COLUMBIA BANKING SYSTEM, INC., 10-Q filed on 5/6/2011
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2011
Apr. 30, 2011
Document and Entity Information
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
2011-03-31 
 
Document Fiscal Year Focus
2011 
 
Entity Registrant Name
COLUMBIA BANKING SYSTEM INC 
 
Entity Central Index Key
0000887343 
 
Current Fiscal Year End Date
12/31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
39,482,955 
Document Fiscal Period Focus
Q1 
 
Consolidated Condensed Statements of Income (USD $)
In Thousands, except Per Share data
3 Months Ended
Mar. 31,
2011
2010
Interest Income
 
 
Loans
$ 47,429 
$ 36,947 
Taxable securities
4,417 
4,745 
Tax-exempt securities
2,467 
2,446 
Federal funds sold and deposits in banks
298 
149 
Total interest income
54,611 
44,287 
Interest Expense
 
 
Deposits
3,079 
4,941 
Federal Home Loan Bank advances
694 
705 
Long-term obligations
251 
249 
Other borrowings
138 
118 
Total interest expense
4,162 
6,013 
Net Interest Income
50,449 
38,274 
Provision for loan and lease losses
0 
15,000 
Provision for losses on covered loans
(422)
0 
Net interest income after provision for loan and lease losses
50,871 
23,274 
Noninterest Income (Loss)
 
 
Service charges and other fees
6,288 
5,424 
Gain on bank acquisitions
0 
9,818 
Merchant services fees
1,633 
1,739 
Gain on sale of investment securities, net
0 
58 
Bank owned life insurance
505 
504 
Change in FDIC loss sharing asset
(14,774)
0 
Other
929 
930 
Total noninterest income (loss)
(5,419)
18,473 
Noninterest Expense
 
 
Compensation and employee benefits
18,921 
16,986 
Occupancy
4,397 
3,969 
Merchant processing
883 
1,100 
Advertising and promotion
901 
838 
Data processing and communications
1,924 
1,879 
Legal and professional fees
1,413 
1,498 
Taxes, licenses and fees
865 
564 
Regulatory premiums
2,195 
1,496 
Net cost of operation of other real estate owned
(442)
1,312 
Amortization of intangibles
984 
787 
Other
5,305 
3,468 
Total noninterest expense
37,346 
33,897 
Income before income taxes
8,106 
7,850 
Income tax provision (benefit)
2,327 
(66)
Net Income
5,779 
7,916 
Net Income Applicable to Common Shareholders
5,779 
6,809 
Earnings per common share
 
 
Basic
0.15 
0.24 
Diluted
0.15 
0.24 
Dividends paid per common share
$ 0.03 
$ 0.01 
Weighted average number of common shares outstanding
39,043 
27,886 
Weighted average number of diluted common shares outstanding
39,156 
28,098 
Consolidated Condensed Balance Sheets (USD $)
In Thousands
3 Months Ended
Mar. 31, 2011
Year Ended
Dec. 31, 2010
ASSETS
 
 
Cash and due from banks
$ 74,973 
$ 55,492 
Interest-earning deposits with banks
401,355 
458,638 
Total cash and cash equivalents
476,328 
514,130 
Securities available for sale at fair value (amortized cost of $864,653 and $743,928, respectively)
888,188 
763,866 
Federal Home Loan Bank stock at cost
17,908 
17,908 
Loans held for sale
542 
754 
Loans, excluding covered loans, net of deferred loan fees of ($3,161) and ($3,490), respectively
1,884,206 
1,915,754 
Less: allowance for loan and lease losses
55,315 
60,993 
Loans, excluding covered loans, net
1,828,891 
1,854,761 
Covered loans, net of allowance for loan losses of ($5,633) and ($6,055), respectively
486,345 
517,061 
Total loans, net
2,315,236 
2,371,822 
FDIC loss sharing asset
193,053 
205,991 
Interest receivable
12,889 
11,164 
Premises and equipment, net
94,131 
93,108 
Other real estate owned ($13,527 and $14,443 covered by FDIC loss share, respectively)
39,608 
45,434 
Goodwill
109,639 
109,639 
Core deposit intangible, net
17,712 
18,696 
Other assets
99,085 
103,851 
Total Assets
4,264,319 
4,256,363 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
Noninterest-bearing
892,751 
895,671 
Interest-bearing
2,443,462 
2,431,598 
Total deposits
3,336,213 
3,327,269 
Federal Home Loan Bank advances
115,265 
119,405 
Securities sold under agreements to repurchase
25,000 
25,000 
Other borrowings
84 
642 
Long-term subordinated debt
25,752 
25,735 
Other liabilities
47,922 
51,434 
Total liabilities
3,550,236 
3,549,485 
Commitments and contingent liabilities
 
 
Shareholders' equity:
 
 
Common Stock (no par value)
577,588 
576,905 
Retained earnings
122,290 
117,692 
Accumulated other comprehensive income
14,205 
12,281 
Total shareholders' equity
714,083 
706,878 
Total Liabilities and Shareholders' Equity
$ 4,264,319 
$ 4,256,363 
Consolidated Condensed Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data
Mar. 31, 2011
Dec. 31, 2010
Consolidated Condensed Balance Sheets
 
 
Securities available for sale, amortized cost
$ 864,653 
$ 743,928 
Deferred loan fees
3,161 
3,490 
Allowance for loan losses
5,633 
6,055 
Covered other real estate owned
13,527 
14,443 
Common stock, authorized shares
63,033 
63,033 
Common stock, Issued and outstanding
39,481 
39,338 
Common stock, par value
$ 0 
$ 0 
Consolidated Condensed Statements of Changes in Shareholders' Equity (USD $)
In Thousands
Preferred Stock [Member]
Common Stock [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Total
Balance, value at Dec. 31, 2009
$ 74,301 
$ 348,706 
$ 93,316 
$ 11,816 
$ 528,139 
Balance, shares at Dec. 31, 2009
77 
28,129 
 
 
 
Comprehensive income:
 
 
 
 
 
Net income
 
 
7,916 
 
7,916 
Other comprehensive income, net of tax:
 
 
 
 
 
Net unrealized gain from securities, net of reclassification adjustments
 
 
 
3,518 
3,518 
Net change in cash flow hedging instruments
 
 
 
(479)
(479)
Net pension plan liability adjustment
 
 
 
30 
30 
Other comprehensive income
 
 
 
 
3,069 
Comprehensive income
 
 
 
 
10,985 
Accretion of preferred stock discount
146 
 
(146)
 
0 
Issuance of common stock - stock option and other plans, value
 
509 
 
 
509 
Issuance of common stock - stock option and other plans, shares
 
41 
 
 
 
Issuance of common stock - restricted stock awards, net of cancelled awards, value
 
350 
 
 
350 
Issuance of common stock - restricted stock awards, net of cancelled awards, shares
 
72 
 
 
 
Tax benefit deficiency associated with share-based compensation
 
(19)
 
 
(19)
Preferred dividends
 
 
(961)
 
(961)
Cash dividends paid on common stock
 
 
(282)
 
(282)
Balance, value at Mar. 31, 2010
74,447 
349,546 
99,843 
14,885 
538,721 
Balance, shares at Mar. 31, 2010
77 
28,242 
 
 
 
Balance, value at Dec. 31, 2010
0 
576,905 
117,692 
12,281 
706,878 
Balance, shares at Dec. 31, 2010
0 
39,338 
 
 
 
Comprehensive income:
 
 
 
 
 
Net income
 
 
5,779 
 
5,779 
Other comprehensive income, net of tax:
 
 
 
 
 
Net unrealized gain from securities, net of reclassification adjustments
 
 
 
2,313 
2,313 
Net change in cash flow hedging instruments
 
 
 
(142)
(142)
Net pension plan liability adjustment
 
 
 
(247)
(247)
Other comprehensive income
 
 
 
 
1,924 
Comprehensive income
 
 
 
 
7,703 
Issuance of common stock - stock option and other plans, value
 
380 
 
 
380 
Issuance of common stock - stock option and other plans, shares
 
23 
 
 
 
Issuance of common stock - restricted stock awards, net of cancelled awards, value
 
335 
 
 
335 
Issuance of common stock - restricted stock awards, net of cancelled awards, shares
 
122 
 
 
 
Repurchase of shares, value
 
(32)
 
 
(32)
Repurchase of shares, shares
 
(2)
 
 
 
Cash dividends paid on common stock
 
 
(1,181)
 
(1,181)
Balance, value at Mar. 31, 2011
$ 0 
$ 577,588 
$ 122,290 
$ 14,205 
$ 714,083 
Balance, shares at Mar. 31, 2011
0 
39,481 
 
 
 
Consolidated Condensed Statements of Cash Flows (USD $)
In Thousands
3 Months Ended
Mar. 31,
2011
2010
Cash Flows From Operating Activities
 
 
Net Income
$ 5,779 
$ 7,916 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
Provision for loan and lease losses
(422)
15,000 
Stock-based compensation expense
335 
350 
Depreciation, amortization and accretion
3,774 
2,903 
Net realized gain on FDIC assisted bank acquisitions
0 
(9,818)
Net realized gain on sale of securities
0 
(58)
Net realized gain on sale of other assets
(3)
(14)
Net realized (gain) loss on sale of other real estate owned
(2,712)
145 
Gain on termination of cash flow hedging instruments
(222)
(743)
Write-down on other real estate owned
1,925 
829 
Deferred income tax benefit
0 
(125)
Net change in:
 
 
Loans held for sale
212 
0 
Interest receivable
(1,725)
(600)
Interest payable
(251)
(145)
Other assets
13,736 
6,493 
Other liabilities
(766)
6,289 
Net cash provided by operating activities
19,660 
28,422 
Cash Flows From Investing Activities
 
 
Loans originated and acquired, net of principal collected
51,870 
75,505 
Purchases of:
 
 
Securities available for sale
(149,799)
(56,469)
Premises and equipment
(2,461)
(10)
Proceeds from:
 
 
Sales of securities available for sale
0 
69,328 
Principal repayments and maturities of securities available for sale
27,315 
21,911 
Disposal of premises and equipment
20 
54 
Sales of covered other real estate owned
6,959 
5,950 
Sales of other real estate and other personal property owned
5,372 
1,361 
Capital improvements on other real estate properties
(251)
(329)
Decrease in Small Business Administration secured borrowings
(558)
0 
Net cash acquired in business combinations
0 
145,534 
Net cash (used in) provided by investing activities
(61,533)
262,835 
Cash Flows From Financing Activities
 
 
Net increase (decrease) in deposits
8,944 
(258,862)
Proceeds from:
 
 
Federal Home Loan Bank advances
100 
0 
Federal Reserve Bank borrowings
100 
0 
Exercise of stock options
380 
490 
Payment for:
 
 
Repayment of Federal Home Loan Bank advances
(4,140)
(30,159)
Repayment of Federal Reserve Bank borrowings
(100)
0 
Preferred stock dividends
0 
(961)
Common stock dividends
(1,181)
(282)
Repurchase of common stock
(32)
0 
Net decrease in other borrowings
0 
(86)
Net cash provided by (used in) financing activities
4,071 
(289,860)
(Decrease) Increase in cash and cash equivalents
(37,802)
1,397 
Cash and cash equivalents at beginning of period
514,130 
305,074 
Cash and cash equivalents at end of period
476,328 
306,471 
Supplemental Information:
 
 
Cash paid for interest
4,413 
6,158 
Non-cash investing activities
 
 
Assets acquired in FDIC assisted acquisitions (excluding cash and cash equivalents)
0 
1,075,166 
Liabilities assumed in FDIC assisted acquisitions
0 
1,210,882 
Loans transferred to other real estate owned
$ 5,467 
$ 3,308 
Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies

1. Basis of Presentation and Significant Accounting Policies

 

(a) Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiary Columbia Bank. All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results to be anticipated for the year ending December 31, 2011. The accompanying interim unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company's 2010 Annual Report on Form 10-K.

 

(b) Significant Accounting Policies

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2010 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2010 10-K disclosure for the year ended December 31, 2010.

Accounting Pronouncements Recently Issued
Accounting Pronouncements Recently Issued

2. Accounting Pronouncements Recently Issued

In April 2011, the Financial Accounting Standards Board ("the FASB") issued Accounting Standards Update ("ASU") 2011-02, A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310). ASU 2011-02 clarifies the criteria for a restructuring to be classified as a TDR. The effective date of ASU 2011-02 will be the first interim or annual period beginning after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The Company is evaluating the impact this ASU will have on its financial condition and results of operations.

Earnings per Common Share
Earnings per Common Share

3. Earnings per Common Share

Basic Earnings Per Share ("EPS") is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Common shares outstanding include common stock and vested restricted stock awards where recipients have satisfied the vesting terms. Diluted EPS reflects the assumed conversion of all dilutive securities, applying the treasury stock method. The Company calculates earnings per share using the two-class method as described in the Earnings per Share topic of the FASB Accounting Standards Codification ("ASC"). The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2011 and 2010:

 

      Three Months Ended
March 31,		  

(in thousands except per share)

   2011     2010  

Basic EPS:

     

Net income

    $ 5,779      $ 7,916   

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

      0        (1,107 ) 
                

Net income applicable to common shareholders

    $ 5,779      $ 6,809   

Less: Earnings allocated to participating securities

      (53 )      (73 ) 
                

Earnings allocated to common shareholders

    $ 5,726      $ 6,736   
                

Weighted average common shares outstanding

      39,043        27,886   

Basic earnings per common share

    $ 0.15      $ 0.24   
                

Diluted EPS:

     

Earnings allocated to common shareholders

    $ 5,726      $ 6,736   
                

Weighted average common shares outstanding

      39,043        27,886   

Dilutive effect of equity awards and warrants

      113        212   
                

Weighted average diluted common shares outstanding

      39,156        28,098   
                

Diluted earnings per common share

    $ 0.15      $ 0.24   
                

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

      54        54   
Securities
Securities

4. Securities

The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities available for sale:

 

(in thousands)

   Amortized
Cost		      Gross
Unrealized
Gains		      Gross
Unrealized
Losses		     Fair Value  

March 31, 2011:

           

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

    $ 612,379       $ 15,739       ($ 1,198 )    $ 626,920   

State and municipal securities

      246,979         10,327         (1,288 )      256,018   

U.S. government agency securities

      2,014         10         0        2,024   

Other securities

      3,281         0         (55 )      3,226   
                                  

Total

    $ 864,653       $ 26,076       ($ 2,541 )    $ 888,188   
                                  

December 31, 2010:

           

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

    $ 491,530       $ 16,139       ($ 1,027 )    $ 506,642   

State and municipal securities

      249,117         7,247         (2,383 )      253,981   

Other securities

      3,281         0         (38 )      3,243   
                                  

Total

    $ 743,928       $ 23,386       ($ 3,448 )    $ 763,866   
                                  

 

The scheduled contractual maturities of investment securities available for sale at March 31, 2011 are presented as follows:

 

     March 31, 2011  
     Amortized
Cost		      Fair Value  
     (in thousands)  

Due within one year

    $ 6,565       $ 6,694   

Due after one year through five years

      59,801         62,138   

Due after five years through ten years

      163,004         168,245   

Due after ten years

      632,002         647,885   
                 

Total investment securities available-for-sale

    $ 861,372       $ 884,962   
                 

The following table summarizes the carrying value of securities pledged as collateral at March 31, 2011:

 

(in thousands)

   Carrying
Amount		  

Washington and Oregon State public deposits

    $ 178,718   

Federal Reserve Bank borrowings

      144,881   

Federal Home Loan Bank advances

      97,162   

Repurchase agreement

      26,734   

Interest rate contracts

      12,407   

Other

      1,427   
        

Total securities pledged as collateral

    $ 461,329   
        

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 March 31, 2011 and December 31, 2010:

March 31, 2011

 

      Less than 12 Months     12 Months or More     Total  

(in thousands)

   Fair
Value		      Unrealized
Losses		     Fair
Value		      Unrealized
Losses		     Fair
Value		      Unrealized
Losses		  

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

    $ 201,951       ($ 1,196 )    $ 493       ($ 2 )    $ 202,444       ($ 1,198 ) 

State and municipal securities

      31,039         (1,051 )      2,840         (237 )      33,879         (1,288 ) 

Other securities

      2,267         (14 )      959         (41 )      3,226         (55 ) 
                                                   

Total

    $ 235,257       ($ 2,261 )    $ 4,292       ($ 280 )    $ 239,549       ($ 2,541 ) 
                                                   

December 31, 2010

                
      Less than 12 Months     12 Months or More     Total  

(in thousands)

   Fair
Value		      Unrealized
Losses		     Fair
Value		      Unrealized
Losses		     Fair
Value		      Unrealized
Losses		  

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

    $ 86,529       ($ 1,025 )    $ 588       ($ 2 )    $ 87,117       ($ 1,027 ) 

State and municipal securities

      74,755         (2,099 )      2,792         (284 )      77,547         (2,383 ) 

Other securities

      2,275         (6 )      968         (32 )      3,243         (38 ) 
                                                   

Total

    $ 163,559       ($ 3,130 )    $ 4,348       ($ 318 )    $ 167,907       ($ 3,448 ) 
                                                   

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

 

Loans
Loans

5. Loans

The following is an analysis of the loan portfolio by major types of loans (net of deferred loan fees):

 

(in thousands)

   March 31,
2011		     December 31,
2010		  

Noncovered loans:

     

Commercial business

    $ 782,565      $ 795,369   

Real Estate:

     

One-to-four family residential

      50,545        49,383   

Commercial and five or more family residential properties

      785,870        794,329   
                

Total real estate

      836,415        843,712   

Real estate construction:

     

One-to-four family residential

      61,097        67,961   

Commercial and five or more family residential properties

      30,072        30,185   
                

Total real estate construction

      91,169        98,146   

Consumer

      177,218        182,017   

Less: deferred loan fees

      (3,161 )      (3,490 ) 
                

Total noncovered loans, net of deferred fees

      1,884,206        1,915,754   

Less: Allowance for loan and lease losses

      (55,315 )      (60,993 ) 
                

Noncovered loans, net

      1,828,891        1,854,761   

Covered loans, net of allowance for loan losses of ($5,633) and ($6,055), respectively

      486,345        517,061   
                

Total loans, net

    $ 2,315,236      $ 2,371,822   
                

Loans held for sale

    $ 542      $ 754   
                

Noncovered Loans

At March 31, 2011 and December 31, 2010, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Substantially all of the Company's loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington and Oregon.

The Company and its banking subsidiary have granted loans to officers and directors of the Company and related interests. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was $11.0 million and $12.9 million at March 31, 2011 and December 31, 2010, respectively. During the first three months of 2011, advances on related party loans were $1.8 million and repayments totaled $3.7 million.

At March 31, 2011 and December 31, 2010, $414.1 million and $426.6 million of commercial and residential real estate loans were pledged as collateral on FHLB borrowings. Additionally, at March 31, 2011, the Company had $84 thousand in Small Business Administration ("SBA") loans pledged as collateral for SBA-secured borrowings.

 

The following is an analysis of nonaccrual loans as of March 31, 2011 and December 31, 2010:

 

      March 31, 2011      December 31, 2010  

(in thousands)

   Recorded
Investment (1)
Nonaccrual
Loans		      Unpaid Principal
Balance
Nonaccrual
Loans		      Recorded
Investment (1)
Nonaccrual
Loans		      Unpaid Principal
Balance
Nonaccrual
Loans		  

Commercial Business

            

Secured

    $ 23,689       $ 32,171       $ 32,368       $ 44,316   

Unsecured

      230         231         0         327   

Real Estate 1-4 Family

            

Residential RE Perm

      3,187         3,558         2,999         3,353   

Real Estate Commercial & Multifamily

            

Commercial RE Land

      6,160         8,945         4,093         6,279   

Income Property Multifamily Perm

      9,384         11,188         11,716         12,737   

Owner Occupied RE Perm

      10,318         10,574         7,407         8,990   

Construction 1-4 Family

            

Land & Acquisition

      9,369         19,275         11,608         21,344   

Residential Construction

      3,663         9,238         6,503         11,547   

Construction Commercial & Multifamily

            

Income Property Multifamily Construction

      7,074         12,892         7,585         12,916   

Owner Occupied RE Construction

      0         0         0         0   

Consumer

      5,713         6,147         5,022         5,192   
                                   

Total

    $ 78,787       $ 114,219       $ 89,301       $ 127,001   
                                   

 

(1) Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest.

 

The following is an analysis of the aged loan portfolio as of March 31, 2011 and December 31, 2010:

 

(in thousands)

   Current
Loans		      30 - 59
Days
Past Due		      60 - 89
Days
Past Due		      Greater
than 90
Days Past
Due		      Total
Past Due		      Nonaccrual
Loans		      Total Loans  

March 31, 2011

                     

Commercial Business

                     

Secured

    $ 716,030       $ 2,839       $ 113       $ 0       $ 2,952       $ 23,671       $ 742,653   

Unsecured

      39,499         136         50         0         186         228         39,913   

Real Estate 1-4 Family

                     

Residential RE Perm

      47,311         50         0         0         50         3,184         50,545   

Real Estate Commercial & Multifamily

                     

Commercial RE Land

      18,052         210         0         0         210         6,155         24,417   

Income Property Multifamily Perm

      420,772         1,026         452         0         1,478         9,370         431,620   

Owner Occupied RE Perm

      317,008         2,513         0         0         2,513         10,312         329,833   

Construction 1-4 Family

                     

Land & Acquisition

      23,574         0         0         0         0         9,365         32,939   

Residential Construction

      22,870         1,665         0         0         1,665         3,622         28,157   

Construction Commercial & Multifamily

                     

Income Property Multifamily Construction

      11,166         0         0         0         0         7,073         18,239   

Owner Occupied RE Construction

      11,832         0         0         0         0         0         11,832   

Consumer

      170,692         609         206         0         815         5,712         177,219   
                                                              

Total

    $ 1,798,806       $ 9,048       $ 821       $ 0       $ 9,869       $ 78,692       $ 1,887,367   
                                                              

December 31, 2010

                     

Commercial Business

                     

Secured

    $ 720,926       $ 919       $ 692       $ 1       $ 1,612       $ 31,919       $ 754,457   

Unsecured

      40,455         9         0         0         9         448         40,912   

Real Estate 1-4 Family

                     

Residential RE Perm

      46,167         220         0         0         220         2,996         49,383   

Real Estate Commercial & Multifamily

                     

Commercial RE Land

      18,979         0         1,752         0         1,752         4,091         24,822   

Income Property Multifamily Perm

      426,320         1,208         121         0         1,329         10,745         438,394   

Owner Occupied RE Perm

      318,508         497         3,752         0         4,249         8,356         331,113   

Construction 1-4 Family

                     

Land & Acquisition

      24,883         214         205         0         419         11,604         36,906   

Residential Construction

      24,655         0         0         0         0         6,400         31,055   

Construction Commercial & Multifamily

                     

Income Property Multifamily Construction

      10,666         0         0         0         0         7,584         18,250   

Owner Occupied RE Construction

      11,935         0         0         0         0         0         11,935   

Consumer

      176,005         397         595         0         992         5,020         182,017   
                                                              

Total

    $ 1,819,499       $ 3,464       $ 7,117       $ 1       $ 10,582       $ 89,163       $ 1,919,244   
                                                              

 

The following is an analysis of noncovered impaired loans as of March 31, 2011 and December 31, 2010:

 

(in thousands)

  Balance  of
Loans
Collectively
Measured for
Contingency
Provision		     Balance of
Loans
Individually
Measured for
Specific
Impairment		     Impaired Loans With
Recorded Allowance		     Impaired Loans Without
Recorded Allowance		     Average
Recorded
Investment
Impaired
Loans (1)		     Interest
Recognized on
Impaired Loans		  
      Recorded
Investment (1)		     Unpaid
Principal
Balance		     Related
Allowance		     Recorded
Investment (1)		     Unpaid
Principal
Balance		      

March 31, 2011

                  

Commercial Business

                  

Secured

   $ 720,865      $ 21,787      $ 12,059      $ 13,247      $ 247      $ 10,345      $ 16,782      $ 26,101      $ 145   

Unsecured

     39,812        102        73        75        73        29        30        103        2   

Real Estate 1-4 Family

                  

Residential RE Perm

     47,687        2,858        70        74        1        2,790        3,083        2,759        4   

Real Estate Commercial & Multifamily

                  

Commercial RE Land

     18,350        6,067        4,713        6,908        58        1,360        1,444        4,970        648   

Income Property Multifamily Perm

     422,156        9,465        311        321        51        9,170        10,866        11,434        10   

Owner Occupied RE Perm

     313,917        15,915        0        0        0        15,959        18,539        15,056        0   

Construction 1-4 Family

                  

Land & Acquisition

     23,421        9,518        5,141        7,915        355        4,380        9,063        10,534        945   

Residential Construction

     24,536        3,622        329        327        34        3,334        8,911        5,082        14   

Construction Commercial & Multifamily

                  

Income Property Multifamily Construction

     11,166        7,073        0        0        0        7,074        12,892        7,329        0   

Owner Occupied RE Construction

     11,832        0        0        0        0        0        0        0        0   

Consumer

     172,295        4,923        0        0        0        4,924        5,228        4,729        0   
                                                                       

Total

   $ 1,806,037      $ 81,330      $ 22,696      $ 28,867      $ 819      $ 59,365      $ 86,838      $ 88,094      $ 1,768   
                                                                       

 

(in thousands)

   Balance  of
Loans
Collectively
Measured for
Contingency
Provision		      Balance of
Loans
Individually
Measured for
Specific
Impairment		      Impaired Loans With
Recorded Allowance		      Impaired Loans Without
Recorded Allowance		  
         Recorded
Investment (1)		      Unpaid
Principal
Balance		      Related
Allowance		      Recorded
Investment (1)		      Unpaid
Principal
Balance		  

December 31, 2010

                     

Commercial Business

                     

Secured

    $ 724,665       $ 29,793       $ 2,717       $ 2,758       $ 600       $ 27,081       $ 26,913   

Unsecured

      40,808         104         75         75         75         29         30   

Real Estate 1-4 Family

                     

Residential RE Perm

      46,728         2,655         0         0         0         2,658         2,949   

Real Estate Commercial & Multifamily

                     

Commercial RE Land

      20,959         3,863         3,062         5,225         0         804         826   

Income Property Multifamily Perm

      427,799         10,595         3,094         3,139         59         10,292         12,253   

Owner Occupied RE Perm

      317,010         14,103         0         0         0         14,152         17,099   

Construction 1-4 Family

                     

Land & Acquisition

      25,362         11,543         533         549         3         11,013         20,718   

Residential Construction

      24,655         6,400         915         1,723         62         5,585         9,824   

Construction Commercial & Multifamily

                     

Income Property Multifamily Construction

      10,666         7,584         6,792         10,515         175         792         2,401   

Owner Occupied RE Construction

      11,935         0         0         0         0         0         0   

Consumer

      177,484         4,533         0         0         0         4,533         4,691   
                                                              

Total

    $ 1,828,071       $ 91,173       $ 17,188       $ 23,984       $ 974       $ 76,939       $ 97,704   
                                                              

 

(1) Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest.

Acquired Loans

Acquired loans accounted for under ASC Topic 310-30, are comprised primarily of covered loans acquired in the Federal Deposit Insurance Corporation (the "FDIC") assisted acquisitions of Columbia River Bank and American Marine Bank and are subject to loss-sharing agreements with the FDIC. Acquired loans subject to loss-sharing agreements with the FDIC are referred to as covered loans. The balance of covered loans, net of allowance for loan losses, was $486.3 million at March 31, 2011.

Under ASC Topic 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Changes in accretable yield for acquired loans were as follows for the three months ended March 31, 2011:

 

      Three months ended
March 31, 2011		  

(in thousands)

   Accretable Yield  

Balance at beginning of period

    $ 256,572   

Accretion

      (21,303 ) 

Cash receipts, disposals and change in cash flows

      (17,918 ) 
        

Balance at end of period

    $ 217,351   
        

 

Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit
Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit

6. 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 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 in which an entity develops a systematic methodology to determine its allowance for loan and lease losses is at the segment level. However, the Company's systematic methodology in determining its allowance for loan and lease losses is prepared at the class level, which is more detailed than the segment level. 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. 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 market place, 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.

The specific valuation allowance is a reserve for each loan determined to be impaired and the value of the impaired loan is 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 dependant 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 the three months ended March 31, 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 pool 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 add to 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 while continuously strengthening loan monitoring systems and controls.

 

The following table shows a detailed analysis of the allowance for loan and lease losses for noncovered loans as of the three months ended March 31, 2011 and the year ended December 31, 2010:

 

(in thousands)

   Beginning
Balance		      Charge-offs     Recoveries      Provision     Ending
Balance		      Specific
Reserve		      General
Allocation		  

March 31, 2011

                   

Commercial Business

                   

Secured

    $ 21,811       ($ 3,287 )    $ 96       $ 3,687      $ 22,307       $ 247       $ 22,060   

Unsecured

      738         (84 )      9         (45 )      618         73         545   

Real Estate 1-4 Family

                   

Residential RE Perm

      1,100         (448 )      0         448        1,100         1         1,099   

Real Estate Commercial & Multifamily

                   

Commercial RE Land

      634         0        0         (79 )      555         58         497   

Income Property Multifamily Perm

      15,210         (365 )      42         (2,591 )      12,296         51         12,245   

Owner Occupied RE Perm

      9,692         0        31         689        10,412         0         10,412   

Construction 1-4 Family

                   

Land & Acquisition

      3,769         (768 )      1,068         (773 )      3,296         355         2,941   

Residential Construction

      2,292         (659 )      36         449        2,118         34         2,084   

Construction Commercial & Multifamily

                   

Income Property Multifamily Construction

      274         (487 )      0         340        127         0         127   

Owner Occupied RE Construction

      70         0        0         (2 )      68         0         68   

Consumer

      2,120         (925 )      63         1,160        2,418         0         2,418   

Unallocated

      3,283         0        0         (3,283 )      0         0         0   
                                                            

Total

    $ 60,993       ($ 7,023 )    $ 1,345       $ 0      $ 55,315       $ 819       $ 54,496   
                                                            

December 31, 2010

                    

Commercial Business

                    

Secured

    $ 20,409       ($ 12,779 )    $ 1,218       $ 12,963       $ 21,811       $ 600       $ 21,211   

Unsecured

      1,560         (2,100 )      1,171         107         738         75         663   

Real Estate 1-4 Family

                    

Residential RE Perm

      1,072         (406 )      15         419         1,100         0         1,100   

Real Estate Commercial & Multifamily

                    

Commercial RE Land

      664         (2,165 )      0         2,135         634         0         634   

Income Property Multifamily Perm

      9,860         (1,969 )      124         7,195         15,210         59         15,151   

Owner Occupied RE Perm

      6,690         (2,039 )      2         5,039         9,692         0         9,692   

Construction 1-4 Family

                    

Land & Acquisition

      5,711         (8,409 )      1,199         5,268         3,769         3         3,766   

Residential Construction

      2,304         (2,447 )      474         1,961         2,292         62         2,230   

Construction Commercial & Multifamily

                    

Income Property Multifamily Construction

      2,453         (3,107 )      775         153         274         175         99   

Owner Occupied RE Construction

      36         0        0         34         70         0         70   

Consumer

      1,282         (3,982 )      649         4,171         2,120         0         2,120   

Unallocated

      1,437         0        0         1,846         3,283         0         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:

 

      Three Months Ended
March  31,		  

(in thousands)

   2011      2010  

Beginning balance

    $ 1,165       $ 775   

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

      495         40   
                 

Ending balance

    $ 1,660       $ 815   
                 

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:

 

  1) ratings of 1-3 indicate minimal to low credit risk,

 

  2) ratings of 4-5 indicate an average to above average credit risk with adequate repayment capacity when prolonged periods of adversity do not exist,

 

  3) ratings of 6-7 indicate potential weaknesses and higher credit risk requiring greater attention by bank personnel and management to help prevent further deterioration,

 

  4) rating of 8 indicates a loss is possible if loan weaknesses are not corrected,

 

  5) rating of 9 indicates loss is highly probable; however, the amount of loss has not yet been determined,

 

  6) 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 non-accrual 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.

The following is an analysis of the credit quality of our noncovered loan portfolio as of March 31, 2011 and December 31, 2010:

 

     March 31, 2011      December 31, 2010  

(dollars in thousands)

   Weighted-
Average
Risk Rating		      Recorded
Investment
Noncovered
Loans (1)		      Weighted-
Average
Risk Rating		      Recorded
Investment
Noncovered
Loans (1)		  

Commercial Business

            

Secured

      4.98       $ 745,141         4.96       $ 757,372   

Unsecured

      4.46         37,536         4.23         41,175   

Real Estate 1-4 Family

            

Residential RE Perm

      4.93         50,720         4.96         49,436   

Real Estate Commercial & Multifamily

            

Commercial RE Land

      5.90         24,545         5.75         24,956   

Income Property Multifamily Perm

      5.03         433,411         5.07         406,711   

Owner Occupied RE Perm

      5.14         331,245         5.12         366,284   

Construction 1-4 Family

            

Land & Acquisition

      6.71         33,065         6.79         37,054   

Residential Construction

      6.48         28,334         6.63         31,293   

Construction Commercial & Multifamily

            

Income Property Multifamily Construction

      5.72         18,290         6.38         18,296   

Owner Occupied RE Construction

      4.87         11,898         4.93         11,990   

Consumer

      4.41         177,465         4.31         182,624   
                       

Total recorded investment of noncovered loans

       $ 1,891,650          $ 1,927,191   
                       

 

(1) Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest.

 

The following is an analysis of our covered loans, net of related allowance for losses on covered loans as of March 31, 2011 and December 31, 2010:

 

(dollars in thousands)

   Covered Loans
March 31, 2011		      Weighted-
Average
Risk Rating		      Allowance
for Loan
Losses		  

Commercial Business

    $ 144,388         5.76       $ 861   

Real Estate 1-4 Family

      62,281         4.75         327   

Real Estate Commercial & Multifamily

      329,192         5.68         2,731   

Construction 1-4 Family

      37,283         7.42         937   

Construction Commercial & Multifamily

      32,290         6.68         628   

Consumer

      53,976         4.52         149   
                    

Subtotal of covered loans

      659,410          $ 5,633   
              

Less:

         

Valuation discount resulting from acquisition accounting

      167,432         

Allowance for loan losses

      5,633         
              

Covered loans, net of allowance for loan losses

    $ 486,345         
              

(dollars in thousands)

   Covered Loans
December 31, 2010		      Weighted-
Average
Risk Rating		      Allowance
for Loan
Losses		  

Commercial Business

    $ 165,255         5.74       $ 2,903   

Real Estate 1-4 Family

      68,700         4.77         1,013   

Real Estate Commercial & Multifamily

      341,063         5.70         821   

Construction 1-4 Family

      39,754         7.29         98   

Construction Commercial & Multifamily

      41,624         6.79         469   

Consumer

      58,337         4.49         751   
                    

Subtotal of covered loans

      714,733          $ 6,055   
              

Less:

         

Valuation discount resulting from acquisition accounting

      191,617         

Allowance for loan losses

      6,055         
              

Covered loans, net of allowance for loan losses

    $ 517,061         
              

Acquired 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. Management monitors and estimates expected future cash flows of acquired loans on a quarterly basis. Acquired 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 a majority of the losses are recoverable from the FDIC under the loss sharing agreements.

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.

During the quarter ended March 31, 2011, the Company recorded a $422 thousand provision expense recapture for losses on covered loans. Of this amount, $482 thousand was impairment expense calculated in accordance with ASC 310-30 and $904 thousand was negative provision to adjust the allowance for loss calculated under ASC 450-20 for draws on acquired loans. The impact to earnings of the $422 thousand of provision expense recapture for covered loans was offset through noninterest income by a $338 thousand decrease in the FDIC loss sharing asset.

 

Changes in Other Real Estate Owned
Changes in Other Real Estate Owned

7. Changes in Other Real Estate Owned

The following table sets forth activity in noncovered OREO for the period:

 

(in thousands)

   March 31,
2011		  

Noncovered OREO:

   

Balance, beginning of period

    $ 30,991   

Transfers in, net of write-downs ($91 and $193, respectively)

      2,042   

OREO improvements

      251   

Additional OREO write-downs

      (1,910 ) 

Proceeds from sale of OREO property

      (5,372 ) 

Gain on sale of OREO

      79   
        

Total noncovered OREO, end of period

    $ 26,081   
        

The following table sets forth activity in covered OREO at carrying value for the period:

 

(in thousands)

   March 31,
2011		  

Covered OREO:

   

Balance, beginning of period

    $ 14,443   

Established through acquisitions

      0   

Transfers in, net of write-downs ($418 and $2,087, respectively)

      3,425   

OREO improvements

      0   

Additional OREO write-downs

      (15 ) 

Proceeds from sale of OREO property

      (6,959 ) 

Gain on sale of OREO

      2,633   
        

Total covered OREO, end of period

    $ 13,527   
        

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% of additional write-downs and losses on covered OREO sales if the minimum loss share thresholds are met.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

8. 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 during the third quarter 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. The Company completed its annual goodwill impairment test during the third quarter of 2010 and determined the fair value of the Company's single reporting unit exceeded its carrying value.

The core deposit intangible ("CDI") is evaluated for impairment if events and circumstances indicate a possible impairment. The CDI is amortized on an accelerated basis over an estimated life of approximately 10 years.

 

The following table sets forth activity for goodwill and intangible assets for the period:

 

     Three Months Ended
March 31,		  

(in thousands)

   2011     2010  

Total goodwill, beginning of period

    $ 109,639      $ 95,519   

Established through acquisitions

      0        14,120   
                

Total goodwill, end of period

      109,639        109,639   
                

Gross core deposit intangible balance, beginning of period

      26,651        8,896   

Accumulated amortization, beginning of period

      (7,955 )      (4,033 ) 
                

Core deposit intangible, net, beginning of period

      18,696        4,863   

Established through acquisitions

      0        17,755   

CDI current period amortization

      (984 )      (787 ) 
                

Total core deposit intangible, end of period

      17,712        21,831   
                

Total goodwill and intangible assets, end of period

    $ 127,351      $ 131,470   
                

The following table provides the estimated future amortization expense of core deposit intangibles for the remaining nine months ending December 31, 2011 and the succeeding four years:

 

(in thousands)

   Amount  

Year ending December 31,

   

2011

    $ 2,842   

2012

      3,441   

2013

      3,066   

2014

      2,604   

2015

      1,958   
Shareholders' Equity
Shareholders' Equity

9. Shareholders' Equity

Common Stock. On February 3, 2011, the Company declared a quarterly cash dividend of $0.03 per share, payable on March 3, 2011 to shareholders of record as of the close of business on February 17, 2011. 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. Subsequent to quarter end, on April 27 the Company declared a quarterly cash dividend of $0.05 per share, payable on May 25, 2011 to shareholders of record at the close of business May 11, 2011.

Comprehensive Income
Comprehensive Income

10. Comprehensive Income

The components of comprehensive income are as follows:

 

      Three Months Ended
March 31,		  

(in thousands)

   2011     2010  

Net income as reported

    $ 5,779      $ 7,916   

Unrealized gain from securities:

     

Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($1,284) and ($1,956)

      2,313        3,556   

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $0 and $20

      0        (38 ) 
                

Net unrealized gain from securities, net of reclassification adjustment

      2,313        3,518   

Cash flow hedging instruments:

     

Reclassification adjustment of net gain included in income, net of tax of $79 and $264

      (142 )      (479 ) 
                

Net change in cash flow hedging instruments

      (142 )      (479 ) 

Pension plan liability adjustment:

     

Net unrealized gain (loss) from unfunded defined benefit plan liability arising during the period, net of tax of $154 and $(12)

      (261 )      23   

Less: amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($8) and $(4)

      14        7   
                

Pension plan liability adjustment, net

      (247 )      30   
                

Total comprehensive income

    $ 7,703      $ 10,985   
                
Fair Value Accounting and Measurement
Fair Value Accounting and Measurement

11. 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 matrix pricing based on the securities' relationship to other benchmark quoted prices, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC are considered a Level 2 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.

The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis at March 31, 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:

 

(in thousands)

    Fair value  at
March 31, 2011		      Fair Value Measurements at Reporting Date Using  
      Level 1      Level 2      Level 3  

Assets

            

Securities available for sale

            

U.S. government agency

    $ 2,024       $ 0       $ 2,024       $ 0   

U.S. government agency and sponsored enterprise mortgage-back securities and collateralized mortgage obligations

      626,920         0         626,920         0   

State and municipal debt securities

      256,018         0         256,018         0   

Other securities

      3,226         0         3,226         0   
                                   

Total securities available for sale

    $ 888,188       $ 0       $ 888,188       $ 0   

Other assets (Interest rate contracts)

    $ 9,050       $ 0       $ 9,050       $ 0   

Liabilities

            

Other liabilities (Interest rate contracts)

    $ 9,050       $ 0       $ 9,050       $ 0   

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 by the fair market value of the collateral less estimated costs to sell.

Other real estate owned - OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is recorded at the lower of the carrying amount of the loan 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 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 following table presents information about the Company's assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made and not necessarily the fair value at the reporting date.

 

     Fair value  at
March 31, 2011		      Fair Value Measurements at
Reporting Date Using		      Losses During  the
Three Months Ended
March 31, 2011		  

(in thousands)

      Level 1      Level2      Level 3     

Impaired loans

    $ 31,712       $ 0       $ 0       $ 31,712       $ 4,908   

Non-covered OREO

      4,490         0         0         4,490         2,001   
                                            
   $ 36,202       $ 0       $ 0       $ 36,202       $ 6,909   
                                            

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 non-covered OREO disclosed above represent the writedowns taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent writedowns from updated appraisals that were charged to earnings.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

12. 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.

Securities available for sale—Securities at fair value are priced using matrix pricing based on the securities' relationship to other benchmark quoted prices.

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 March 31, 2011 for loans which mirror the attributes of the loans with similar rate structures and average maturities. Commercial loans and construction loans, which are variable rate and short-term are reflected with fair values equal to carrying value. 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.

FDIC loss sharing asset - The FDIC loss sharing asset is considered to have a fair value that approximates carrying value.

Interest rate contracts—Interest rate swap positions are valued in models, which use as their basis, readily observable market parameters.

Deposits —For deposits with no contractual maturity, the fair value is equal to the carrying value. 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.

FHLB and FRB borrowings—The fair value of Federal Home Loan Bank of Seattle (the "FHLB") advances and Federal Reserve Bank of San Francisco (the "FRB") borrowings are estimated based on discounting the future cash flows using the market rate currently offered.

Repurchase Agreements—The fair value of securities sold under agreement to repurchase are estimated based on discounting the future cash flows using the market rate currently offered.

Long-term subordinated debt—The fair value of long-term subordinated debt are estimated based on discounting the future cash flows using an estimated market rate.

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 as well as assumptions used by the Company in estimating fair value:

 

      March 31, 2011      December 31, 2010  
     Carrying
Amount		      Fair
Value		      Carrying
Amount		      Fair
Value		  
     (in thousands)  

Assets

            

Cash and due from banks

    $ 74,973       $ 74,973       $ 55,492       $ 55,492   

Interest-earning deposits with banks

      401,355         401,355         458,638         458,638   

Securities available for sale

      888,188         888,188         763,866         763,866   

FHLB stock

      17,908         17,908         17,908         17,908   

Loans held for sale

      542         542         754         754   

Loans

      2,315,236         2,440,528         2,371,822         2,525,113   

FDIC loss sharing asset

      193,053         193,053         205,991         205,991   

Interest rate contracts

      9,050         9,050         10,167         10,167   

Liabilities

            

Deposits

    $ 3,336,213       $ 3,336,809       $ 3,327,269       $ 3,330,616   

FHLB Advances

      115,265         117,725         119,405         122,722   

Repurchase agreements

      25,000         27,175         25,000         27,251   

Other borrowings

      84         84         642         642   

Long-term subordinated debt

      25,752         23,455         25,735         20,156   

Interest rate contracts

      9,050         9,050         10,167         10,167   
Derivatives and Hedging Activities
Derivatives and Hedging Activities

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 following table presents the fair value of derivative instruments at March 31, 2011 and 2010:

 

     Asset Derivatives      Liability Derivatives  
As of March 31,    2011      2010      2011      2010  
(in thousands)    Balance Sheet
Location		      Fair
Value		      Balance Sheet
Location		      Fair
Value		      Balance Sheet
Location		      Fair
Value		      Balance Sheet
Location		      Fair
Value		  

Derivatives not designated as hedging instruments

                        

Interest rate contracts

      Other assets       $ 9,050         Other assets       $ 13,623         Other liabilities       $ 9,050         Other liabilities       $ 13,623