agreement, the pledged securities will be returned to the Company.
13. Derivatives and Hedging Activities
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 December 31, 2012 and 2011 was $177.0 million and $160.3 million, respectively. There was no impact to
the statement of operations for the years ending December 31, 2012, 2011 and 2010.
The following table presents the fair value and balance sheet classification of derivatives not designated as hedging
instruments at December 31, 2012 and 2011:
Asset Derivatives
Liability Derivatives
2012
2011
2012
2011
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Other assets
$ 14,921 Other assets
$ 16,302 Other liabilities
$ 14,921 Other liabilities
$ 16,302
(in thousands)
Interest rate
contracts
87
14. Employee Benefit Plans
401(k) Plan
The Company maintains defined contribution and profit sharing plans in conformity with the provisions of section 401(k)
of the Internal Revenue Code. The Columbia Bank 401(k) and Profit Sharing Plan (the “401(k) Plan”), permits eligible
Columbia Bank employees, those who are at least 18 years of age and have completed six months of service, to contribute up to
75% of their eligible compensation to the 401(k) Plan. On a per pay period basis the Company is required to match 50% of
employee contributions up to 3% of each employee’s eligible compensation. Additionally, as determined annually by the Board
of Directors of the Company, the 401(k) Plan provides for a non-matching discretionary profit sharing contribution. The
Company contributed $1.4 million during 2012, $1.2 million during 2011, and $866 thousand during 2010, in matching funds
to the 401(k) Plan. The Company’s discretionary profit sharing contributions were $2.9 million during 2012, $2.6 million
during 2011 and $1.2 million during 2010.
Employee Stock Purchase Plan
The Company maintains an “Employee Stock Purchase Plan” (the “ESP Plan”) in which substantially all employees of
the Company are eligible to participate. The ESP Plan provides participants the opportunity to purchase common stock of the
Company at a discounted price. Under the ESP Plan, participants can purchase common stock of the Company for 90% of the
lowest price on either the first or last day in each of two six month look-back periods. The look-back periods are January 1st
through June 30th and July 1st through December 31st of each calendar year. The 10% discount is recognized by the Company
as compensation expense and does not have a material impact on net income or earnings per common share. Participants of the
ESP Plan purchased 39,393 shares for $725 thousand in 2012, 39,989 shares for $690 thousand in 2011 and 35,806 shares for
$614 thousand in 2010. At December 31, 2012 there were 608,510 shares available for purchase under the ESP plan.
Supplemental Compensation Plan
The Company maintains supplemental compensation arrangements (“Unit Plans”) to provide benefits for certain
employees. The Unit Plans generally vest over a 4-10 year period and provide a fixed annual benefit over a 5-10 year period. At
December 31, 2012 and 2011 the liability associated with these plans was $4.7 million and $4.4 million, respectively. Expense
associated with these plans for the years ended December 31, 2012, 2011 and 2010 was $677 thousand, $655 thousand and
$750 thousand, respectively.
Supplemental Executive Retirement Plan
The Company maintains a supplemental executive retirement plan (the “SERP”), a nonqualified deferred compensation
plan that provides retirement benefits to certain highly compensated executives. The SERP is unsecured and unfunded and
there are no program assets. The SERP projected benefit obligation, which represents the vested net present value of future
payments to individuals under the plan is accrued over the estimated remaining term of employment of the participants and has
been determined by actuarial valuation using the “RP-2000 Annuity Mortality Table” for the mortality assumptions and
discount rates of 5.10% and 5.30% in 2012 and 2011, respectively. Additional assumptions and features of the plan are a
normal retirement age of 65 and a 2% annual cost of living benefit adjustment. The projected benefit obligation is included in
other liabilities on the Consolidated Balance Sheets.
The following table reconciles the accumulated liability for the projected benefit obligation:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
11,237
(80)
1,017
(558)
11,616
$
$
10,363
329
987
(442)
11,237
December 31,
2012
2011
(in thousands)
88
The benefits expected to be paid in conjunction with the SERP are presented in the following table:
Years Ending December 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 through 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(in thousands)
763
758
780
917
1,049
6,583
10,850
15. Commitments and Contingent Liabilities
Lease Commitments: The Company leases locations as well as equipment under various non-cancellable operating leases
that expire between 2013 and 2045. The majority of the leases contain renewal options and provisions for increases in rental
rates based on an agreed upon index or predetermined escalation schedule. As of December 31, 2012, minimum future rental
payments, exclusive of taxes and other charges, of these leases were:
Years Ending December 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum payments. . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
4,309
$
4,018
3,454
2,032
1,468
7,329
22,610
$
Total rental expense on buildings and equipment, net of rental income of $639 thousand, $655 thousand and $591
thousand, was $4.5 million, $4.6 million and $4.5 million, for the years ended December 31, 2012, 2011 and 2010, respectively.
Financial Instruments with Off-Balance Sheet Risk: In the normal course of business, the Company makes loan
commitments (typically unfunded loans and unused lines of credit) and issues standby letters of credit to accommodate the
financial needs of its customers.
Standby letters of credit commit the Company to make payments on behalf of customers under specified conditions.
Historically, no significant losses have been incurred by the Company under standby letters of credit. Both arrangements have
credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit
policies, including collateral requirements, where appropriate. At December 31, 2012 and 2011, the Company’s loan
commitments amounted to $888.5 million and $709.9 million, respectively. Standby letters of credit were $19.5 million and
$30.9 million at December 31, 2012 and 2011, respectively. In addition, commitments under commercial letters of credit used
to facilitate customers’ trade transactions amounted to $46 thousand and $243 thousand at December 31, 2012 and 2011,
respectively.
Pending acquisition: On September 25, 2012, we entered into an Agreement and Plan of Merger with West Coast
Bancorp ("West Coast"). The closing of the transaction is subject to the satisfaction of certain customary conditions, including
the receipt of required regulatory approvals and the approval of West Coast's and our respective shareholders. Under the terms
of the merger agreement, the aggregate merger consideration payable by Columbia will consist of 12,809,525 shares of
Columbia common stock and $264.5 million in cash (subject to increase under certain circumstances). If the merger agreement
is terminated (i) due to our failure to obtain requisite approval from our shareholders or (ii) due to our failure to obtain
regulatory approval, we will be required to pay West Coast a termination fee of $5.0 million.
Legal Proceedings: The Company and its subsidiary are from time to time defendants in and are threatened with various
legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of the
opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a
material effect on the financial statements of the Company.
89
16. Shareholders’ Equity
On January 26, 2012, the Company declared a quarterly cash dividend of $0.08 per share and a special, one-time cash
dividend of $0.29, payable on February 22, 2012 to shareholders of record as of the close of business on February 8, 2012. On
April 25, 2012 the Company declared a quarterly cash dividend of $0.08 per share and a special, one-time cash dividend of
$0.14, payable on May 23, 2012 to shareholders of record at the close of business May 9, 2012. On July 26, 2012 the
Company declared a quarterly cash dividend of $0.09 per share and a special, one-time cash dividend of $0.21, payable on
August 22, 2012 to shareholders of record at the close of business August 8, 2012. On October 25, 2012 the Company declared
a quarterly cash dividend of $0.09 per share payable on November 21, 2012 to shareholders of record at the close of business
November 7, 2012. Subsequent to year end, on January 24, 2013 the Company declared a quarterly cash dividend of $0.10 per
share payable on February 20, 2013, to shareholders of record at the close of business on February 6, 2013.
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.
Stock Repurchase Program
In October 2011, the Board of Directors authorized the repurchase of 2 million shares of Columbia common stock. The
Company may purchase the shares from time to time in the open market or in private transactions, under conditions which
allow such repurchases to be accretive to earnings per share while maintaining capital ratios that exceed the guidelines for a
well-capitalized financial institution. No shares were repurchased under the stock repurchase program during 2012 or 2011.
17. 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.
90
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a
recurring basis at December 31, 2012 and 2011 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 at
December 31, 2012
Fair Value Measurements at Reporting Date Using
Level 1
Level 2
Level 3
(in thousands)
Assets
Securities available for sale
U.S. government agency and sponsored
enterprise mortgage-back securities and
collateralized mortgage obligations . . . . . .
State and municipal securities . . . . . . . . . . . .
U.S. government agency and government-
sponsored enterprise securities . . . . . . . . . .
U.S. government securities. . . . . . . . . . . . . . .
Other securities. . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale. . . . . . . . . . . . . .
Other assets (Interest rate contracts) . . . . . . . . . . .
Liabilities
Other liabilities (Interest rate contracts) . . . . . . . .
$
$
$
$
572,369
285,575
120,501
19,828
3,392
1,001,665
14,921
14,921
Assets
Securities available for sale
U.S. government agency and sponsored
enterprise mortgage-back securities and
collateralized mortgage obligations . . . . . .
State and municipal debt securities . . . . . . . .
U.S. government agency and government-
sponsored enterprise securities. . . . . . . . . . . .
Other securities. . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale. . . . . . . . . . . . . .
Other assets (Interest rate contracts) . . . . . . . . . . .
Liabilities
Other liabilities (Interest rate contracts) . . . . . . . .
Fair value at
December 31, 2011
$
$
$
$
695,954
285,763
43,063
3,330
1,028,110
16,302
16,302
$
$
$
$
$
$
$
$
— $
—
—
19,828
—
572,369
285,575
120,501
—
3,392
19,828
$
981,837
— $
14,921
— $
14,921
$
$
$
$
Fair Value Measurements at Reporting Date Using
Level 1
Level 2
Level 3
(in thousands)
— $
—
—
—
695,954
285,763
43,063
3,330
— $
1,028,110
— $
16,302
— $
16,302
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the years ended December 31,
2012 and 2011. The Company recognizes transfers between levels of the valuation hierarchy based on the valuation level at the
end of the reporting period.
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 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,
91
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 and other personal property owned ("OPPO")—OREO and OPPO is real and personal
property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO and OPPO are generally
measured based on the item's fair market value as indicated by an appraisal or a letter of intent to purchase. OREO and OPPO
are recorded at the lower of the carrying amount or fair value less estimated costs to sell. This amount becomes the property’s
new basis. Any write-downs based on the property fair value less estimated cost to sell at the date of acquisition are charged to
the allowance for loan and lease losses. Management periodically reviews OREO and OPPO in an effort to ensure the property
is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any write-downs subsequent to acquisition
are charged to earnings. The initial and subsequent write-down 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 OPPO 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 table sets forth the Company’s assets that were measured using fair value estimates on a nonrecurring
basis at December 31, 2012 and 2011:
Impaired loans . . . . . . . . . . . . .
Noncovered OREO. . . . . . . . . .
Covered OREO. . . . . . . . . . . . .
Noncovered OPPO
Impaired loans . . . . . . . . . . . . .
Noncovered OREO. . . . . . . . . .
Covered OREO. . . . . . . . . . . . .
Fair value at
December 31, 2012
Fair Value Measurements at Reporting Date Using
Level 1
Level 2
Level 3
Losses During the
Year Ended
December 31, 2012
$
$
10,599
10,970
2,663
210
24,442
Fair value at
December 31, 2011
$
$
17,755
11,233
2,442
31,430
$
$
$
$
(in thousands)
— $
—
—
—
— $
— $
—
—
—
— $
10,599
10,970
2,663
210
24,442
$
$
3,891
3,788
1,032
39
8,750
Fair Value Measurements at Reporting Date Using
Level 1
Level 2
Level 3
Losses During the
Year Ended
December 31, 2011
(in thousands)
— $
—
—
— $
— $
—
—
— $
17,755
11,233
2,442
31,430
$
$
5,841
3,089
644
9,574
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 noncovered 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 write-downs from updated appraisals that were charged to
earnings.
92
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
during 2012, along with the valuation techniques used, are shown in the following table:
Fair value at
December
31, 2012
Impaired loans - real estate collateral . . . . . .
$
10,099
Valuation Technique
Unobservable Input
(dollars in thousands)
Fair Market Value
of Collateral
Adjustment to
Appraisal Value
Impaired loans - other collateral (3). . . . . . . .
Fair Market Value
of Collateral
Adjustment to Stated
Value
500
Noncovered OREO . . . . . . . . . . . . . . . . . . . .
10,970
Covered OREO . . . . . . . . . . . . . . . . . . . . . . .
2,663
Fair Market Value
of Collateral
Adjustment to
Appraisal Value
Fair Market Value
of Collateral
Adjustment to
Appraisal Value
Noncovered OPPO. . . . . . . . . . . . . . . . . . . . .
Fair Market Value
of Collateral
Adjustment to
Appraisal Value
210
Range (Weighted
Average) (1)
N/A (2)
N/A (2)
N/A (2)
N/A (2)
N/A (2)
(1) Discount applied to appraisal value, letter of intent to purchase, or stated value (in the case of accounts receivable and
inventory).
(2) Quantitative disclosures are not provided for impaired loans collateralized by real estate, impaired loans collateralized by
non real estate collateral, noncovered OREO, covered OREO and noncovered OPPO because there were no adjustments made
to the appraisal value during the current period.
(3) Other collateral consists of accounts receivable and inventory.
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 December 31, 2012 or 2011
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 covered loans, fair value is estimated by discounting the
expected future cash flows using a lending rate that would have been offered on December 31, 2012 (Level 3).
FDIC loss-sharing asset —The fair value of the FDIC loss-sharing asset is estimated based on discounting the expected
93
future cash flows using an estimated market rate (Level 3).
Interest rate contracts—Interest rate contracts are valued in models, which use as their basis, readily observable market
parameters (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 securities sold under agreement to repurchase is estimated based on
discounting the future cash flows using the market rate currently offered (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.
The following table summarizes carrying amounts and estimated fair values of selected financial instruments:
December 31,
2012
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
(in thousands)
December 31,
2011
Carrying
Amount
Fair
Value
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . .
$
124,573
$
124,573
$
124,573
$
Interest-earning deposits with banks. . . . . . . . . . . .
389,353
389,353
Securities available for sale . . . . . . . . . . . . . . . . . .
1,001,665
1,001,665
FHLB stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . .
21,819
2,563
21,819
2,563
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,864,803
2,944,317
FDIC loss-sharing asset . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . .
96,354
14,921
26,543
14,921
389,353
19,828
—
—
—
—
—
— $
—
981,837
21,819
2,563
—
—
14,921
— $
91,364
$
91,364
—
—
—
—
202,925
202,925
1,028,110
1,028,110
22,215
2,148
22,215
2,148
2,944,317
2,827,259
2,957,345
26,543
—
175,071
16,302
71,788
16,302
Liabilities
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,042,085
$ 4,043,221
$ 3,549,821
$
493,400
$
— $ 3,815,529
$ 3,817,013
FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements. . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . .
6,644
25,000
14,921
5,894
26,464
14,921
—
—
—
5,894
26,464
14,921
—
—
—
119,009
119,849
25,000
16,302
26,580
16,302
18. 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 grants restricted shares under share-based compensation plans that qualify as
participating securities.
94
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
Basic EPS:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Preferred dividends and accretion of issuance discount for
preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shareholders . . . . . . . . . . . . . . . . . . . . .
Less: Earnings allocated to participating securities . . . . . . . . . . . . . . . . . .
Earnings allocated to common shareholders . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS:
Earnings allocated to common shareholders (1) . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Dilutive effect of equity awards and warrants . . . . . . . . . . . . . . . . . . . . . . .
Weighted average diluted common shares outstanding . . . . . . . . . . . . . . . .
Diluted earnings per common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Potentially dilutive share options that were not included in the
computation of diluted EPS because to do so would be anti-dilutive . . .
$
$
$
$
$
$
Year Ended December 31,
2012
2011
2010
(in thousands except per share)
$
$
$
$
$
$
46,143
—
46,143
(443)
45,700
39,260
1.16
45,700
39,260
3
39,263
1.16
9
$
$
$
$
$
$
48,037
—
48,037
(450)
47,587
39,103
1.22
47,588
39,103
77
39,180
1.21
53
30,784
(4,947)
25,837
(244)
25,593
35,209
0.73
25,593
35,209
183
35,392
0.72
54
__________
(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.
19. Share-Based Payments
At December 31, 2012, the Company had one equity compensation plan (the “Plan”), which is shareholder approved, that
provides for the granting of share options and shares to eligible employees and directors up to 2,891,482 shares.
Share Awards: Restricted share awards provide for the immediate issuance of shares of Company common stock to the
recipient, with such shares held in escrow until certain service conditions are met, generally four years of continual service.
Recipients of restricted shares do not pay any cash consideration to the Company for the shares, have the right to vote all shares
subject to such grant, and receive all dividends with respect to such shares, whether or not the shares have vested. The fair
value of share awards is equal to the fair market value of the Company’s common stock on the date of grant.
95
A summary of changes in the Company’s nonvested shares and related information for the years ended December 31,
2012, 2011 and 2010 is presented below:
Nonvested Shares
Nonvested at January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Grant-Date
Fair Value
21.34
20.68
21.38
20.77
21.14
19.45
25.72
18.86
19.24
21.32
21.65
18.60
19.54
Shares
278,504
108,075
(25,521)
(7,775)
353,283
133,350
(109,033)
(14,925)
362,675
180,841
(118,511)
(40,915)
384,090
$
$
$
$
$
$
$
$
$
$
$
$
$
As of December 31, 2012, there was $5.8 million of total unrecognized compensation cost related to nonvested share-
based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average
period of 2.3 years. The total fair value of shares vested during the years ended December 31, 2012, 2011, and 2010 was $2.5
million, $2.2 million, and $546 thousand, respectively.
Share Options: Option awards are generally granted with an exercise price equal to the market price of the Company’s
stock at the date of grant; those option awards generally vest based on three years of continual service and are exercisable for a
five-year period after vesting. Option awards granted have a 10-year maximum term.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The
fair value of all options is amortized on a straight-line basis over the requisite service periods, which are generally the vesting
periods. The expected life of options granted represents the period of time that they are expected to be outstanding. The
expected life is determined based on historical experience with similar awards, giving consideration to the contractual terms
and vesting schedules. Expected volatilities of our common stock are estimated at the date of grant based on the historical
volatility of the stock. The volatility factor is based on historical stock prices over the most recent period commensurate with
the estimated expected life of the award. The risk-free interest rate is based on the U.S. Treasury curve in effect at the time of
the award. The expected dividend yield is based on dividend trends and the market value of the Company’s stock price at the
time of the award.
A summary of option activity under the Plan as of December 31, 2012, and changes during the year then ended is
presented below:
Options
Balance at December 31, 2011. . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2012. . . . . . . . . . . . . . . . .
Total Exercisable at December 31, 2012 . . . . . . . . .
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
($000)
Shares
22.76
—
23.29
24.71
12.21
20.13
20.13
1.3
1.3
$
$
27
27
64,912
$
— $
$
$
$
$
$
(1,000)
(37,444)
(516)
25,952
25,952
96
The total intrinsic value of options exercised during the years ended December 31, 2012, 2011, and 2010 was $5
thousand, $65 thousand, and $154 thousand, respectively. No options were granted in 2012, 2011 and 2010.
As of December 31, 2012, outstanding stock options consist of the following:
Ranges of
Exercise Prices
12.35 - 15.43
15.44 - 18.51
18.52 - 21.60
21.61 - 24.68
27.78 - 30.86
Number of
Option
Shares
6,395
3,240
7,266
5,000
4,051
25,952
Weighted Average
Remaining
Contractual Life
0.8
0.4
1.3
0.2
4.1
1.3
Weighted Average
Exercise Price of
Option Shares
Number of
Exercisable
Option Shares
Weighted Average
Exercise Price of
Exercisable Option
Shares
$
$
$
$
$
$
14.04
17.28
18.61
23.29
30.86
20.13
6,395
3,240
7,266
5,000
4,051
25,952
$
$
$
$
$
$
14.04
17.28
18.61
23.29
30.86
20.13
It is the Company’s policy to issue new shares for share option exercises and share awards. The Company expenses
awards of share options and shares on a straight-line basis over the related vesting term of the award. For the 12 months ended
December 31, 2012, 2011 and 2010, the Company recognized pre-tax share-based compensation expense for nonvested share
awards of $1.6 million, $1.6 million and $1.4 million, respectively.
20. Income Tax
The components of income tax expense (benefit) are as follows:
Years Ended December 31,
2012
2011
(in thousands)
2010
Current tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
21,218
(3,656)
17,562
$
$
21,688
(3,783)
17,905
$
$
(13,547)
15,838
2,291
Significant components of the Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental executive retirement plan . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option and restricted stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OREO costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Asset purchase tax basis difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31,
2012
2011
(in thousands)
30,027
6,967
682
3,801
193
—
557
42,227
(19,408)
(1,963)
(745)
(1,755)
(11,150)
(1,870)
(36,891)
5,336
$
$
20,910
6,564
989
3,209
222
1,041
632
33,567
(14,812)
(1,977)
(1,030)
(1,517)
(14,291)
(1,517)
(35,144)
(1,577)
97
A reconciliation of the Company’s effective income tax rate with the federal statutory tax rate is as follows:
Income tax based on statutory rate . . . . . . . .
Reduction resulting from:
Tax credits. . . . . . . . . . . . . . . . . . . . . . .
Tax exempt instruments . . . . . . . . . . . .
Life insurance proceeds . . . . . . . . . . . .
Bargain purchase. . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2012
2011
2010
Amount
Percent
Amount
Percent
Amount
Percent
(dollars in thousands)
$
22,297
35 % $
23,080
35 % $
11,576
35 %
(504)
(3,906)
(1,001)
—
676
17,562
$
(1)%
(6)%
(2)%
— %
1 %
27 % $
(608)
(3,824)
(766)
(1,036)
1,059
17,905
(1)%
(6)%
(1)%
(2)%
2 %
27 % $
(808)
(3,744)
(735)
(5,383)
1,385
2,291
(2)%
(11)%
(2)%
(16)%
3 %
7 %
As of December 31, 2012 and 2011, we had no unrecognized tax benefits. Our policy is to recognize interest and
penalties on unrecognized tax benefits in “Provision for income taxes” in the Consolidated Statements of Income. There were
no amounts related to interest and penalties recognized for the years ended December 31, 2012 and 2011. The tax years subject
to examination by federal and state taxing authorities are the years ending December 31, 2011, 2010, and 2009.
21. Regulatory Capital Requirements
The Company (on a consolidated basis) and its banking subsidiary are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company
and its subsidiary's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking
subsidiary to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted
assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in the regulations). Management
believes, as of December 31, 2012 and 2011, that the Company and Columbia Bank met all capital adequacy requirements to
which they are subject.
98
As of December 31, 2012, the most recent notification from the Federal Deposit Insurance Corporation categorized
Columbia Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following tables. There are no conditions or events since the notification that management believes have changed Columbia
Bank’s category. The Company and its banking subsidiary’s actual capital amounts and ratios as of December 31, 2012 and
2011, are also presented in the following table.
Actual
For Capital
Adequacy
Purposes
To Be Well
Capitalized Under
Prompt
Corrective Action
Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
As of December 31, 2012
Total Capital (to risk-weighted assets):
The Company . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . .
$ 652,704
$ 565,677
20.62% $ 253,242
17.87% $ 253,244
8.0%
N/A
8.0% $ 316,556
N/A
10.0%
Tier 1 Capital (to risk-weighted assets):
The Company . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . .
$ 612,584
$ 525,556
19.35% $ 126,621
16.60% $ 126,622
N/A
4.0%
4.0% $ 189,933
Tier 1 Capital (to average assets):
The Company . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . .
$ 612,584
$ 525,556
12.78% $ 191,778
11.07% $ 189,986
N/A
4.0%
4.0% $ 237,483
N/A
6.0%
N/A
5.0%
As of December 31, 2011
Total Capital (to risk-weighted assets):
The Company . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . .
$ 636,559
$ 561,216
21.05% $ 241,955
18.55% $ 242,028
N/A
8.0%
8.0% $ 302,535
N/A
10.0%
Tier 1 Capital (to risk-weighted assets):
The Company . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . .
$ 598,485
$ 523,131
19.79% $ 120,978
17.29% $ 121,014
N/A
4.0%
4.0% $ 181,521
Tier 1 Capital (to average assets):
The Company . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . .
$ 598,485
$ 523,131
12.96% $ 184,780
11.45% $ 182,747
4.0%
N/A
4.0% $ 228,434
N/A
6.0%
N/A
5.0%
22. Business Combinations
Bank of Whitman
On August 5, 2011 the Bank acquired certain assets and assumed certain liabilities of the Bank of Whitman from the
FDIC in an FDIC-assisted transaction. The Bank and the FDIC entered into a modified whole bank purchase and assumption
agreement without loss share.
The Bank of Whitman was a full service community bank headquartered in Colfax, Washington. We entered into this
transaction to acquire 9 branches total in Adams, Asotin, Grant, Spokane, Walla Walla, and Whitman counties to assist us with
filling in our geographic footprint in eastern Washington. We believe participating with the FDIC in this assisted transaction
was, from an economical standpoint, advantageous to expansion through de novo branching.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting
(formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair
values as of the August 5, 2011 acquisition date. The application of the acquisition method of accounting resulted in the
recognition of a bargain purchase gain, net of tax, of $1.8 million, which is included in the Gain on bank acquisition line item
in the Consolidated Statements of Income, and a core deposit intangible of $3.9 million. The bargain purchase gain represents
the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed and is
influenced significantly by the FDIC-assisted transaction process. The core deposit intangible asset recognized is deductible
for income tax purposes.
The operating results of the Company include the operating results produced by the acquired assets and assumed
liabilities for the period August 6, 2011 to December 31, 2011. Due to the exclusion of the majority of the non-performing
99
loans and 11 branch locations, as well as the significant amount of fair value adjustments, historical results of the Bank of
Whitman are not meaningful to the Company's results and thus no proforma information is presented.
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and
liabilities assumed:
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Bank and Federal Home Loan Bank stock . . . . . . . . . . . .
Acquired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired (after tax gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August 5, 2011
(in thousands)
$
$
$
$
52,072
16,298
3,977
200,041
1,975
86
156,710
3,943
2,447
437,549
401,127
32,949
213
1,034
396
435,719
1,830
First Heritage Bank
On May 27, 2011 the Bank acquired certain assets and assumed certain liabilities of First Heritage Bank from the FDIC
in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into loss-
sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-sharing agreements”), whereby the FDIC will
cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and certain accrued
interest on loans for up to 90 days. We refer to the acquired loans and OREO subject to the loss-sharing agreements collectively
as “covered assets.” Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of
loss recoveries. The loss-sharing provisions of the agreements for commercial and single family residential mortgage loans are
in effect for five years and ten years, respectively, from the May 27, 2011 acquisition date and the loss recovery provisions for
such loans are in effect for eight years and ten years, respectively, from the acquisition date.
First Heritage Bank was a full service community bank headquartered in Snohomish, Washington that operated five
branch locations in King and Snohomish Counties. We entered into this transaction to assist us with filling in our geographic
footprint between Seattle and Bellingham, Washington and to support our recently expanded Bellingham banking team. We
believe participating with the FDIC in this assisted transaction was, from an economical standpoint, advantageous to expansion
through de novo branching.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting
(formerly the purchase method). The assets and liabilities, both tangible and intangible, were initially provisionally recorded at
their estimated fair values as of the May 27, 2011 acquisition date pending completion of valuation adjustments related to
acquired loans, OREO, the indemnification asset, and other assets. The initial amounts recorded for acquired loans, OREO, the
indemnification asset, and other assets were $81.9 million, $8.3 million, $38.1 million, and $1.7 million, respectively. At
December 31, 2011 these amounts were retrospectively adjusted resulting in a $369 thousand decrease to acquired loans, a $61
thousand decrease to OREO, a $427 thousand increase to the indemnification asset, and a $1.9 million increase to other assets.
The application of the acquisition method of accounting resulted in the recognition of $4.0 million of goodwill and a core
deposit intangible of $1.3 million. The goodwill represents the excess of the estimated fair value of the liabilities assumed over
the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process.
The operating results of the Company include the operating results produced by the acquired assets and assumed
liabilities for the period May 28, 2011 to December 31, 2011. Due primarily to the significant amount of fair value adjustments
and the FDIC loss-sharing agreements put in place, historical results of First Heritage Bank are not meaningful to the
Company’s results and thus no proforma information is presented.
100
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and
liabilities assumed:
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned covered by loss sharing. . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC indemnification asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 27, 2011
(in thousands)
$
$
$
$
4,688
6,689
5,303
477
81,488
476
5,339
4,751
8,225
4,023
1,337
38,531
3,657
164,984
159,525
5,003
421
35
164,984
Summit Bank
On May 20, 2011 the Bank acquired certain assets and assumed certain liabilities of Summit Bank from the Federal
Deposit Insurance Corporation (“FDIC”) in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement,
the Bank and the FDIC entered into loss-sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-
sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded
commitments), OREO and certain accrued interest on loans for up to 90 days. We refer to the acquired loans and OREO subject
to the loss-sharing agreements collectively as “covered assets.” Under the terms of the loss-sharing agreements, the FDIC will
absorb 80% of losses and share in 80% of loss recoveries. The loss-sharing provisions of the agreements for commercial and
single family residential mortgage loans are in effect for five years and ten years, respectively, from the May 20, 2011
acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the
acquisition date.
Summit Bank was a full service community bank headquartered in Burlington, Washington that operated three branch
locations in Skagit County. We entered into this transaction to assist us with filling in our geographic footprint between Seattle
and Bellingham, Washington and to support our recently expanded Bellingham banking team. We believe participating with the
FDIC in this assisted transaction was, from an economical standpoint, advantageous to expansion through de novo branching.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting
(formerly the purchase method). The assets and liabilities, both tangible and intangible, were initially provisionally recorded at
their estimated fair values as of the May 20, 2011 acquisition date pending completion of valuation adjustments related to
acquired loans, OREO, the indemnification asset, and other assets. The initial amounts recorded for acquired loans, OREO, the
indemnification asset, and other assets were $71.4 million, $2.7 million, $27.2 million, and $786 thousand, respectively. At
December 31, 2011 these amounts were retrospectively adjusted resulting in a $1.7 million decrease to acquired loans, a $509
thousand decrease to OREO, a $3.0 million increase to the indemnification asset, and a $1.0 million increase to other
assets. The application of the acquisition method of accounting resulted in the recognition of $1.9 million of goodwill and a
core deposit intangible of $509 thousand. The goodwill represents the excess of the estimated fair value of the liabilities
assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction
process.
101
The operating results of the Company include the operating results produced by the acquired assets and assumed
liabilities for the period May 21, 2011 to December 31, 2011. Due primarily to the significant amount of fair value adjustments
and the FDIC loss-sharing agreements put in place, historical results of Summit Bank are not meaningful to the Company’s
results and thus no pro forma information is presented.
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and
liabilities assumed:
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits with banks and federal funds sold. . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned covered by loss sharing. . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC indemnification asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 20, 2011
(in thousands)
$
$
$
$
1,837
14,198
871
406
69,783
429
42
6,984
2,162
1,892
509
30,203
1,813
131,129
123,279
7,772
71
7
131,129
American Marine Bank
On January 29, 2010, the Bank acquired certain assets and assumed certain liabilities of American Marine Bank from the
FDIC, which had been appointed receiver of the institution. As part of the Purchase and Assumption Agreement, the Bank and
the FDIC entered into loss-sharing agreements whereby the FDIC will cover a substantial portion of any future losses on loans
(and related unfunded commitments), OREO and certain accrued interest on loans. Under the terms of the loss-sharing
agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $66 million on covered assets
and absorb 95% of losses and share in 95% of loss recoveries exceeding $66 million. The loss-sharing agreements for
commercial and single family residential mortgage loans are in effect for five years and ten years, respectively, from the
January 29, 2010 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years,
respectively, from the acquisition date.
The Bank acquired assets with an acquisition date fair value of approximately $307.8 million, including $176.3 million of
loans, an FDIC loss sharing asset of $70.4 million, $28.6 million of investment securities, $14.5 million of cash and cash
equivalents and federal funds sold and $18.0 million of other assets. The Bank assumed liabilities with an acquisition date fair
value of approximately $292.6 million, including $254.0 million of insured and uninsured deposits, $37.7 million of FHLB
advances and $974 thousand of other liabilities. American Marine Bank was a full service commercial bank headquartered on
Bainbridge Island, Washington that operated 11 branch locations in western Washington. In addition, as part of this acquisition,
the Bank received regulatory approval to exercise trust powers and intends to continue to operate the Trust and Wealth
Management Division of American Marine Bank. We made this acquisition to expand our geographic footprint.
102
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 January 29, 2010
acquisition date. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain,
net of tax, of $9.8 million, which is included in the Gain on bank acquisition line item in the Consolidated Condensed
Statements of Income, and a core deposit intangible of $4.3 million. The transaction resulted in a bargain purchase gain as the
fair value of assets acquired exceeded the fair value of liabilities assumed.
The operating results of the Company for the year ended December 31, 2010 include the operating results produced by
the acquired assets and assumed liabilities for the period January 30, 2010 to December 31, 2010. Due primarily to the
Company acquiring only certain assets and liabilities of American Marine Bank, the significant amount of fair value
adjustments and the FDIC loss-sharing agreements now in place, historical results of American Marine Bank are not
meaningful to the Company's results and thus no pro forma information is presented.
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and
liabilities assumed:
January 29, 2010
(in thousands)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans covered by loss-sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned covered by loss-sharing . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC loss-sharing asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
14,215
267
28,592
3,257
176,278
1,280
8,680
4,313
70,442
498
307,822
253,965
37,682
337
5,383
637
298,004
9,818
Columbia River Bank
On January 22, 2010 the Bank acquired certain assets and assumed certain liabilities of Columbia River Bank from the
FDIC in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered
into loss-sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-sharing agreements”), whereby the
FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and certain
accrued interest on loans. We refer to the acquired loans and OREO subject to the loss-sharing agreements collectively as
“covered assets.” Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss
recoveries on the first $206 million on covered assets and absorb 95% of losses and share in 95% of loss recoveries exceeding
$206 million. The loss-sharing agreements for commercial and single family residential mortgage loans are in effect for five
years and ten years, respectively, from the January 22, 2010 acquisition date and the loss recovery provisions for such loans are
in effect for eight years and ten years, respectively, from the acquisition date.
103
The Bank acquired assets with an acquisition date fair value of approximately $912.9 million, including $480.3 million of
loans, an FDIC loss sharing asset of $189.8 million, $100.7 million of investment securities, $98.1 million of cash and cash
equivalents and $44.0 million of other assets. The Bank assumed liabilities with an acquisition date fair value of approximately
$912.9 million, including $893.4 million of insured and uninsured deposits, $18.4 million of Federal Home Loan Bank
(“FHLB”) advances and $1.1 million of other liabilities. Columbia River Bank was a full service commercial bank
headquartered in The Dalles, Oregon that operated 21 branch locations, including 14 in the state of Oregon and seven in the
State of Washington. We made this acquisition to expand our geographic footprint.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting
(formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair
values as of the January 22, 2010 acquisition date. The application of the acquisition method of accounting resulted in the
recognition in $14.1 million of goodwill and a core deposit intangible of $13.4 million. The goodwill represents the excess of
the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced
significantly by the FDIC-assisted transaction process. All of the goodwill and core deposit intangible assets recognized are
deductible for income tax purposes.
The operating results of the Company for the year ended December 31, 2010 include the operating results produced by
the acquired assets and assumed liabilities for the period January 23, 2010 to December 31, 2010. Due primarily to the
Company acquiring only certain assets and liabilities of Columbia River Bank, the significant amount of fair value adjustments
and the FDIC loss-sharing agreements now in place, historical results of Columbia River Bank are not meaningful to the
Company's results and thus no pro forma information is presented.
The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and
liabilities assumed:
January 22, 2010
(in thousands)
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Interest-earning deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned covered by loss sharing. . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC loss-sharing asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
33,222
64,921
100,650
3,045
480,306
4,021
8,714
14,120
13,442
189,822
615
912,878
893,356
18,428
524
570
Total liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
912,878
104
23. Parent Company Financial Information
Condensed Statements of Income—Parent Company Only
Income
Dividend from banking subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax expense (benefit) and equity in
undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before equity in undistributed net income of
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income (loss) of subsidiaries . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2012
2011
(in thousands)
2010
48,950
153
—
49,103
182
—
1,193
1,375
47,728
(435)
48,163
(2,020)
46,143
$
$
— $
712
17
729
88
579
1,114
1,781
(1,052)
91
(1,143)
49,180
48,037
$
—
1,319
31
1,350
96
1,029
1,066
2,191
(841)
(778)
(63)
30,847
30,784
Condensed Balance Sheets—Parent Company Only
Assets
Cash and due from banking subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in banking subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Shareholders’ Equity
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
December 31,
2012
2011
(in thousands)
1,729
84,915
86,644
676,974
649
764,267
259
259
764,008
764,267
$
$
$
$
3,220
72,014
75,234
683,977
510
759,721
383
383
759,338
759,721
105
Condensed Statements of Cash Flows—Parent Company Only
Years Ended December 31,
2012
2011
2010
(in thousands)
$
46,143
$
48,037
$
30,784
2,020
1,622
(264)
49,521
—
—
(38,824)
—
—
—
713
—
—
—
(38,111)
11,410
75,234
86,644
(49,180)
1,635
315
807
774
774
(10,660)
(25,774)
—
(32)
848
(50,000)
98
—
(85,520)
(83,939)
159,173
(30,847)
1,424
(769)
592
—
—
(4,302)
—
229,129
—
948
(70,000)
—
(80,200)
75,575
76,167
83,006
$
75,234
$
159,173
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed loss (earnings) of subsidiaries . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in other assets and liabilities. . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . .
Investing Activities
Proceeds from termination of trust subsidiaries . . . . . . . . . . . . . . . . . . .
Net cash provided by investing activities . . . . . . . . . . . . . . . .
Financing Activities
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term subordinated debt . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock, net of offering costs . . . . . . . . . . . . . . . . . .
Purchase and retirement of common stock . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . .
Downstream stock offering proceeds to the Bank . . . . . . . . . . . . . . . . .
Excess tax benefit associated with share-based compensation . . . . . . .
Purchase and retirement of preferred stock . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities. . . . . . . . .
Increase (decrease) in cash and cash equivalents. . . . . .
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . .
$
106
24. Summary of Quarterly Financial Information (Unaudited)
Quarterly financial information for the years ended December 31, 2012 and 2011 is summarized as follows:
2012
Total interest income . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses. . . . . . . . . . . .
Provision (recapture) for losses on covered loans
Noninterest income (loss). . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Per common share (1)
Earnings (basic). . . . . . . . . . . . . . . . . . . . . . .
Earnings (diluted) . . . . . . . . . . . . . . . . . . . . .
2011
Total interest income . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses. . . . . . . . . . . .
Provision (recapture) for losses on covered loans
Noninterest income . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Per common share (1)
Earnings (basic). . . . . . . . . . . . . . . . . . . . . . .
Earnings (diluted) . . . . . . . . . . . . . . . . . . . . .
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year Ended
December 31,
(in thousands, except per share amounts)
$
$
$
$
$
$
$
$
69,712
2,649
67,063
4,500
15,685
9,574
44,352
12,100
3,198
8,902
0.22
0.22
54,611
4,162
50,449
—
(422)
(5,419)
37,346
8,106
2,327
5,779
0.15
0.15
$
$
$
$
$
$
$
$
62,114
2,413
59,701
3,750
11,688
11,828
39,825
16,266
4,367
11,899
0.30
0.30
53,309
3,934
49,375
2,150
2,301
3,542
37,164
11,302
2,670
8,632
0.22
0.22
$
$
$
$
$
$
$
$
59,469
2,204
57,265
2,875
(3,992)
(911)
40,936
16,535
4,655
11,880
0.30
0.30
68,432
3,644
64,788
500
433
2,196
39,935
26,116
7,244
18,872
0.48
0.48
$
$
$
$
$
$
$
$
57,209
2,311
54,898
2,350
2,511
6,567
37,800
18,804
5,342
13,462
0.34
0.34
74,919
2,795
72,124
4,750
(3,960)
(9,602)
41,314
20,418
5,664
14,754
0.37
0.37
$
$
$
$
$
$
$
$
248,504
9,577
238,927
13,475
25,892
27,058
162,913
63,705
17,562
46,143
1.16
1.16
251,271
14,535
236,736
7,400
(1,648)
(9,283)
155,759
65,942
17,905
48,037
1.22
1.21
__________
(1) Due to averaging of shares, quarterly earnings per share may not add up to the totals reported for the full year.
107
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A.
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.
Internal Control Over Financial Reporting
Management’s Annual Report On Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting. The internal control system has been designed to provide reasonable assurance to the Company’s management and
Board of Directors regarding the preparation and fair presentation of the Company’s published financial statements. Internal
control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the
Company’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the
Company’s financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with
management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company
assets that could have a material effect on the Company’s financial statements would be prevented or detected on a timely
basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance
that a misstatement of the Company’s financial statements would be prevented or detected.
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2012
based on the control criteria established in a report entitled Internal Control-Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on such evaluation, management has concluded that the
Company’s internal control over financial reporting is effective as of December 31, 2012. There were no changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently
completed fiscal year that materially affected or are reasonably likely to materially affect internal control over financial
reporting.
Our independent registered public accounting firm has issued an attestation report on our internal control over financial
reporting, which appears in this annual report on Form 10-K.
108
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Columbia Banking System, Inc.
Tacoma, Washington
We have audited the internal control over financial reporting of Columbia Banking System, Inc. and its subsidiary (the
“Company”) as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act
(FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls
over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the
Consolidated Reports of Condition and Income for Schedules RC, RI, and RI-A. The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Annual Report On Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management’s
statement referring to compliance with laws and regulations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report
dated February 28, 2013 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 28, 2013
109
ITEM 9B.
OTHER INFORMATION
None.
110
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding “Directors, Executive Officers and Corporate Governance” is set forth under the headings
“Proposal No.1: Election of Directors”, “Management—Executive Officers Who are Not Directors” and “Corporate
Governance” in the Company’s 2013 Annual Proxy Statement (“Proxy Statement”) and is incorporated herein by reference.
Information regarding “Compliance with Section 16(a) of the Exchange Act” is set forth under the section “Section 16(a)
Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding the Company’s audit committee financial expert is set forth under the heading “Board Structure and
Compensation—What Committees has the Board Established” in our Proxy Statement and is incorporated by reference.
On February 25, 2004, consistent with the requirements of the Sarbanes-Oxley Act of 2002, the Company adopted a Code
of Ethics applicable to senior financial officers including the principal executive officer. The Code of Ethics was filed as
Exhibit 14 to our 2003 Form 10-K Annual Report and can be accessed electronically by visiting the Company’s website at
www.columbiabank.com.
ITEM 11.
EXECUTIVE COMPENSATION
Information regarding “Executive Compensation” is set forth under the headings “Board Structure and Compensation”
and “Executive Compensation” of the Company’s Proxy Statement and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” is set forth under the heading “Stock Ownership” of the Company’s Proxy Statement and is incorporated herein by
reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding “Certain Relationships and Related Transactions, and Director Independence” is set forth under the
headings “Certain Relationships and Related Transactions” and “Corporate Governance—Director Independence” of the
Company’s Proxy Statement and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding “Principal Accounting Fees and Services” is set forth under the heading “Independent Registered
Public Accounting Firm” of the Company’s Proxy Statement and is incorporated herein by reference.
111
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
PART IV
The Consolidated Financial Statements and related documents set forth in “Item 8. Financial Statements and
Supplementary Data” of this report are filed as part of this report.
(2) Financial Statements Schedules:
All other schedules to the Consolidated Financial Statements required by Regulation S-X are omitted because they are
not applicable, not material or because the information is included in the Consolidated Financial Statements and related notes in
“Item 8. Financial Statements and Supplementary Data” of this report.
(3) Exhibits:
The response to this portion of Item 15 is submitted as a separate section of this report appearing immediately following
the signature page and entitled “Index to Exhibits.”
112
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of February 2013.
SIGNATURES
COLUMBIA BANKING SYSTEM, INC.
(Registrant)
By:
/s/ MELANIE J. DRESSEL
Melanie J. Dressel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated, on the 28th day of February 2013.
Principal Executive Officer:
By:
/s/ MELANIE J. DRESSEL
Melanie J. Dressel
President and Chief Executive Officer
Principal Financial and Accounting Officer:
By:
/s/ CLINT E. STEIN
Clint E. Stein
Executive Vice President and Chief Financial Officer
Melanie J. Dressel, pursuant to a power of attorney that is being filed with the Annual Report on Form 10-K, has signed
this report on February 28, 2013 as attorney in fact for the following directors who constitute a majority of the Board.
[John P. Folsom]
[Frederick M. Goldberg]
[Thomas M. Hulbert]
[Michelle M. Lantow]
[Thomas L. Matson]
/s/ MELANIE J. DRESSEL
Melanie J. Dressel
Attorney-in-fact
February 28, 2013
[S. Mae Numata]
[Daniel C. Regis]
[Donald Rodman]
[William T. Weyerhaeuser]
[James M. Will]
113
INDEX TO EXHIBITS
Exhibit No. Exhibit
2.1
3.1
3.2
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8
10.9*
10.10*
10.11*
Agreement and Plan of Merger between the Company and West Coast Bancorp dated as of September 25,
2012 (1)
Amended and Restated Articles of Incorporation (2)
Amended and Restated Bylaws (3)
Specimen of common stock certificate (4)
Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, copies of instruments defining the rights of holders of
long-term debt and preferred securities are not filed. The Company agrees to furnish a copy thereof to the
Securities and Exchange Commission upon request
Amended and Restated Stock Option and Equity Compensation Plan (5)
Form of Stock Option Agreement (6)
Form of Restricted Stock Agreement (6)
Form of Stock Appreciation Right Agreement (6)
Form of Restricted Stock Unit Agreement (6)
Form of Long Term Restricted Stock Agreement (7)
Amended and Restated Employee Stock Purchase Plan (8)
Office Lease, dated as of December 15, 1999, between the Company and Haub Brothers Enterprises Trust (9)
Employment Agreement between the Bank, the Company and Melanie J. Dressel effective August 1, 2004 (10)
Amendment to Employment Agreement between the Bank, the Company and Melanie J. Dressel effective
February 1, 2009 (11)
Amendment to Employment Agreement effective December 31, 2008 among the Bank, the Company and
Melanie J. Dressel (12)
10.12*
Change in Control Agreement between the Bank and Gary R. Schminkey effective November 15, 2010 (13)
10.13*
10.14*
10.15*
10.16*
10.17*
Form of Change in Control Agreement between the Bank and Andrew McDonald dated June 1, 2009 (6)
Change in Control Agreement between the Bank and Kent L. Roberts dated December 4, 2011 (13)
Change in Control Agreement between the Bank and Mark Nelson dated as of October 23, 2012 (14)
Change in Control Agreement between the Bank and Clint Stein dated as of October 24, 2012 (14)
Form of Long-Term Care Agreement between the Bank, the Company, and each of the following directors: Mr.
Folsom, Mr. Hulbert, Mr. Matson, Mr. Rodman, Mr. Weyerhaeuser and Mr. Will (15)
114
Exhibit No. Exhibit
10.18*
10.19*
Amended and Restated Executive Supplemental Compensation Agreements dated as of May 27, 2009 among
the Company, Columbia State Bank and Melanie J. Dressel, Gary R. Schminkey and Mark W. Nelson,
respectively (16)
Amended and Restated 401 Plus Plan (Deferred Compensation Plan) dated December 14, 2011 for directors
and key employees (13)
10.20*
Form of Supplemental Compensation Agreement between the Bank and Mr. Andrew McDonald (6)
10.21*
Form of Amendment to Supplemental Compensation Agreement effective December 31, 2008 between the
Bank and Andrew L. McDonald (12)
10.22*
Form of Indemnification Agreement between the Company and its directors (12)
10.23*
Town Center Bancorp 2004 Stock Incentive Plan (17)
10.24*
10.25*
10.26*
10.27*
Town Center Bancorp Form of Restricted Stock Award Agreement (17)
Mountain Bank Holding Company Director Stock Option Plan (18)
Mountain Bank Holding Company Form of Non-employee Director Stock Option Agreement (18)
Mountain Bank Holding Company 1999 Employee Stock Option Plan (18)
10.28*
Mountain Bank Holding Company Form of Employee Stock Option Agreement (18)
10.29*
Mt. Rainier National Bank 1990 Stock Option Plan (18)
14
21+
23+
24+
31.1+
31.2+
32+
101**
Code of Ethics (19)
Subsidiaries of the Company
Consent of Deloitte & Touche LLP
Power of Attorney
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Filed Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
The following financial information from Columbia Banking System, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 2012 is formatted in XBRL: (i)Audited Consolidated Balance Sheets, (ii)
Audited Consolidated Statements of Income, (iii) Audited Consolidated Statements of Comprehensive Income,
(iv) Audited Consolidated Statements of Changes in Shareholders' Equity, (v) Audited Consolidated Statements
of Cash Flows, and (vi) Notes to Audited Consolidated Financial Statements.**
115
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed October 25, 2012
Incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2008
Incorporated by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K filed on February 2, 2010
Incorporated by reference to Exhibit 4.3 of the Company's S-3 Registration Statement (File No. 333-156350) filed December 19, 2008
Incorporated by reference to Exhibit 99.1 of the Company's S-8 Registration Statement (File No. 333-160370) filed July 1, 2009
Incorporated by reference to Exhibits 10.2-10.5, 10,10 and 10.16 of the Company's Annual Report on Form 10-K for the year ended December 31, 2007
Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed January 5, 2010
Incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2010
Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000
Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed February 19, 2009
(12)
Incorporated by reference to Exhibits 10.2-10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009
(13)
(14)
(15)
(16)
Incorporated by reference to Exhibits 10.10, 10.14 and 10.15 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011
Incorporated by reference to Exhibits 10.1 and 10.2 of the Company's Current Report on Form 8-K filed October 29, 2012
Incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 of the Company's Current Report on Form 8-K filed on June 2, 2009
(17)
Incorporated by reference to Exhibits 10.1 and 10.2 of the Company's S-8 Registration Statement (File No. 333-145207) filed August 7, 2007
(18)
(19)
Incorporated by reference to Exhibits 99.1-99.5 of the Company's S-8 Registration Statement (File No. 333-144811) filed July 24, 2007
Incorporated by reference to Exhibit 14 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003
* Management contract or compensatory plan or arrangement
+ Filed herewith
** Furnished herewith
116
2012 Annual Report
and Form 10-K
Independent AudItoRs
deloitte & touche LLp
tRAnsFeR Agent And RegIstRAR
American stock transfer & trust Co.
FInAnCIAL InFoRmAtIon
Columbia news and financial results are
available through the Internet and mail.
ReguLAtoRy & seCuRItIes CounseL
graham & dunn pC
stoCK LIstIng
the Company’s common stock trades on the
nasdaq global select market tier of the nasdaq
stock markets under the symbol: CoLB
InteRnet
For information about Columbia Banking
system, Inc., including news and financial
results, product information and service
locations, access our home page on the World
Wide Web at www.columbiabank.com. you
can also view or retrieve copies of Columbia’s
financial reports on the Internet by connecting
to www.sec.gov. Immediate access to the
Company’s quarterly earnings news releases
via the Internet is provided by Company news
on Call at www.prnewswire.com.
1301 A street, tacoma, WA 98402
253-305-1900 / 800-305-1905
ColumbiaBank.com
To Our Shareholders
Board of Directors
Columbia’s commitment to our communities continues.
levels remain well above the standard requirement, giving us the flexibility to consider other options for effective deployment of
When we opened our doors almost twenty years ago with four branches and about $200 million in assets, our goal was to
become a leading, customer-focused Pacific Northwest regional community bank. The merger with West Coast Bancorp
positioned us to achieve that goal. West Coast’s addition to the Columbia family has brought our footprint to about 150
branches throughout Washington and Oregon, over $7 billion in assets and a team of wonderful employees who are truly
committed to their legacy of customer service.
capital.
The FDIC’s most recent deposit market share analysis shows that as of June 30, 2012, Columbia’s ranking was 8th among all
banks operating in Washington State, and 14th in the state of Oregon. Our merger with West Coast will elevate Columbia to
7th in both states; we will be the number one ranked community bank in both Washington and Oregon.
For the second consecutive year, Columbia was ranked as the best bank headquartered in Washington State on the Forbes list
Our commitment to our customers and communities has not wavered despite our significant growth in size and in geographic
of America’s Best Banks; we were also listed as second in the Pacific Northwest and 30th in the country. The ranking reflects
footprint over the past two decades. We will continue to emphasize our strong commitment to the hundreds of community
activities we support not only financially, but also by volunteering our time. As we often say, we want to be the community
our commitment to providing a strong and secure community bank, as well as the accomplishments of our outstanding,
customer-focused employees. We were also very gratified this year to again receive recognition as one of the best places to
bank in every community we serve.
work in Washington by Seattle Business Magazine.
Positive core performance trends – loan growth, credit quality, increased noninterest income and
controlled expenses.
Our core performance measures improved during 2012 compared to the full year 2011. This positive trend was a result
of our ongoing strategic initiatives, and resulted in solid loan growth, improved credit quality metrics, increased levels of
noninterest income and controlled expenses. Our net income was $46.1 million for the year, or $1.16 per diluted common
share, a decrease of 4% from net income of $48.0 million, or $1.21 per diluted common share, for 2011. Comparisons to
2011 are distorted by the favorable impact resulting from one of our FDIC-assisted acquisitions, which bolstered earnings
during the fourth quarter of 2011 by $0.15 per share, or $6.0 million.
Total shareholders’ equity at the end of 2012 was $764.0 million, an increase of 1% from $759.3 million at December 31,
2011. Total assets were approximately $4.91 billion at year-end 2012, up 3% from $4.79 billion at year-end 2011. Our net
interest margin for 2012 was 5.77% as compared to 6.27% for 2011.
Our loan growth in 2012 was a result of our banking teams’ ability to cultivate strong relationships with customers and
prospects throughout our market area. Our noncovered loans (loans not covered under the FDIC loss-sharing agreements)
were $2.53 billion at the end of 2012, up $177 million, or 8%, from $2.35 billion at the end of 2011. We saw the biggest
increase in our commercial business loans, which increased about 12% from the end of 2011, and our commercial real
estate loans, which were up about 9%.
Our commitment to a diversified loan portfolio continues to be a strength for us. At the end of 2012, 45% of our total
portfolio was in commercial business loans, 42% was in commercial real estate loans, 6% in consumer loans, 5% in real
estate construction-related loans, and approximately 2% in the for-sale housing segment.
Our overall loan quality continued its positive trend in 2012. At the end of December 2012, nonperforming, noncovered
assets were $48.5 million, down 43% from $85.4 million at the end of 2011. The allowance for loan losses was 2.07% of
total loans at December 31, 2012 compared to 2.26% at the end of 2011.
We reached $4 billion in total deposits at the end of 2012, a major milestone for our Company. This represented an increase
of 6% from $3.82 billion in 2011. Our core deposits, which are an important factor in maintaining a stable net interest margin,
increased 8% during the year to $3.80 billion, and comprised an exceptional 94% of total deposits.
Our total risk-based capital ratio at December 31, 2012 exceeded 20%, more than double the minimum of 10% required
to be considered “well-capitalized” under regulatory standards. Even after finalizing the West Coast acquisition, our capital
For two years running, Columbia
Bank has been the top-ranked bank
headquartered in Washington state on
Forbes’ list of America’s Best Banks.
© 2012, Forbes Media LLC. Used with permission.
We want to express our deepest thanks to Thomas Matson and Donald Rodman, who have reached the mandatory age for
retiring from our board. Tom has served as a director since 1998, and has been a member of the Compensation, Nominating
and Trust committees. Don has been a director since 1991, serving on the Compensation and Enterprise Risk Management
committees. We are grateful for their wise counsel and valuable contributions to Columbia’s success.
We are delighted to welcome David Dietzler, a former West Coast director, to our board. Previously a managing partner of
KPMG LLP’s office in Portland, Oregon, Dave brings a wealth of experience auditing public companies, SEC reporting, financial
statement preparation, internal control and compliance.
In the coming months, we will focus on our strategic plan to integrate Columbia and West Coast, with both banks playing
essential roles. We anticipate a smooth transition and have eagerly welcomed West Coast’s staff and customers to Columbia.
Additionally, we will continue to keep our bankers externally focused with the intent to continue to drive loan growth, expand
noninterest income, and to develop strong relationships with customers and prospects. Equally as important will be our
continued focus on improving the efficiency of our company. With the additional expense of new regulations and cost of
compliance looming largely for our industry, it will be even more important to optimize our operational structure. Having a
broader base over which to spread infrastructure investments should help with this objective. Without sacrificing customer
service, we plan to deliver our products and services more efficiently, continue to manage our expenses closely and take
advantage of revenue-generating opportunities by introducing our customers to our broad array of services to meet virtually all
We firmly believe we are in a good position to provide long-term benefits for our shareholders, and are looking forward to the
of their financial needs.
exciting opportunities ahead.
Sincerely,
William T. Weyerhaeuser
Chairman of the Board
Melanie J. Dressel
President & Chief Executive Officer
David A. Dietzler
John P. Folsom
Frederick M. Goldberg
Thomas M. Hulbert
Michelle M. Lantow
Thomas L. Matson
S. Mae Fujita Numata
Daniel C. Regis
Donald H. Rodman
James M. Will
Executive Officers
William T. Weyerhaeuser
Chairman of the Board
Columbia Banking System, Inc.
Melanie J. Dressel
President and Chief Executive Officer
Columbia Banking System, Inc. and Columbia Bank
Andy McDonald
Executive Vice President &
Chief Credit Officer
Mark W. Nelson
Executive Vice President &
Chief Operating Officer
Kent L. Roberts
Clint E. Stein
Executive Vice President &
Human Resources Director
Executive Vice President &
Chief Financial Officer
Our people truly make the difference.
Columbia Bank has been recognized repeatedly by several organizations
as the best bank and a great place to work, including:
(cid:116)(cid:1)
(cid:116)(cid:1)
(cid:116)(cid:1)
Puget Sound Business Journal – Best Places to Work
Seattle Business Magazine – Washington’s 100 Best Companies to Work For
South Sound Magazine – Best Bank
2012 Annual Report
Bellingham
Concrete
Everett
Redmond
Bellevue
Seattle
Port Angeles
Hoodsport
Tacoma
Olympia
Puyallup
Centralia
Astoria
Longview
Yakima
Tillamook
The Dalles
Vancouver
Portland
Salem
Newport
Eugene
Bend
Washington
Spokane
Colfax
Pullman
Tri-Cities
Walla Walla
Pendleton
Oregon
1301 A Street, Tacoma, WA 98402
253-305-1900 / 800-305-1905
ColumbiaBank.com
Member FDIC
A combined network of more than 150 branches.
Legacy Columbia Bank Branches
Former West Coast Bank Branches
Building the Premier
Pacific Northwest
Community Bank