COLB 10-Q Quarterly Report Sept. 30, 2015 | Alphaminr
COLUMBIA BANKING SYSTEM, INC.
ALPHAMINR

COLB 10-Q Quarter ended Sept. 30, 2015

Balance Sheet
Cash Flow
Income Statement
COLUMBIA BANKING SYSTEM, INC.
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10-Q 1 colb093015pub10-q.htm 10-Q 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015 .
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number 0-20288
________________________________________________________
COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________
Washington
91-1422237
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
1301 A Street
Tacoma, Washington
98402-2156
(Address of principal executive offices)
(Zip Code)
(253) 305-1900
(Issuer’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No ý
The number of shares of common stock outstanding at October 31, 2015 was 57,730,550 .


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


PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
September 30,
2015
December 31,
2014
ASSETS
(in thousands)
Cash and due from banks
$
149,610

$
171,221

Interest-earning deposits with banks
22,578

16,949

Total cash and cash equivalents
172,188

188,170

Securities available for sale at fair value (amortized cost of $2,004,728 and $2,087,069, respectively)
2,027,424

2,098,257

Federal Home Loan Bank stock at cost
10,242

33,365

Loans held for sale
6,637

1,116

Loans, net of unearned income of ($45,436) and ($59,374), respectively
5,746,511

5,445,378

Less: allowance for loan and lease losses
69,049

69,569

Loans, net
5,677,462

5,375,809

FDIC loss-sharing asset
8,146

15,174

Interest receivable
30,486

27,802

Premises and equipment, net
168,495

172,090

Other real estate owned
19,456

22,190

Goodwill
382,762

382,537

Other intangible assets, net
25,229

30,459

Other assets
227,457

231,877

Total assets
$
8,755,984

$
8,578,846

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
$
3,386,968

$
2,651,373

Interest-bearing
3,927,837

4,273,349

Total deposits
7,314,805

6,924,722

Federal Home Loan Bank advances
6,540

216,568

Securities sold under agreements to repurchase
73,182

105,080

Other borrowings
—

8,248

Other liabilities
107,321

96,053

Total liabilities
7,501,848

7,350,671

Commitments and contingent liabilities


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

2,000

Issued and outstanding
9

9

2,217

2,217

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

63,033

Issued and outstanding
57,729

57,437

989,088

985,839

Retained earnings
250,005

234,498

Accumulated other comprehensive income
12,826

5,621

Total shareholders’ equity
1,254,136

1,228,175

Total liabilities and shareholders’ equity
$
8,755,984

$
8,578,846

See accompanying Notes to unaudited Consolidated Financial Statements.

1

CONSOLIDATED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2015
2014
2015
2014
(in thousands except per share amounts)
Interest Income
Loans
$
72,242

$
65,903

$
214,808

$
198,448

Taxable securities
7,472

8,545

22,258

21,679

Tax-exempt securities
2,920

2,624

8,972

7,913

Deposits in banks
31

61

84

105

Total interest income
82,665

77,133

246,122

228,145

Interest Expense
Deposits
756

713

2,244

2,194

Federal Home Loan Bank advances
78

80

391

309

Other borrowings
137

120

419

358

Total interest expense
971

913

3,054

2,861

Net Interest Income
81,694

76,220

243,068

225,284

Provision for loan and lease losses
2,831

980

6,242

5,019

Net interest income after provision for loan and lease losses
78,863

75,240

236,826

220,265

Noninterest Income
Service charges and other fees
15,893

14,254

46,636

40,980

Merchant services fees
2,422

2,104

6,802

6,014

Investment securities gains, net
236

33

1,300

552

Bank owned life insurance
1,086

956

3,370

2,897

Change in FDIC loss-sharing asset
(1,635
)
(4,816
)
(2,979
)
(14,685
)
Other
4,497

3,399

11,599

8,807

Total noninterest income
22,499

15,930

66,728

44,565

Noninterest Expense
Compensation and employee benefits
35,175

32,559

112,721

94,961

Occupancy
8,101

7,445

24,781

24,276

Merchant processing
1,090

1,080

3,146

3,058

Advertising and promotion
1,354

1,027

3,480

2,746

Data processing and communications
3,796

4,269

13,022

11,469

Legal and professional fees
2,173

2,905

7,527

7,377

Taxes, licenses and fees
1,344

1,156

4,003

3,387

Regulatory premiums
1,084

1,195

3,626

3,444

Net cost (benefit) of operation of other real estate owned
240

(1,256
)
(1,569
)
(1,207
)
Amortization of intangibles
1,695

1,456

5,230

4,516

Other
8,015

8,146

23,305

21,105

Total noninterest expense
64,067

59,982

199,272

175,132

Income before income taxes
37,295

31,188

104,282

89,698

Income tax provision
11,515

9,605

32,195

27,044

Net Income
$
25,780

$
21,583

$
72,087

$
62,654

Earnings per common share
Basic
$
0.45

$
0.41

$
1.25

$
1.20

Diluted
$
0.45

$
0.41

$
1.25

$
1.18

Dividends paid per common share
$
0.34

$
0.28

$
0.98

$
0.64

Weighted average number of common shares outstanding
57,051

52,112

57,007

51,772

Weighted average number of diluted common shares outstanding
57,064

52,516

57,021

52,479

See accompanying Notes to unaudited Consolidated Financial Statements.

2

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Columbia Banking System, Inc.
(Unaudited)
Three Months Ended
September 30,
2015
2014
(in thousands)
Net income
$
25,780

$
21,583

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) from securities:
Net unrealized holding gain (loss) from available for sale securities arising during the period, net of tax of ($5,765) and $2,310
10,126

(4,057
)
Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $85 and $12
(151
)
(21
)
Net unrealized gain (loss) from securities, net of reclassification adjustment
9,975

(4,078
)
Pension plan liability adjustment:
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($35) and ($13)
62

23

Pension plan liability adjustment, net
62

23

Other comprehensive income (loss)
10,037

(4,055
)
Total comprehensive income
$
35,817

$
17,528

Nine Months Ended
September 30,
2015
2014
(in thousands)
Net income
$
72,087

$
62,654

Other comprehensive income, net of tax:
Unrealized gain from securities:
Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($4,647) and ($6,731)
8,161

11,830

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $471 and $200
(829
)
(352
)
Net unrealized gain from securities, net of reclassification adjustment
7,332

11,478

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

Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($87) and ($40)
153

71

Pension plan liability adjustment, net
(127
)
71

Other comprehensive income
7,205

11,549

Total comprehensive income
$
79,292

$
74,203

See accompanying Notes to unaudited Consolidated Financial Statements.


3

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

$
2,217

57,437

$
985,839

$
234,498

$
5,621

$
1,228,175

Net income
—

—

—

—

72,087

—

72,087

Other comprehensive income
—

—

—

—

—

7,205

7,205

Issuance of common stock - stock option and other plans
—

—

46

1,194

—

—

1,194

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

—

277

2,934

—

—

2,934

Purchase and retirement of common stock
—

—

(31
)
(879
)
—

—

(879
)
Preferred dividends
—

—

—

—

(100
)
—

(100
)
Cash dividends paid on common stock
—

—

—

—

(56,480
)
—

(56,480
)
Balance at September 30, 2015
9

$
2,217

57,729

$
989,088

$
250,005

$
12,826

$
1,254,136

Balance at January 1, 2014
9

$
2,217

51,265

$
860,562

$
202,514

$
(12,044
)
$
1,053,249

Net income
—

—

—

—

62,654

—

62,654

Other comprehensive income
—

—

—

—

—

11,549

11,549

Issuance of common stock - cashless exercise of warrants
—

—

1,140

—

—

—

—

Activity in deferred compensation plan
—

—

—

(1
)
—

—

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

—

40

915

—

—

915

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

—

228

2,041

—

—

2,041

Purchase and retirement of common stock
—

—

(24
)
(605
)
—

—

(605
)
Preferred dividends
—

—

—

—

(66
)
—

(66
)
Cash dividends paid on common stock
—

—

—

—

(33,525
)
—

(33,525
)
Balance at September 30, 2014
9

$
2,217

52,649

$
862,912

$
231,577

$
(495
)
$
1,096,211


See accompanying Notes to unaudited Consolidated Financial Statements.

4

CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
Nine Months Ended September 30,
2015
2014 (1)
(in thousands)
Cash Flows From Operating Activities
Net income
$
72,087

$
62,654

Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan and lease losses
6,242

5,019

Stock-based compensation expense
2,934

2,041

Depreciation, amortization and accretion
21,892

21,956

Investment securities gain, net
(1,300
)
(552
)
Net realized (gain) loss on sale of other assets
(241
)
566

Net realized gain on sale and valuation adjustments of other real estate owned (1)
(1,798
)
(1,735
)
Net realized gain on sale of branches
—

(565
)
Originations of loans held for sale (1)
(57,249
)
(18,137
)
Proceeds from sales of loans held for sale (1)
52,983

18,424

Net gain on sale of loans held for sale (1)
(1,255
)
(501
)
Net change in:
Interest receivable
(2,684
)
(3,092
)
Interest payable
(136
)
(61
)
Other assets
(1,618
)
(5,567
)
Other liabilities
11,012

6,749

Net cash provided by operating activities
100,869

87,199

Cash Flows From Investing Activities
Loans originated and acquired, net of principal collected
(314,768
)
(310,185
)
Purchases of:
Securities available for sale
(218,734
)
(127,728
)
Premises and equipment
(7,351
)
(10,530
)
Federal Home Loan Bank stock
(7,360
)
—

Proceeds from:
FDIC reimbursement on loss-sharing asset
4,195

4,607

Sales of securities available for sale
82,776

55,834

Principal repayments and maturities of securities available for sale
204,322

134,882

Sales of premises and equipment, Federal Home Loan Bank stock and loans held for investment
44,615

1,470

Sales of other real estate and other personal property owned (1)
13,254

24,688

Payments to FDIC related to loss-sharing asset
(1,472
)
(3,384
)
Net cash paid in branch sale
—

(16,788
)
Net cash used in investing activities
(200,523
)
(247,134
)
Cash Flows From Financing Activities
Net increase in deposits
390,083

307,103

Net decrease in sweep repurchase agreements
(31,898
)
—

Proceeds from:
Federal Home Loan Bank advances
1,467,000

1,308,000

Federal Reserve Bank borrowings
1,010

800

Exercise of stock options
1,194

915

Payments for:
Repayment of Federal Home Loan Bank advances
(1,677,000
)
(1,338,000
)
Repayment of Federal Reserve Bank borrowings
(1,010
)
(800
)
Common stock dividends
(56,480
)
(33,525
)
Preferred stock dividends
(100
)
(66
)
Repayment of other borrowings
(8,248
)
—

Purchase and retirement of common stock
(879
)
(605
)
Net cash provided by financing activities
83,672

243,822

Increase (decrease) in cash and cash equivalents
(15,982
)
83,887

Cash and cash equivalents at beginning of period
188,170

179,561

Cash and cash equivalents at end of period
$
172,188

$
263,448


5

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Columbia Banking System, Inc.
(Unaudited)
Nine Months Ended September 30,
2015
2014 (1)
(in thousands)
Supplemental Information:
Cash paid during the period for:
Cash paid for interest
$
3,190

$
2,922

Cash paid for income tax
$
19,054

$
11,230

Non-cash investing and financing activities
Loans transferred to other real estate owned
$
8,751

$
8,930

__________
(1) Reclassified to conform to the current period’s presentation. There were no changes to cash flows from operating, investing or financing activities as a result of these reclassifications.

See accompanying Notes to unaudited Consolidated Financial Statements.

6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include the accounts of Columbia Banking System, Inc. (“we”, “our”, “Columbia” or the “Company”) and its subsidiaries, including its wholly owned banking subsidiary Columbia State Bank (“Columbia Bank” or the “Bank”) and West Coast Trust Company, Inc. (“West Coast Trust”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the nine months ended September 30, 2015 are not necessarily indicative of results to be anticipated for the year ending December 31, 2015 . The accompanying interim unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2014 Annual Report on Form 10-K.
Our results of operations for the three and nine month periods ended September 30, 2015 include the acquisition of Intermountain Community Bancorp (“Intermountain”) for the entire period. However, the results of operations for the prior year periods do not include the acquisition. See Note 3, Business Combinations, for further information regarding this acquisition.
Significant Accounting Policies
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2014 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2014 Form 10-K disclosure for the year ended December 31, 2014 .
2.
Accounting Pronouncements Recently Issued
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers . The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update was to be effective for interim and annual periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU 2015-14, which delayed the effective date of ASU 2014-09 by one year and permits companies to voluntarily adopt the new standard as of the original effective date. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments . the amendments in ASU 2015-16 require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in ASU 2015-16 are effective for years beginning after December 15, 2015. Early adoption is permitted for reporting periods for which financial statements have not been issued. The Company adopted the amendments in ASU 2015-16 during the current quarter.
3.
Business Combinations
On November 1, 2014 , the Company completed its acquisition of Intermountain. The Company paid $131.9 million in total consideration to acquire 100% of the equity interests of Intermountain. The primary reason for the acquisition was to expand the Company’s geographic footprint into the state of Idaho, consistent with its ongoing growth strategy.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of the November 1, 2014 acquisition date. Initial accounting for deferred taxes was provisionally measured as of November 1, 2014 . During the current quarter, the provisionally measured deferred taxes were finalized. The resulting adjustment was a decrease in other assets of $225 thousand

7

and a corresponding increase in goodwill of $225 thousand . There was no impact to earnings as a result of these adjustments. These adjustments were recorded as current period adjustments pursuant to the Company’s early adoption of ASU 2015-16. The application of the acquisition method of accounting resulted in recognition of goodwill of $38.8 million and a core deposit intangible of $10.9 million , or 1.75% of core deposits. The goodwill represents the excess purchase price over the fair value of the net assets acquired. The goodwill is not deductible for income tax purposes.
The table below summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:
November 1, 2014
(in thousands)
Purchase price as of November 1, 2014
$
131,935

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

Investment securities
299,458

Federal Home Loan Bank stock
2,124

Acquired loans
502,595

Interest receivable
4,656

Premises and equipment
20,696

Other real estate owned
2,752

Core deposit intangible
10,900

Other assets
35,128

Deposits
(736,795
)
Other borrowings
(22,904
)
Securities sold under agreements to repurchase
(59,043
)
Other liabilities
(13,725
)
Total fair value of identifiable net assets
93,125

Goodwill
$
38,810

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

8

For illustrative purposes only, the following table presents certain unaudited pro forma information for the nine month period ended September 30, 2014 . This unaudited pro forma information was calculated as if Intermountain had been acquired as of the beginning of the year prior to the date of acquisition. The unaudited pro forma information combines the historical results of Intermountain with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective period. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. In particular, no adjustments have been made to eliminate the impact of other-than-temporary impairment losses and losses recognized on the sale of securities that may not have been necessary had the investment securities been recorded at fair value as of the beginning of the year prior to the date of acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value. Additionally, Columbia expects to achieve further operating cost savings and other business synergies, including revenue growth, as a result of the acquisition which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.
Unaudited Pro Forma
Nine Months Ended September 30,
2014
(in thousands except per share)
Total revenues (net interest income plus noninterest income)
$
300,151

Net income
$
66,788

Earnings per share - basic
$
1.19

Earnings per share - diluted
$
1.18

In connection with the Intermountain acquisition, Columbia recognized $428 thousand and $9.0 million in acquisition-related expenses for the three and nine month periods ended September 30, 2015 , respectively, and recognized $459 thousand in acquisition-related expenses for the three and nine month periods ended September 30, 2014 . In addition, related to the acquisition of West Coast Bancorp (“West Coast”) which was completed on April 1, 2013, Columbia recognized $72 thousand in acquisition-related expenses for the nine month period ended September 30, 2015 , and $2.8 million and $4.4 million in acquisition-related expenses for the three and nine month periods ended September 30, 2014 , respectively.
The following table shows the impact of the acquisition-related expenses related to the acquisition of Intermountain for the three and nine month periods ended September 30, 2015 to the various components of noninterest expense:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Noninterest Expense
Compensation and employee benefits
$
—

$
—

$
3,308

$
—

Occupancy
181

—

1,484

—

Advertising and promotion
40

27

383

27

Data processing and communications
42

—

1,780

—

Legal and professional fees
71

388

1,089

388

Other
94

44

929

44

Total impact of acquisition-related costs to noninterest expense
$
428

$
459

$
8,973

$
459

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

9

4.
Securities
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities available for sale:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(in thousands)
September 30, 2015
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
1,157,054

$
12,610

$
(5,132
)
$
1,164,532

State and municipal securities
476,650

13,574

(755
)
489,469

U.S. government agency and government-sponsored enterprise securities
345,309

2,922

(375
)
347,856

U.S. government securities
20,431

1

(32
)
20,400

Other securities
5,284

31

(148
)
5,167

Total
$
2,004,728

$
29,138

$
(6,442
)
$
2,027,424

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

$
10,219

$
(8,210
)
$
1,162,387

State and municipal securities
483,578

14,432

(1,526
)
496,484

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

856

(4,069
)
413,706

U.S. government securities
20,910

—

(411
)
20,499

Other securities
5,284

20

(123
)
5,181

Total
$
2,087,069

$
25,527

$
(14,339
)
$
2,098,257

Proceeds from sales of securities available-for-sale were $10.6 million and $25.1 million for the three months ended September 30, 2015 and 2014 , respectively, and were $82.8 million and $55.8 million for the nine months ended September 30, 2015 and 2014 , respectively. The following table provides the gross realized gains and losses on the sales of securities for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2015
2014
2015
2014
(in thousands)
Gross realized gains
$
236

$
33

$
1,310

$
552

Gross realized losses
—

—

(10
)
—

Net realized gains
$
236

$
33

$
1,300

$
552


10

The scheduled contractual maturities of investment securities available for sale at September 30, 2015 are presented as follows:
September 30, 2015
Amortized Cost
Fair Value
(in thousands)
Due within one year
$
22,054

$
22,320

Due after one year through five years
418,087

421,722

Due after five years through ten years
543,698

553,422

Due after ten years
1,015,605

1,024,793

Other securities with no stated maturity
5,284

5,167

Total investment securities available-for-sale
$
2,004,728

$
2,027,424

The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:
September 30, 2015
(in thousands)
Washington and Oregon State to secure public deposits
$
328,476

Federal Reserve Bank to secure borrowings
55,578

Other securities pledged
149,032

Total securities pledged as collateral
$
533,086

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2015 and December 31, 2014 :
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
September 30, 2015
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
124,092

$
(804
)
$
204,165

$
(4,328
)
$
328,257

$
(5,132
)
State and municipal securities
37,808

(161
)
29,960

(594
)
67,768

(755
)
U.S. government agency and government-sponsored enterprise securities
500

(1
)
54,892

(374
)
55,392

(375
)
U.S. government securities
—

—

9,925

(32
)
9,925

(32
)
Other securities
—

—

2,807

(148
)
2,807

(148
)
Total
$
162,400

$
(966
)
$
301,749

$
(5,476
)
$
464,149

$
(6,442
)
December 31, 2014
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
258,825

$
(1,287
)
$
279,015

$
(6,924
)
$
537,840

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

(543
)
44,148

(982
)
115,174

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

(518
)
216,221

(3,551
)
321,471

(4,069
)
U.S. government securities
—

—

19,450

(411
)
19,450

(411
)
Other securities
2,313

(2
)
2,834

(121
)
5,147

(123
)
Total
$
437,414

$
(2,350
)
$
561,668

$
(11,989
)
$
999,082

$
(14,339
)

11

At September 30, 2015 , there were 75 U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations securities in an unrealized loss position, of which 38 were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015 .
At September 30, 2015 , there were 57 state and municipal government securities in an unrealized loss position, of which 28 were in a continuous loss position for 12 months or more. The unrealized losses on state and municipal securities were caused by interest rate changes or widening of market spreads subsequent to the purchase of the individual securities. Management monitors published credit ratings of these securities for adverse changes. As of September 30, 2015 , none of the rated obligations of state and local government entities held by the Company had a below investment grade credit rating. Because the credit quality of these securities are investment grade and the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015 .
At September 30, 2015 , there were six U.S. government agency and government-sponsored enterprise securities in an unrealized loss position, five of which were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not currently intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015 .
At September 30, 2015 , there was one U.S. government security in an unrealized loss position which was in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where this investment falls within the yield curve and its 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 upon maturity, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2015 .
At September 30, 2015 , there was one other security in an unrealized loss position, which was in a continuous unrealized loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates and the additional risk premium investors are demanding for investment securities with these characteristics. The Company does not consider this investment to be other-than-temporarily impaired at September 30, 2015 as it has the intent and ability to hold the investment for sufficient time to allow for recovery in the market value.
5.
Loans
The Company’s loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments are referred to collectively as loans, excluding purchased credit impaired loans. Purchased loans for which there was, at acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or “PCI loans.”

12

The following is an analysis of the loan portfolio by major types of loans (net of unearned income):
September 30, 2015
December 31, 2014
Loans, excluding PCI loans
PCI Loans
Total
Loans, excluding PCI loans
PCI Loans
Total
(in thousands)
Commercial business
$
2,354,731

$
39,919

$
2,394,650

$
2,119,565

$
44,505

$
2,164,070

Real estate:
One-to-four family residential
177,108

25,122

202,230

175,571

26,993

202,564

Commercial and multifamily residential
2,449,847

101,382

2,551,229

2,363,541

128,769

2,492,310

Total real estate
2,626,955

126,504

2,753,459

2,539,112

155,762

2,694,874

Real estate construction:
One-to-four family residential
136,783

2,401

139,184

116,866

4,021

120,887

Commercial and multifamily residential
134,097

2,007

136,104

134,443

2,321

136,764

Total real estate construction
270,880

4,408

275,288

251,309

6,342

257,651

Consumer
348,315

20,235

368,550

364,182

23,975

388,157

Less: Net unearned income
(45,436
)
—

(45,436
)
(59,374
)
—

(59,374
)
Total loans, net of unearned income
5,555,445

191,066

5,746,511

5,214,794

230,584

5,445,378

Less: Allowance for loan and lease losses
(55,059
)
(13,990
)
(69,049
)
(53,233
)
(16,336
)
(69,569
)
Total loans, net
$
5,500,386

$
177,076

$
5,677,462

$
5,161,561

$
214,248

$
5,375,809

Loans held for sale
$
6,637

$
—

$
6,637

$
1,116

$
—

$
1,116

At September 30, 2015 and December 31, 2014 , the Company had no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon and Idaho.
The Company has made loans to executive officers and directors of the Company and related interests. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was $10.1 million at September 30, 2015 and $13.2 million at December 31, 2014 . During the first nine months of 2015 , there were $6 thousand in advances and $3.1 million in repayments.
At September 30, 2015 and December 31, 2014 , $2.17 billion and $1.08 billion of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank of Des Moines (“FHLB”) borrowings and additional borrowing capacity. The Company has also pledged $52.1 million and $46.0 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at September 30, 2015 and December 31, 2014 , respectively.



13

The following is an analysis of nonaccrual loans as of September 30, 2015 and December 31, 2014 :
September 30, 2015
December 31, 2014
Recorded
Investment
Nonaccrual
Loans
Unpaid Principal
Balance
Nonaccrual
Loans
Recorded
Investment
Nonaccrual
Loans
Unpaid Principal
Balance
Nonaccrual
Loans
(in thousands)
Commercial business:
Secured
$
9,512

$
15,560

$
16,552

$
21,453

Unsecured
638

732

247

269

Real estate:
One-to-four family residential
2,012

3,430

2,822

5,680

Commercial & multifamily residential:
Commercial land
700

786

821

1,113

Income property
1,923

1,997

3,200

5,521

Owner occupied
1,694

1,840

3,826

5,837

Real estate construction:
One-to-four family residential:
Land and acquisition
575

591

95

112

Residential construction
897

1,040

370

370

Commercial & multifamily residential:
Owner occupied
470

489

480

489

Consumer
659

902

2,939

3,930

Total
$
19,080

$
27,367

$
31,352

$
44,774


14

Loans, excluding purchased credit impaired loans
The following is an aging of the recorded investment of the loan portfolio as of September 30, 2015 and December 31, 2014 :
Current
Loans
30 - 59
Days
Past Due
60 - 89
Days
Past Due
Greater
than 90
Days Past
Due
Total
Past Due
Nonaccrual
Loans
Total Loans
September 30, 2015
(in thousands)
Commercial business:
Secured
$
2,251,545

$
3,734

$
1,177

$
—

$
4,911

$
9,512

$
2,265,968

Unsecured
82,826

247

28

—

275

638

83,739

Real estate:
One-to-four family residential
170,390

1,053

662

—

1,715

2,012

174,117

Commercial & multifamily residential:
Commercial land
206,597

735

380

—

1,115

700

208,412

Income property
1,318,021

1,492

1,028

—

2,520

1,923

1,322,464

Owner occupied
894,172

204

244

—

448

1,694

896,314

Real estate construction:
One-to-four family residential:
Land and acquisition
13,960

—

—

—

—

575

14,535

Residential construction
120,410

—

—

—

—

897

121,307

Commercial & multifamily residential:
Income property
63,182

—

—

—

—

—

63,182

Owner occupied
67,793

980

—

—

980

470

69,243

Consumer
333,275

2,167

63

—

2,230

659

336,164

Total
$
5,522,171

$
10,612

$
3,582

$
—

$
14,194

$
19,080

$
5,555,445

Current
Loans
30 - 59
Days
Past Due
60 - 89
Days
Past Due
Greater
than 90
Days Past
Due
Total
Past Due
Nonaccrual
Loans
Total Loans
December 31, 2014
(in thousands)
Commercial business:
Secured
$
2,004,418

$
5,137

$
6,149

$
1,372

$
12,658

$
16,552

$
2,033,628

Unsecured
79,661

185

—

—

185

247

80,093

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

1,700

45

—

1,745

2,822

171,764

Commercial & multifamily residential:
Commercial land
187,470

1,454

34

—

1,488

821

189,779

Income property
1,294,982

3,031

786

—

3,817

3,200

1,301,999

Owner occupied
839,689

937

289

—

1,226

3,826

844,741

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

953

—

—

953

95

16,510

Residential construction
97,821

326

—

4

330

370

98,521

Commercial & multifamily residential:
Income property
73,783

—

—

—

—

—

73,783

Owner occupied
57,470

—

994

—

994

480

58,944

Consumer
341,032

933

118

10

1,061

2,939

345,032

Total
$
5,158,985

$
14,656

$
8,415

$
1,386

$
24,457

$
31,352

$
5,214,794


15


The following is an analysis of impaired loans as of September 30, 2015 and December 31, 2014 :
Recorded Investment
of Loans
Collectively Measured
for Contingency
Provision
Recorded Investment
of Loans
Individually
Measured for
Specific
Impairment
Impaired Loans With
Recorded Allowance
Impaired Loans Without
Recorded Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
September 30, 2015
(in thousands)
Commercial business:
Secured
$
2,260,544

$
5,424

$
1,402

$
1,412

$
1,020

$
4,022

$
5,312

Unsecured
83,739

—

—

—

—

—

—

Real estate:
One-to-four family residential
171,669

2,448

317

341

84

2,131

2,903

Commercial & multifamily residential:
Commercial land
208,412

—

—

—

—

—

—

Income property
1,320,287

2,177

—

—

—

2,177

2,336

Owner occupied
889,085

7,229

571

571

17

6,658

9,137

Real estate construction:
One-to-four family residential:
Land and acquisition
13,854

681

106

106

64

575

591

Residential construction
120,414

893

—

—

—

893

893

Commercial & multifamily residential:
Income property
63,182

—

—

—

—

—

—

Owner occupied
69,243

—

—

—

—

—

—

Consumer
336,136

28

14

15

14

14

85

Total
$
5,536,565

$
18,880

$
2,410

$
2,445

$
1,199

$
16,470

$
21,257

Recorded Investment
of Loans
Collectively Measured
for Contingency
Provision
Recorded Investment
of Loans
Individually
Measured for
Specific
Impairment
Impaired Loans With
Recorded Allowance
Impaired Loans Without
Recorded Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
December 31, 2014
(in thousands)
Commercial business:
Secured
$
2,023,104

$
10,524

$
99

$
99

$
25

$
10,425

$
12,410

Unsecured
80,091

2

2

2

2

—

—

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

2,145

424

465

120

1,721

2,370

Commercial & multifamily residential:
Commercial land
189,779

—

—

—

—

—

—

Income property
1,295,650

6,349

—

—

—

6,349

10,720

Owner occupied
835,895

8,846

582

582

27

8,264

12,732

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

109

109

109

67

—

—

Residential construction
98,521

—

—

—

—

—

—

Commercial & multifamily residential:
Income property
73,783

—

—

—

—

—

—

Owner occupied
58,944

—

—

—

—

—

—

Consumer
344,908

124

—

—

—

124

201

Total
$
5,186,695

$
28,099

$
1,216

$
1,257

$
241

$
26,883

$
38,433


16

The following table provides additional information on impaired loans for the three and nine month periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
Average Recorded
Investment
Impaired Loans
Interest Recognized
on
Impaired Loans
Average Recorded
Investment
Impaired Loans
Interest Recognized
on
Impaired Loans
Average Recorded
Investment
Impaired Loans
Interest Recognized
on
Impaired Loans
Average Recorded
Investment
Impaired Loans
Interest Recognized
on
Impaired Loans
(in thousands)
Commercial business:
Secured
$
6,507

$
3

$
6,869

$
17

$
8,602

$
10

$
6,550

$
50

Unsecured
—

—

15

—

1

—

23

1

Real estate:
One-to-four family residential
3,315

11

2,307

14

3,238

35

2,082

37

Commercial & multifamily residential:
Commercial land
—

—

94

—

118

—

102

—

Income property
2,061

10

7,345

69

3,114

27

6,891

205

Owner occupied
6,665

65

9,117

239

7,302

533

9,629

715

Real estate construction:
One-to-four family residential:
Land and acquisition
825

1

111

1

685

4

840

4

Residential construction
893

—

—

—

670

—

—

—

Consumer
27

1

142

2

216

3

152

7

Total
$
20,293

$
91

$
26,000

$
342

$
23,946

$
612

$
26,269

$
1,019


17

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) during the three and nine months ended September 30, 2015 and 2014 :
Three months ended September 30, 2015
Three months ended September 30, 2014
Number of TDR Modifications
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of TDR Modifications
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
(dollars in thousands)
Commercial business:
Secured
4

$
2,903

$
2,903

—

$
—

$
—

Real estate:
Commercial and multifamily residential:
Owner occupied
—

—

—

1

1,496

1,496

Total
4

$
2,903

$
2,903

1

$
1,496

$
1,496

Nine months ended September 30, 2015
Nine months ended September 30, 2014
Number of TDR Modifications
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of TDR Modifications
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
(dollars in thousands)
Commercial business:
Secured
4

$
2,903

$
2,903

4

$
759

$
759

Real estate:
One-to-four family residential
1

30

30

2

494

494

Commercial and multifamily residential:
Income property
—

—

—

1

143

126

Owner occupied
—

—

—

1

1,496

1,496

Total
5

$
2,933

$
2,933

8

$
2,892

$
2,875

The Company’s loans classified as TDR are loans that have been modified or the borrower has been granted special concessions due to financial difficulties that, if not for the challenges of the borrower, the Company would not otherwise consider. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended. The concessions granted in the restructurings completed in the three and nine month periods ending September 30, 2015 and 2014 largely consisted of maturity extensions, interest rate modifications or a combination of both. In limited circumstances, a reduction in the principal balance of the loan could also be made as a concession. Credit losses for loans classified as TDR are measured on the same basis as impaired loans. For impaired loans, an allowance is established when the collateral value less selling costs (or discounted cash flows or observable market price) of the impaired loan is lower than the recorded investment of that loan.
The Company had no commitments to lend additional funds on loans classified as TDR as of September 30, 2015 and December 31, 2014 . The Company did not have any loans modified as TDR that defaulted within twelve months of being modified as TDR during the three and nine month periods ended September 30, 2015 and 2014 .
Purchased Credit Impaired Loans (“PCI Loans”)
PCI loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. Loans that have common risk characteristics are aggregated into pools. The Company remeasures contractual and expected cash flows, at the pool-level, on a quarterly basis.
Contractual cash flows are calculated based upon the loan pool terms after applying a prepayment factor. Calculation of the applied prepayment factor for contractual cash flows is the same as described below for expected cash flows.
Inputs to the determination of expected cash flows include cumulative default and prepayment data as well as loss severity and recovery lag information. Cumulative default and prepayment data are calculated via a transition matrix. The transition matrix is a matrix of probability values that specifies the probability of a loan pool transitioning into a particular delinquency state (e.g. 0-30 days past due, 31 to 60 days, etc.) given its delinquency state at the remeasurement date. Loss severity factors

18

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.
The excess of cash flows expected to be collected over the initial fair value of purchased credit impaired loans is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes of indices for acquired loans with variable interest rates.
The following is an analysis of our PCI loans, net of related allowance for losses and remaining valuation discounts as of September 30, 2015 and December 31, 2014 :
September 30, 2015
December 31, 2014
(in thousands)
Commercial business
$
44,234

$
50,334

Real estate:
One-to-four family residential
28,575

31,981

Commercial and multifamily residential
108,895

140,398

Total real estate
137,470

172,379

Real estate construction:
One-to-four family residential
2,447

4,353

Commercial and multifamily residential
2,225

2,588

Total real estate construction
4,672

6,941

Consumer
22,477

26,814

Subtotal of PCI loans
208,853

256,468

Less:
Valuation discount resulting from acquisition accounting
17,787

25,884

Allowance for loan losses
13,990

16,336

PCI loans, net of allowance for loan losses
$
177,076

$
214,248

The following table shows the changes in accretable yield for PCI loans for the three and nine months ended September 30, 2015 and 2014 :
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Balance at beginning of period
$
67,283

$
92,511

$
73,849

$
103,907

Accretion
(5,049
)
(8,034
)
(17,105
)
(28,658
)
Disposals
256

(357
)
(1,796
)
(3,183
)
Reclassifications from nonaccretable difference
350

(3,589
)
7,892

8,465

Balance at end of period
$
62,840

$
80,531

$
62,840

$
80,531

6.
Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit
Loans, excluding PCI loans
We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:
1.
General valuation allowance consistent with the Contingencies topic of the FASB ASC.
2.
Classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with the Receivables topic of the FASB ASC.
3.
The unallocated allowance provides for other factors inherent in our loan portfolio that may not have been contemplated in the general and specific components of the allowance. This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed quarterly based on trends in credit losses, the results of credit reviews and overall economic trends.

19

The general valuation allowance is calculated quarterly using quantitative and qualitative information about specific loan classes. The minimum required level with respect to which an entity develops a methodology to determine its ALLL is by general categories of loans, such as commercial business, real estate, and consumer. However, the Company’s methodology in determining its ALLL is prepared in a more detailed manner at the loan class level, utilizing specific categories such as commercial business secured, commercial business unsecured, real estate commercial land, and real estate income property multifamily. The quantitative information uses historical losses from a specific loan class and incorporates the loan’s risk rating migration from origination to the point of loss based upon the consideration of an appropriate look back period.
A loan’s risk rating is primarily determined based upon the borrower’s ability to fulfill its debt obligation from a cash flow perspective. In the event there is financial deterioration of the borrower, the borrower’s other sources of income or repayment are also considered, including recent appraisal values for collateral dependent loans. The qualitative information takes into account general economic and business conditions affecting our marketplace, seasoning of the loan portfolio, duration of the business cycle, etc. to ensure our methodologies reflect the current economic environment and other factors as using historical loss information exclusively may not give an accurate estimate of inherent losses within the Company’s loan portfolio.
When a loan is deemed to be impaired, the Company has to determine if a specific valuation allowance is required for that loan. The specific valuation allowance is a reserve, calculated at the individual loan level, for each loan determined to be both impaired and containing a value less than its recorded investment. The Company measures the impairment based on the discounted expected future cash flows, observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent or if foreclosure is probable. The specific reserve for each loan is equal to the difference between the recorded investment in the loan and its determined impairment value.
The ALLL is increased by provisions for loan and lease losses (“provision”) charged to expense, and is reduced by loans charged off, net of recoveries or a recovery of previous provisions. While the Company’s management believes the best information available is used to determine the ALLL, changes in market conditions could result in adjustments to the ALLL, affecting net income, if circumstances differ from the assumptions used in determining the ALLL.
We have used the same methodology for ALLL calculations during the nine months ended September 30, 2015 and 2014 . Adjustments to the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each class of loans. The Company reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments when appropriate. The Company continues to strive towards maintaining a conservative approach to credit quality and will continue to make revisions to our ALLL as necessary to maintain adequate reserves. The Company carefully monitors the loan portfolio and continues to emphasize the importance of credit quality.
Once it is determined that all or a portion of a loan balance is uncollectable, and the amount can be reasonably estimated, the uncollectable portion of the loan is charged-off.
PCI Loans
Purchased credit impaired loans that have common risk characteristics are aggregated into loan pools. When required, we record impairment, at the pool-level, to adjust the pool’s carrying value to its net present value of expected future cash flows. Quarterly, we re-measure expected loan pool cash flows. If, due to credit deterioration, the present value of expected cash flows is less than carrying value, we reduce the loan pool’s carrying value by adjusting the ALLL with an impairment charge to earnings which is recorded as provision for loan losses. If credit quality improves and the present value of expected cash flows exceeds carrying value, we increase the loan pool’s carrying value by recapturing previously recorded ALLL, if any. See Note 5, Loans, for further discussion of the accounting for PCI loans.
Credit losses attributable to draws on purchased credit impaired loans, advanced subsequent to the loan purchase date, are accounted for under ASC 450-20 and those amounts are also subject to the Company’s internal and external credit review. An ALLL is estimated in a similar manner as loans, excluding PCI loans, and a provision for loan losses is charged to earnings as necessary.

20

The following tables show a detailed analysis of the ALLL for the three and nine months ended September 30, 2015 and 2014 :
Beginning
Balance
Charge-offs
Recoveries
Provision (Recovery)
Ending
Balance
Specific
Reserve
General
Allocation
Three months ended September 30, 2015
(in thousands)
Commercial business:
Secured
$
27,708

$
(2,439
)
$
530

$
5,189

$
30,988

$
1,020

$
29,968

Unsecured
857

(131
)
93

471

1,290

—

1,290

Real estate:
One-to-four family residential
1,355

—

261

(420
)
1,196

84

1,112

Commercial & multifamily residential:
Commercial land
1,581

—

130

123

1,834

—

1,834

Income property
8,197

(83
)
273

22

8,409

—

8,409

Owner occupied
5,801

(115
)
14

473

6,173

17

6,156

Real estate construction:
One-to-four family residential:
Land and acquisition
497

—

98

(206
)
389

64

325

Residential construction
958

—

7

(250
)
715

—

715

Commercial & multifamily residential:
Income property
407

—

2

(68
)
341

—

341

Owner occupied
441

—

—

(31
)
410

—

410

Consumer
3,182

(311
)
297

49

3,217

14

3,203

Purchased credit impaired
16,174

(3,198
)
1,533

(519
)
13,990

—

13,990

Unallocated
2,099

—

—

(2,002
)
97

—

97

Total
$
69,257

$
(6,277
)
$
3,238

$
2,831

$
69,049

$
1,199

$
67,850

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

$
(5,847
)
$
1,242

$
9,670

$
30,988

$
1,020

$
29,968

Unsecured
927

(235
)
208

390

1,290

—

1,290

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

(297
)
288

(1,076
)
1,196

84

1,112

Commercial & multifamily residential:
Commercial land
799

—

130

905

1,834

—

1,834

Income property
9,159

(126
)
3,532

(4,156
)
8,409

—

8,409

Owner occupied
5,007

(115
)
36

1,245

6,173

17

6,156

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

—

101

(909
)
389

64

325

Residential construction
1,860

—

40

(1,185
)
715

—

715

Commercial & multifamily residential:
Income property
622

—

7

(288
)
341

—

341

Owner occupied
434

—

—

(24
)
410

—

410

Consumer
3,180

(1,521
)
707

851

3,217

14

3,203

Purchased credit impaired
16,336

(10,174
)
5,262

2,566

13,990

—

13,990

Unallocated
1,844

—

—

(1,747
)
97

—

97

Total
$
69,569

$
(18,315
)
$
11,553

$
6,242

$
69,049

$
1,199

$
67,850


21

Beginning
Balance
Charge-offs
Recoveries
Provision (Recovery)
Ending
Balance
Specific
Reserve
General
Allocation
Three months ended September 30, 2014
(in thousands)
Commercial business:
Secured
$
25,519

$
(1,348
)
$
333

$
243

$
24,747

$
39

$
24,708

Unsecured
754

—

23

112

889

11

878

Real estate:
One-to-four family residential
1,083

—

63

230

1,376

124

1,252

Commercial & multifamily residential:
Commercial land
470

—

51

(124
)
397

—

397

Income property
10,511

—

83

(784
)
9,810

—

9,810

Owner occupied
4,990

(7
)
5

(193
)
4,795

31

4,764

Real estate construction:
One-to-four family residential:
Land and acquisition
403

—

3

876

1,282

68

1,214

Residential construction
677

—

18

1,103

1,798

—

1,798

Commercial & multifamily residential:
Income property
414

—

—

535

949

—

949

Owner occupied
166

—

—

168

334

—

334

Consumer
2,643

(620
)
340

502

2,865

—

2,865

Purchased credit impaired
19,801

(3,236
)
1,888

(520
)
17,933

—

17,933

Unallocated
1,864

—

—

(1,168
)
696

—

696

Total
$
69,295

$
(5,211
)
$
2,807

$
980

$
67,871

$
273

$
67,598

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

$
(3,188
)
$
2,216

$
(5,308
)
$
24,747

$
39

$
24,708

Unsecured
696

(110
)
342

(39
)
889

11

878

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

(207
)
103

228

1,376

124

1,252

Commercial & multifamily residential:
Commercial land
489

(29
)
70

(133
)
397

—

397

Income property
9,234

(1,934
)
601

1,909

9,810

—

9,810

Owner occupied
3,605

(1,030
)
44

2,176

4,795

31

4,764

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

—

44

628

1,282

68

1,214

Residential construction
822

—

461

515

1,798

—

1,798

Commercial & multifamily residential:
Income property
285

—

—

664

949

—

949

Owner occupied
58

—

—

276

334

—

334

Consumer
2,547

(2,256
)
931

1,643

2,865

—

2,865

Purchased credit impaired
20,174

(11,350
)
5,690

3,419

17,933

—

17,933

Unallocated
1,655

—

—

(959
)
696

—

696

Total
$
72,454

$
(20,104
)
$
10,502

$
5,019

$
67,871

$
273

$
67,598


22

Changes in the allowance for unfunded commitments and letters of credit, a component of other liabilities in the consolidated balance sheet, are summarized as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2015
2014
2015
2014
(in thousands)
Balance at beginning of period
$
2,930

$
2,355

$
2,655

$
2,505

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

150

275

—

Balance at end of period
$
2,930

$
2,505

$
2,930

$
2,505

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

23

The following is an analysis of the credit quality of our loan portfolio, excluding PCI loans, as of September 30, 2015 and December 31, 2014 :
Pass
Special Mention
Substandard
Doubtful
Loss
Total
September 30, 2015
(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured
$
2,162,946

$
48,884

$
54,138

$
—

$
—

$
2,265,968

Unsecured
81,902

17

1,820

—

—

83,739

Real estate:
One-to-four family residential
170,685

53

3,379

—

—

174,117

Commercial and multifamily residential:
Commercial land
200,404

6,850

1,158

—

—

208,412

Income property
1,307,536

6,580

8,348

—

—

1,322,464

Owner occupied
870,085

7,363

18,866

—

—

896,314

Real estate construction:
One-to-four family residential:
Land and acquisition
14,379

—

156

—

—

14,535

Residential construction
120,011

—

1,296

—

—

121,307

Commercial and multifamily residential:
Income property
63,182

—

—

—

—

63,182

Owner occupied
68,371

—

872

—

—

69,243

Consumer
333,721

—

2,443

—

—

336,164

Total
$
5,393,222

$
69,747

$
92,476

$
—

$
—

5,555,445

Less:
Allowance for loan and lease losses
55,059

Loans, excluding PCI loans, net
$
5,500,386

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

$
15,790

$
54,628

$
—

$
—

$
2,033,628

Unsecured
79,534

—

559

—

—

80,093

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

55

7,795

—

—

171,764

Commercial and multifamily residential:
Commercial land
183,701

4,217

1,861

—

—

189,779

Income property
1,287,729

5,885

8,385

—

—

1,301,999

Owner occupied
825,694

7,876

11,171

—

—

844,741

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

167

1,036

—

—

16,510

Residential construction
96,031

909

1,581

—

—

98,521

Commercial and multifamily residential:
Income property
73,783

—

—

—

—

73,783

Owner occupied
58,055

—

889

—

—

58,944

Consumer
339,695

68

5,269

—

—

345,032

Total
$
5,086,653

$
34,967

$
93,174

$
—

$
—

5,214,794

Less:
Allowance for loan and lease losses
53,233

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


24

The following is an analysis of the credit quality of our PCI loan portfolio as of September 30, 2015 and December 31, 2014 :
Pass
Special Mention
Substandard
Doubtful
Loss
Total
September 30, 2015
(in thousands)
PCI loans:
Commercial business:
Secured
$
34,524

$
198

$
8,070

$
—

$
—

$
42,792

Unsecured
1,422

—

20

—

—

1,442

Real estate:
One-to-four family residential
25,581

—

2,994

—

—

28,575

Commercial and multifamily residential:
Commercial land
8,711

—

665

—

—

9,376

Income property
39,457

—

7,007

—

—

46,464

Owner occupied
51,073

—

1,982

—

—

53,055

Real estate construction:
One-to-four family residential:
Land and acquisition
1,168

—

500

—

—

1,668

Residential construction
767

—

12

—

—

779

Commercial and multifamily residential:
Income property
1,322

—

—

—

—

1,322

Owner occupied
903

—

—

—

—

903

Consumer
21,369

—

1,108

—

—

22,477

Total
$
186,297

$
198

$
22,358

$
—

$
—

208,853

Less:
Valuation discount resulting from acquisition accounting
17,787

Allowance for loan losses
13,990

PCI loans, net
$
177,076

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

$
937

$
9,223

$
—

$
—

$
48,087

Unsecured
2,156

—

91

—

—

2,247

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

—

3,159

—

—

31,981

Commercial and multifamily residential:
Commercial land
9,104

—

6,240

—

—

15,344

Income property
51,435

1,892

7,186

—

—

60,513

Owner occupied
58,629

346

5,566

—

—

64,541

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

—

913

—

—

2,508

Residential construction
741

—

1,104

—

—

1,845

Commercial and multifamily residential:
Income property
1,435

—

227

—

—

1,662

Owner occupied
926

—

—

—

—

926

Consumer
24,037

—

2,777

—

—

26,814

Total
$
216,807

$
3,175

$
36,486

$
—

$
—

256,468

Less:
Valuation discount resulting from acquisition accounting
25,884

Allowance for loan losses
16,336

PCI loans, net
$
214,248


25

7.
Other Real Estate Owned (“OREO”)
The following tables set forth activity in OREO for the three and nine months ended September 30, 2015 and 2014 :
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Balance, beginning of period
$
20,617

$
28,254

$
22,190

$
35,927

Transfers in
915

1,089

8,751

8,930

Valuation adjustments
(664
)
(667
)
(1,457
)
(3,220
)
Proceeds from sale of OREO property
(1,675
)
(8,755
)
(13,283
)
(24,688
)
Gain on sale of OREO, net
263

1,983

3,255

4,955

Balance, end of period
$
19,456

$
21,904

$
19,456

$
21,904

At September 30, 2015 , the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession was $2.8 million and the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $1.9 million .
8. FDIC Loss-sharing Asset and Covered Assets
We are a party to eight loss-sharing agreements with the FDIC relating to four FDIC-assisted acquisitions. Such agreements cover a substantial portion of losses incurred on acquired covered loans and OREO. The loss-sharing agreements relate to the acquisitions of (1) Columbia River Bank in January 2010, (2) American Marine Bank in January 2010, (3) Summit Bank in May 2011, and (4) First Heritage Bank in May 2011. Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries up to specified amounts. With respect to loss-sharing agreements for two acquisitions completed in 2010, after those specified amounts, the FDIC will absorb 95% of losses and share in 95% of loss recoveries. The loss-sharing provisions of the agreements for non-single family and single family mortgage loans are in effect for five and ten years, respectively and the loss recovery provisions are in effect for eight and ten years, respectively. The loss-sharing provisions for the Columbia River Bank and American Marine Bank non-single family covered assets were effective through March 31, 2015. Accordingly, further activity will be limited to recoveries through the first quarter of 2018 for assets covered by these loss-sharing agreements.
Ten years and forty-five days after the applicable acquisition dates, the Bank must pay to the FDIC a clawback in the event the losses from the acquisitions fail to reach stated levels. The amount of the clawback is determined by a formula specified in each individual loss-sharing agreement. As of September 30, 2015 , the net present value of the Bank’s estimated clawback liability was $4.3 million , which was included in other liabilities on the consolidated balance sheets.
At September 30, 2015 , the FDIC loss-sharing asset was comprised of a $6.7 million FDIC indemnification asset and a $1.4 million FDIC receivable. The indemnification asset represents the net present value of cash flows the Company expects to collect from the FDIC under the loss-sharing agreements and the FDIC receivable represents amounts from the FDIC for which the Company has requested reimbursement but has not yet received reimbursement.
For PCI loans, the Company remeasures contractual and expected cash flows on a quarterly basis. When the quarterly remeasurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded. As a result of this impairment, for loans covered by loss-sharing agreements with respect to which the loss-sharing provisions are still effective, the indemnification asset is increased to reflect anticipated future cash to be received from the FDIC. Consistent with the loss-sharing agreements between the Company and the FDIC, the amount of the increase to the indemnification asset is measured as 80% of the resulting impairment.
Alternatively, when the quarterly remeasurement results in an increase in expected future cash flows due to a decrease in expected credit losses, the nonaccretable difference decreases and the effective yield of the related loan portfolio is increased. As a result of the improved expected cash flows, for loans covered by loss-sharing agreements with respect to which the loss-sharing provisions are still effective, the indemnification asset would be reduced first by the amount of any impairment previously recorded and, second, by increased amortization over the remaining life of the related loss-sharing agreement.


26

The following table shows a detailed analysis of the FDIC loss-sharing asset for the three and nine months ended September 30, 2015 and 2014 :
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Balance at beginning of period
$
9,344

$
27,981

$
15,174

$
39,846

Adjustments not reflected in income:
Cash (received from) paid to the FDIC, net
799

541

(2,723
)
(1,223
)
FDIC reimbursable recoveries, net
(362
)
(214
)
(1,326
)
(446
)
Adjustments reflected in income:
Amortization, net
(1,416
)
(3,992
)
(5,086
)
(16,208
)
Loan impairment
(119
)
(416
)
1,413

2,735

Sale of other real estate
(126
)
(383
)
(753
)
(2,104
)
Write-downs of other real estate
25

67

1,148

860

Other
1

(92
)
299

32

Balance at end of period
$
8,146

$
23,492

$
8,146

$
23,492

The following table presents information about the composition of the FDIC loss-sharing asset, the clawback liability, and the non-single family and the single family covered assets as of the date indicated:
September 30, 2015
Columbia River Bank
American Marine Bank
Summit Bank
First Heritage Bank
Total
(in thousands)
FDIC loss-sharing asset
$
360

$
2,879

$
2,997

$
1,910

$
8,146

Clawback liability
$
4,141

$
200

$
—

$
—

$
4,341

Non-single family covered assets
$
80,921

$
12,680

$
11,767

$
16,903

$
122,271

Single family covered assets
$
8,388

$
24,658

$
6,277

$
2,217

$
41,540

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

27

The following table sets forth activity for goodwill and other intangible assets for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Goodwill
Goodwill at beginning of period (1)
$
382,537

$
343,952

$
382,537

$
343,952

Provisional period adjustments (1)
225

—

225

—

Total goodwill (1)
382,762

343,952

382,762

343,952

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

47,698

58,598

47,698

Accumulated amortization at beginning of period
(32,593
)
(25,825
)
(29,058
)
(22,765
)
Core deposit intangible, net at beginning of period
26,005

21,873

29,540

24,933

CDI current period amortization
(1,695
)
(1,456
)
(5,230
)
(4,516
)
Total core deposit intangible, net at end of period
24,310

20,417

24,310

20,417

Intangible assets not subject to amortization
919

919

919

919

Other intangible assets, net at end of period
25,229

21,336

25,229

21,336

Total goodwill and other intangible assets at end of period
$
407,991

$
365,288

$
407,991

$
365,288

__________
(1) See Note 3, Business Combinations, for additional information regarding goodwill and intangible assets recorded related to the acquisition of Intermountain on November 1, 2014.
The following table provides the estimated future amortization expense of core deposit intangibles for the remaining three months ending December 31, 2015 and the succeeding four years:
Amount
(in thousands)
Year ending December 31,
2015
$
1,653

2016
5,945

2017
4,913

2018
3,855

2019
2,951


28

10.
Derivatives and Balance Sheet Offsetting
The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at September 30, 2015 and December 31, 2014 was $226.8 million and $215.6 million , respectively. During the three and nine months ended September 30, 2015 , a mark-to-market loss of $6 thousand and $2 thousand , respectively was recorded to other noninterest expense. There were no earnings impacts for the three or nine month periods ending September 30, 2014 .
The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2015 and December 31, 2014 :
Asset Derivatives
Liability Derivatives
September 30, 2015
December 31, 2014
September 30, 2015
December 31, 2014
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
(in thousands)
Interest rate contracts
Other assets
$
14,548

Other assets
$
11,800

Other liabilities
$
14,602

Other liabilities
$
11,851

The Company is party to interest rate contracts and repurchase agreements that are subject to enforceable master netting arrangements or similar agreements. Under these agreements, the Company may have the right to net settle multiple contracts with the same counterparty. The following tables show the gross interest rate swap agreements and repurchase agreements in the consolidated balance sheets and the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability. Therefore, instances of overcollateralization are not shown.
Gross Amounts of Recognized Assets/Liabilities
Gross Amounts Offset in the Consolidated Balance Sheets
Net Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheets
Gross Amounts Not Offset in the Consolidated Balance Sheets
Collateral Posted
Net Amount
September 30, 2015
(in thousands)
Assets
Interest rate contracts
$
14,548

$
—

$
14,548

$
—

$
14,548

Liabilities
Interest rate contracts
$
14,602

$
—

$
14,602

$
(14,602
)
$
—

Repurchase agreements
$
73,182

$
—

$
73,182

$
(73,182
)
$
—

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

$
—

$
11,800

$
—

$
11,800

Liabilities
Interest rate contracts
$
11,851

$
—

$
11,851

$
(11,851
)
$
—

Repurchase agreements
$
105,080

$
—

$
105,080

$
(105,080
)
$
—


29

The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:
Remaining contractual maturity of the agreements
Overnight and continuous
Up to 30 days
30 - 90 days
Greater than 90 days
Total
September 30, 2015
(in thousands)
Class of collateral pledged for repurchase agreements
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
48,182

$
—

$
—

$
25,000

$
73,182

Gross amount of recognized liabilities for repurchase agreements
73,182

Amounts related to agreements not included in offsetting disclosure
$
—

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

30

12. Accumulated Other Comprehensive Income (Loss)
The following table shows changes in accumulated other comprehensive income (loss) by component for the three and nine month periods ended September 30, 2015 and 2014 :
Unrealized Gains and Losses on Available-for-Sale Securities (1)
Unrealized Gains and Losses on Pension Plan Liability (1)
Total (1)
Three months ended September 30, 2015
(in thousands)
Beginning balance
$
4,819

$
(2,030
)
$
2,789

Other comprehensive loss before reclassifications
10,126

—

10,126

Amounts reclassified from accumulated other comprehensive income (loss) (2)
(151
)
62

(89
)
Net current-period other comprehensive income (loss)
9,975

62

10,037

Ending balance
$
14,794

$
(1,968
)
$
12,826

Three months ended September 30, 2014
Beginning balance
$
5,448

$
(1,888
)
$
3,560

Other comprehensive income before reclassifications
(4,057
)
—

(4,057
)
Amounts reclassified from accumulated other comprehensive income (loss) (2)
(21
)
23

2

Net current-period other comprehensive income
(4,078
)
23

(4,055
)
Ending balance
$
1,370

$
(1,865
)
$
(495
)
Nine months ended September 30, 2015
Beginning balance
$
7,462

$
(1,841
)
$
5,621

Other comprehensive loss before reclassifications
8,161

(280
)
7,881

Amounts reclassified from accumulated other comprehensive income (loss) (2)
(829
)
153

(676
)
Net current-period other comprehensive loss
7,332

(127
)
7,205

Ending balance
$
14,794

$
(1,968
)
$
12,826

Nine months ended September 30, 2014
Beginning balance
$
(10,108
)
$
(1,936
)
$
(12,044
)
Other comprehensive income before reclassifications
11,830

—

11,830

Amounts reclassified from accumulated other comprehensive income (loss) (2)
(352
)
71

(281
)
Net current-period other comprehensive income
11,478

71

11,549

Ending balance
$
1,370

$
(1,865
)
$
(495
)
__________
(1) All amounts are net of tax. Amounts in parenthesis indicate debits.
(2) See following table for details about these reclassifications.

31


The following table shows details regarding the reclassifications from accumulated other comprehensive income (loss) for the three and nine month periods ended September 30, 2015 and 2014 :
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Three Months Ended September 30,
Nine Months Ended September 30,
Affected line Item in the Consolidated
2015
2014
2015
2014
Statement of Income
(in thousands)
Unrealized gains and losses on available-for-sale securities
Investment securities gains
$
236

$
33

$
1,300

$
552

Investment securities gains, net
236

33

1,300

552

Total before tax
(85
)
(12
)
(471
)
(200
)
Income tax provision
$
151

$
21

$
829

$
352

Net of tax
Amortization of pension plan liability
Actuarial losses
$
(97
)
$
(36
)
$
(240
)
$
(111
)
Compensation and employee benefits
(97
)
(36
)
(240
)
(111
)
Total before tax
35

13

87

40

Income tax benefit
$
(62
)
$
(23
)
$
(153
)
$
(71
)
Net of tax
13.
Fair Value Accounting and Measurement
The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Fair values are determined as follows:
Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all securities other than U.S. Treasury notes, which are considered a Level 1 input method.
Interest rate contract positions are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

32

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2015 and December 31, 2014 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
Fair value
Fair Value Measurements at Reporting Date Using
Level 1
Level 2
Level 3
September 30, 2015
(in thousands)
Assets
Securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations
$
1,164,532

$
—

$
1,164,532

$
—

State and municipal debt securities
489,469

—

489,469

—

U.S. government agency and government-sponsored enterprise securities
347,856

—

347,856

—

U.S. government securities
20,400

20,400

—

—

Other securities
5,167

—

5,167

—

Total securities available for sale
$
2,027,424

$
20,400

$
2,007,024

$
—

Other assets (Interest rate contracts)
$
14,548

$
—

$
14,548

$
—

Liabilities
Other liabilities (Interest rate contracts)
$
14,602

$
—

$
14,602

$
—

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

$
—

$
1,162,387

$
—

State and municipal debt securities
496,484

—

496,484

—

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

—

413,706

—

U.S. government securities
20,499

20,499

—

—

Other securities
5,181

—

5,181

—

Total securities available for sale
$
2,098,257

$
20,499

$
2,077,758

$
—

Other assets (Interest rate contracts)
$
11,800

$
—

$
11,800

$
—

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

$
—

$
11,851

$
—

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

33

Nonrecurring Measurements
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:
Impaired loans —A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral less estimated costs to sell if the loan is a collateral-dependent loan. Generally, the Company utilizes the fair market value of the collateral to measure impairment. The impairment evaluations are performed in conjunction with the ALLL process on a quarterly basis by officers in the Special Credits group, which reports to the Chief Credit Officer. The Real Estate Appraisal Services Department (“REASD”), which also reports to the Chief Credit Officer, is responsible for obtaining appraisals from third-parties or performing internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.
Other real estate owned —OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is generally measured based on the property’s fair market value as indicated by an appraisal or a letter of intent to purchase. OREO is initially recorded at the fair value less estimated costs to sell. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the ALLL, or in the event of a write-up without previous losses charged to the ALLL, a credit to earnings is recorded. Management periodically reviews OREO in an effort to ensure the property is recorded at its fair value, net of estimated costs to sell. Any fair value adjustments subsequent to acquisition are charged or credited to earnings. The initial and subsequent evaluations are performed by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD obtains appraisals from third-parties for OREO and performs internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.
The following tables set forth information related to the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the current and prior year quarterly periods:
Fair value at September 30, 2015
Fair Value Measurements at Reporting Date Using
Losses During the Three Months Ended
September 30, 2015
Losses During the Nine Months Ended
September 30, 2015
Level 1
Level 2
Level 3
(in thousands)
Impaired loans
$
350

$
—

$
—

$
350

$
(1,012
)
$
(1,012
)
OREO
3,286

—

—

3,286

(646
)
(662
)
$
3,636

$
—

$
—

$
3,636

$
(1,658
)
$
(1,674
)
Fair value at
September 30, 2014
Fair Value Measurements at Reporting Date Using
Gains (Losses) During the Three Months Ended
September 30, 2014
Losses During the Nine Months Ended September 30, 2014
Level 1
Level 2
Level 3
(in thousands)
Impaired loans
$
2,998

$
—

$
—

$
2,998

$
69

$
(14
)
OREO (1)
2,950

—

—

2,950

(388
)
(388
)
$
5,948

$
—

$
—

$
5,948

$
(319
)
$
(402
)
__________
(1) Reclassified to conform to the current period’s presentation. The reclassification was limited to combining historically reported “Noncovered OREO” and “Covered OREO” into one line item for OREO.
The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent changes in any valuation allowances from updated appraisals that were recorded to earnings.

34

Quantitative information about Level 3 fair value measurements
The range and weighted-average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:
Fair value at September 30, 2015
Valuation Technique
Unobservable Input
Range (Weighted Average) (1)
(dollars in thousands)
Impaired loans
$
350

Fair Market Value of Collateral
Adjustment to Appraisal Value
N/A (2)
OREO
3,286

Fair Market Value of Collateral
Adjustment to Appraisal Value
N/A (2)
(1) Discount applied to appraisal value, letter of intent to purchase, or stated value (in the case of accounts receivable, inventory and equipment).
(2) Quantitative disclosures are not provided for impaired loans and OREO because there were no adjustments made to the appraisal value during the current period.
Fair value at
September 30, 2014
Valuation Technique
Unobservable Input
Range (Weighted Average) (1)
(dollars in thousands)
Impaired loans - real estate collateral
$
534

Fair Market Value of Collateral
Adjustment to Appraisal Value
N/A (2)
Impaired loans - other collateral (3)
2,464

Fair Market Value of Collateral
Adjustment to Stated value
0% - 71% (49%)
OREO
2,950

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


35

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 held for sale —The carrying amount of loans held for sale approximates their fair values due to the short period of time between the origination and sale dates (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 September 30, 2015 or December 31, 2014 , for loans which mirror the attributes of the loans with similar rate structures and average maturities. The fair values resulting from these calculations are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers’ credit quality since the loans were originated. For nonperforming loans, fair value is estimated by applying a valuation discount based upon loan sales data from the FDIC. For PCI loans, fair value is estimated by discounting the expected future cash flows using a lending rate that would have been offered on September 30, 2015 (Level 3).
FDIC loss-sharing asset —The fair value of the FDIC loss-sharing asset is estimated based on discounting the expected future cash flows using an estimated market rate (Level 3).
Interest rate contracts —Interest rate swap positions are valued in models, which use readily observable market parameters as their basis (Level 2).
Deposits —For deposits with no contractual maturity, the fair value is equal to the carrying value (Level 1). The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and current market rates for deposits of similar remaining maturities (Level 2).
FHLB advances —The fair value of FHLB advances is estimated based on discounting the future cash flows using the market rate currently offered (Level 2).
Repurchase Agreements —The fair value of term repurchase agreements is estimated based on discounting the future cash flows using the market rate currently offered. The carrying amount of sweep repurchase agreements approximates their fair values due to the short period of time between repricing dates (Level 2).
Other Borrowings — Other borrowings are trust preferred obligations assumed by the Company in the Intermountain acquisition. The fair value is estimated as the carrying value as these obligations are redeemable and a market participant would expect redemption in the near-term (Level 2).
Other Financial Instruments —The majority of our commitments to extend credit and standby letters of credit carry current market interest rates if converted to loans, as such, carrying value is assumed to equal fair value.

36

The following tables summarize carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value at September 30, 2015 and December 31, 2014 :
September 30, 2015
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
(in thousands)
Assets
Cash and due from banks
$
149,610

$
149,610

$
149,610

$
—

$
—

Interest-earning deposits with banks
22,578

22,578

22,578

—

—

Securities available for sale
2,027,424

2,027,424

20,400

2,007,024

—

FHLB stock
10,242

10,242

—

10,242

—

Loans held for sale
6,637

6,637

—

6,637

—

Loans
5,677,462

5,783,474

—

—

5,783,474

FDIC loss-sharing asset
8,146

2,140

—

—

2,140

Interest rate contracts
14,548

14,548

—

14,548

—

Liabilities
Deposits
$
7,314,805

$
7,312,329

$
6,844,014

$
468,315

$
—

FHLB Advances
6,540

7,198

—

7,198

—

Repurchase agreements
73,182

74,046

—

74,046

—

Interest rate contracts
14,602

14,602

—

14,602

—

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

$
171,221

$
171,221

$
—

$
—

Interest-earning deposits with banks
16,949

16,949

16,949

—

—

Securities available for sale
2,098,257

2,098,257

20,499

2,077,758

—

FHLB stock
33,365

33,365

—

33,365

—

Loans held for sale
1,116

1,116

—

1,116

—

Loans
5,375,809

5,516,286

—

—

5,516,286

FDIC loss-sharing asset
15,174

4,054

—

—

4,054

Interest rate contracts
11,800

11,800

—

11,800

—

Liabilities
Deposits
$
6,924,722

$
6,921,804

$
6,416,017

$
505,787

$
—

FHLB Advances
216,568

217,296

—

217,296

—

Repurchase agreements
105,080

106,171

—

106,171

—

Other borrowings
8,248

8,248

—

8,248

—

Interest rate contracts
11,851

11,851

—

11,851

—

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

37

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2015
2014
2015
2014
(in thousands except per share)
Basic EPS:
Net income
$
25,780

$
21,583

$
72,087

$
62,654

Less: Earnings allocated to participating securities:
Preferred Shares
45

42

127

121

Nonvested restricted shares
296

216

772

598

Earnings allocated to common shareholders
$
25,439

$
21,325

$
71,188

$
61,935

Weighted average common shares outstanding
57,051

52,112

57,007

51,772

Basic earnings per common share
$
0.45

$
0.41

$
1.25

$
1.20

Diluted EPS:
Earnings allocated to common shareholders (1)
$
25,439

$
21,325

$
71,188

$
61,940

Weighted average common shares outstanding
57,051

52,112

57,007

51,772

Dilutive effect of equity awards
13

404

14

707

Weighted average diluted common shares outstanding
57,064

52,516

57,021

52,479

Diluted earnings per common share
$
0.45

$
0.41

$
1.25

$
1.18

Potentially dilutive share options that were not included in the computation of diluted EPS because to do so would be anti-dilutive
29

58

40

67

__________
(1)
Earnings allocated to common shareholders for basic and diluted EPS may differ under the two-class method as a result of adding common stock equivalents for options and warrants to dilutive shares outstanding, which alters the ratio used to allocate earnings to common shareholders and participating securities for the purposes of calculating diluted EPS.
15. Branch Sales
On August 23, 2014 , Columbia completed a branch sale transaction to Sound Community Bancorp. In the transaction, Columbia sold three branches and related assets and deposit liabilities to Sound Community Bancorp. The transaction was completed with a transfer of $22.2 million in deposits to Sound Community Bancorp in exchange for a deposit premium of 2.35% . Also included in the branch sale were $1.1 million in loans and $3.8 million in premises and equipment. The Company recognized a gain of $565 thousand related to the deposit premium, which was recorded in the line item Other noninterest income in the Consolidated Statements of Income. In addition, the Company recorded a $50 thousand loss on the disposal of premises and equipment related to this transaction, which was recorded in the line item Other noninterest expense in the Consolidated Statements of Income.

38

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

39

reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under federal securities laws.
CRITICAL ACCOUNTING POLICIES
Management has identified the accounting policies related to the ALLL, business combinations, PCI loans, FDIC loss-sharing asset and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” under the headings “Allowance for Loan and Lease Losses”, “Business Combinations”, “Purchased Credit Impaired Loans”, “FDIC Loss-sharing Asset” and “Valuation and Recoverability of Goodwill” in our 2014 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies as compared to those disclosed in our 2014 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
On November 1, 2014, the Company completed its acquisition of Intermountain. The Company acquired approximately $964.4 million in assets, including $502.6 million in loans measured at fair value, and approximately $736.8 million in deposits. Due to the timing of this acquisition, our results of operations for the nine month period ended September 30, 2015 include the acquisition for the entire period, however the prior year period does not include the acquisition. See Note 3 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report for further information regarding this acquisition.
Earnings Summary
The Company reported net income for the third quarter of $25.8 million or $0.45 per diluted common share, compared to $21.6 million or $0.41 per diluted common share for the third quarter of 2014 . The increase in net income for the current quarter compared to the prior year period was due to a combination of higher net interest income and noninterest income, partially offset by higher noninterest expense. These fluctuations were primarily due to the timing of the acquisition of Intermountain, as noted above.
Comparison of current quarter to prior year period
Revenue (net interest income plus noninterest income) for the three months ended September 30, 2015 was $104.2 million , 13% higher than the same period in 2014 . The increase in revenue was a result of higher net interest income arising not only from the loans and securities acquired in the Intermountain transaction but also organic loan growth. Also contributing to the increase in revenue was higher noninterest income due to both a decrease in the expense recorded for the change in the FDIC loss-sharing asset as well as an increase in service charges and other fees. For a more complete discussion of these topics, please refer to the net interest income and noninterest income sections contained in the ensuing pages.
The provision for loan and lease losses for the third quarter of 2015 was $2.8 million compared to a provision of $980 thousand during the third quarter of 2014 . The provision recorded in the third quarter of 2015 was due to the recording of a $3.3 million provision on loans, excluding PCI loans, partially offset by provision recapture of $519 thousand related to PCI loans. For a more complete discussion of this topic, please refer to the provision for loan and lease losses section contained in the ensuing pages.
Total noninterest expense for the quarter ended September 30, 2015 was $64.1 million , up from $60.0 million for the third quarter of 2014 . The increase from the prior-year period was primarily due to additional noninterest expense stemming from the growth resulting from the Intermountain acquisition, partially offset by lower acquisition-related expenses recorded during the third quarter of 2015. For a more complete discussion of this topic, please refer to the noninterest expense section contained in the ensuing pages.

40

Net income was positively affected by the pre-tax earnings impact of the FDIC acquired loan portfolios for the current quarter and year-to-date periods, but was negatively affected by the pre-tax earnings impact of the FDIC acquired loan portfolios during the prior year periods. The negative effect of the FDIC acquired loan portfolios in the prior year periods were primarily due to greater amortization of the FDIC loss-sharing asset recorded in the prior year periods. With the recent expiration of our two largest FDIC loss-sharing agreements, the amortization of the FDIC loss-sharing asset has declined. The following table illustrates the impact to earnings associated with the Company’s FDIC acquired loan portfolios for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Incremental accretion income on FDIC purchased credit impaired loans
$
2,082

$
4,205

$
6,896

$
16,428

Incremental accretion income on other FDIC acquired loans
34

175

166

474

Recapture (provision) for losses on purchased credit impaired loans
519

520

(2,566
)
(3,419
)
Change in FDIC loss-sharing asset (1)
(1,635
)
(4,816
)
(2,979
)
(14,685
)
FDIC clawback liability recovery (expense)
(174
)
(201
)
(167
)
(302
)
Pre-tax earnings impact of FDIC acquired loan portfolios
$
826

$
(117
)
$
1,350

$
(1,504
)
__________
(1) For additional information on the FDIC loss-sharing asset, please see the “FDIC Loss-sharing Asset” section of this Management’s Discussion and Analysis and Note 8 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
Revenue (net interest income plus noninterest income) for the nine months ended September 30, 2015 was $309.8 million , compared to $269.8 million for the same period in 2014 . The increase in revenue was a result of higher net interest income arising not only from the loans and securities acquired in the Intermountain transaction but also from organic loan growth. Also contributing to the increase in revenue was higher noninterest income due to both a decrease in the expense recorded for the change in the FDIC loss-sharing asset as well as an increase in service charges and other fees. For a more complete discussion of this topic, please refer to the net interest income section and noninterest income sections contained in the ensuing pages.
The provision for loan and lease losses for the nine months ended September 30, 2015 was $6.2 million compared to a provision of $5.0 million for the first nine months of 2014 . The $6.2 million provision was due to the recording of a $3.6 million provision on loans, excluding PCI loans and a $2.6 million provision on PCI loans. For a more complete discussion of this topic, please refer to the provision for loan and lease losses section contained in the ensuing pages.
Total noninterest expense for the nine months ended September 30, 2015 was $199.3 million , a 14% increase from the first nine months of 2014 . The increase from the prior-year period was primarily due to additional noninterest expense stemming from the growth resulting from the Intermountain acquisition as well as higher acquisition-related expenses recorded during the nine months ended September 30, 2015 . For a more complete discussion of this topic, please refer to the noninterest expense section contained in the ensuing pages.
Net Interest Income
Comparison of current quarter to prior year period
Net interest income for the third quarter of 2015 was $81.7 million , an increase of 7% from $76.2 million for the same quarter in 2014 . The increase in net interest income was due to interest income earned from a larger volume of earning assets. Growth in earning assets was driven not only by loans and securities acquired in the Intermountain transaction but also by loans originated for investment. Net interest income was higher in the current period despite lower incremental accretion income from acquired loans and lower interest income on taxable securities. As shown in the table below, incremental accretion income continued to decline which was reflective of the decreasing balance of certain acquired loan portfolios. Interest income on taxable securities was lower in the current period due to the previously disclosed $2.6 million adjustment recorded in the prior year period. For additional information on the Company’s accounting policies related to recording interest income on loans and

41

the adjustment recorded during 2014, please refer to “Item 8. Financial Statements and Supplementary Data” in our 2014 Annual Report on Form 10-K.
The Company’s net interest margin (tax equivalent) decreased to 4.37% in the third quarter of 2015 , from 4.85% for the same quarter last year. This decrease was due to lower incremental accretion income on acquired loan portfolios. The Company’s operating net interest margin (tax equivalent) (1) decreased to 4.18% from 4.22% due to lower rates on loans and securities.
Comparison of current year-to-date to prior year period
Net interest income for the nine months ended September 30, 2015 was $243.1 million , an increase of 8% from $225.3 million for the same period in 2014 . The increase in net interest income was due to higher average loan and securities balances during the current year as a result of the acquisition of Intermountain and organic growth in the loan portfolio. The Company’s net interest margin (tax equivalent) decreased to 4.39% for the first nine months of 2015 , from 4.86% for the prior year period. The decrease in the Company’s net interest margin (tax equivalent) was primarily due to lower accretion income on the acquired loan portfolios. As shown in the table below, the Company recorded $21.2 million in total incremental accretion during the nine months ended September 30, 2015 , a decrease of $ 11.9 million from the prior year period. The Company’s operating net interest margin (tax equivalent) (1) for the nine months ended September 30, 2015 decreased modestly to 4.18% from 4.23% due to lower rates on loans and securities.
The following table shows the impact to interest income of incremental accretion income as well as the net interest margin and operating net interest margin for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(dollars in thousands)
Incremental accretion income due to:
FDIC purchased credit impaired loans
$
2,082

$
4,205

$
6,896

$
16,428

Other FDIC acquired loans
34

175

166

474

Other acquired loans
4,293

5,040

14,116

16,136

Incremental accretion income
$
6,409

$
9,420

$
21,178

$
33,038

Net interest margin (tax equivalent)
4.37
%
4.85
%
4.39
%
4.86
%
Operating net interest margin (tax equivalent) (1)
4.18
%
4.22
%
4.18
%
4.23
%
__________
(1) Operating net interest margin (tax equivalent) is a non-GAAP measurement. See Non-GAAP measures section of Item 2, Management’s Discussion and Analysis.

42

The following tables set forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and, in total, net interest income and net interest margin:
Three Months Ended September 30,
Three Months Ended September 30,
2015
2014
Average
Balances
Interest
Earned / Paid
Average
Rate
Average
Balances
Interest
Earned / Paid
Average
Rate
(dollars in thousands)
ASSETS
Loans, net (1)(2)(4)
$
5,712,614

$
73,231

5.13
%
$
4,770,443

$
66,421

5.57
%
Taxable securities (3)
1,498,211

7,472

1.99
%
1,224,608

8,545

2.79
%
Tax exempt securities (4)
446,963

4,491

4.02
%
361,388

4,118

4.56
%
Interest-earning deposits with banks
53,743

31

0.23
%
95,221

61

0.26
%
Total interest-earning assets
7,711,531

$
85,225

4.42
%
6,451,660

$
79,145

4.91
%
Other earning assets
149,895

131,887

Noninterest-earning assets
811,266

753,759

Total assets
$
8,672,692

$
7,337,306

LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit
$
480,132

$
213

0.18
%
$
460,985

$
288

0.25
%
Savings accounts
643,672

17

0.01
%
539,982

15

0.01
%
Interest-bearing demand
916,388

158

0.07
%
1,201,154

117

0.04
%
Money market accounts
1,870,503

368

0.08
%
1,645,609

293

0.07
%
Total interest-bearing deposits
3,910,695

756

0.08
%
3,847,730

713

0.07
%
Federal Home Loan Bank advances
13,968

78

2.23
%
16,503

80

1.95
%
Other borrowings
82,535

137

0.66
%
25,000

120

1.92
%
Total interest-bearing liabilities
4,007,198

$
971

0.10
%
3,889,233

$
913

0.09
%
Noninterest-bearing deposits
3,323,168

2,263,079

Other noninterest-bearing liabilities
102,496

85,482

Shareholders’ equity
1,239,830

1,099,512

Total liabilities & shareholders’ equity
$
8,672,692

$
7,337,306

Net interest income (tax equivalent)
$
84,254

$
78,232

Net interest margin (tax equivalent)
4.37
%
4.85
%
__________
(1)
Adjusted to conform to the current period presentation. The adjustment was limited to including amounts historically disclosed as “Covered loans” in “Loans, net.”
(2)
Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on certain acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $1.2 million for both three month periods ended September 30, 2015 and 2014 , respectively. The incremental accretion income on acquired loans was $6.4 million and $9.4 million for the three months ended September 30, 2015 and 2014 , respectively.
(3)
During the three months ended September 30, 2014, the Company recorded a $2.6 million reversal of premium amortization, which increased interest income on taxable securities.
(4)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $989 thousand and $518 thousand for the three months ended September 30, 2015 and 2014 , respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.6 million and $1.5 million for the three months ended September 30, 2015 and 2014 , respectively.


43

The following tables set forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and, in total, net interest income and net interest margin:
Nine Months Ended September 30,
Nine Months Ended September 30,
2015
2014
Average
Balances
Interest
Earned / Paid
Average
Rate
Average
Balances
Interest
Earned / Paid
Average
Rate
(dollars in thousands)
ASSETS
Loans, net (1)(2)(4)
$
5,557,771

$
217,128

5.21
%
$
4,652,157

$
199,747

5.72
%
Taxable securities (3)
1,541,018

22,258

1.93
%
1,278,295

21,679

2.26
%
Tax exempt securities (4)
455,509

13,802

4.04
%
359,471

12,419

4.61
%
Interest-earning deposits with banks
46,656

84

0.24
%
55,986

105

0.25
%
Total interest-earning assets
7,600,954

$
253,272

4.44
%
6,345,909

$
233,950

4.92
%
Other earning assets
148,189

129,819

Noninterest-earning assets
821,682

761,731

Total assets
$
8,570,825

$
7,237,459

LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit
$
490,720

$
689

0.19
%
$
481,370

$
975

0.27
%
Savings accounts
631,979

53

0.01
%
527,183

42

0.01
%
Interest-bearing demand
1,003,544

451

0.06
%
1,185,831

340

0.04
%
Money market accounts
1,813,282

1,051

0.08
%
1,615,162

837

0.07
%
Total interest-bearing deposits
3,939,525

2,244

0.08
%
3,809,546

2,194

0.08
%
Federal Home Loan Bank advances
88,121

391

0.59
%
51,634

309

0.80
%
Other borrowings
92,169

419

0.61
%
25,000

358

1.91
%
Total interest-bearing liabilities
4,119,815

$
3,054

0.10
%
3,886,180

$
2,861

0.10
%
Noninterest-bearing deposits
3,108,293

2,185,062

Other noninterest-bearing liabilities
99,864

82,168

Shareholders’ equity
1,242,853

1,084,049

Total liabilities & shareholders’ equity
$
8,570,825

$
7,237,459

Net interest income (tax equivalent)
$
250,218

$
231,089

Net interest margin (tax equivalent)
4.39
%
4.86
%
__________
(1)
Adjusted to conform to the current period presentation. The adjustment was limited to including amounts historically disclosed as “Covered loans” in “Loans, net.”
(2)
Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on certain acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $3.8 million and $3.3 million for the nine months ended September 30, 2015 and 2014 , respectively. The incremental accretion income on acquired loans was $21.2 million and $33.0 million for the nine months ended September 30, 2015 and 2014 , respectively.
(3)
During the nine months ended September 30, 2014, the Company recorded a $2.6 million reversal of premium amortization, which increased interest income on taxable securities.
(4)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $2.3 million and $1.3 million for the nine months ended September 30, 2015 and 2014 , respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.8 million and $4.5 million for the nine months ended September 30, 2015 and 2014 , respectively.


44

The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
Three Months Ended September 30,
2015 Compared to 2014
Increase (Decrease) Due to
Volume
Rate
Total
(in thousands)
Interest Income
Loans, net
$
12,376

$
(5,566
)
$
6,810

Taxable securities
1,670

(2,743
)
(1,073
)
Tax exempt securities
898

(525
)
373

Interest earning deposits with banks
(25
)
(5
)
(30
)
Interest income
$
14,919

$
(8,839
)
$
6,080

Interest Expense
Deposits:
Certificates of deposit
$
12

$
(87
)
$
(75
)
Savings accounts
3

(1
)
2

Interest-bearing demand
(33
)
74

41

Money market accounts
43

32

75

Total interest on deposits
25

18

43

Federal Home Loan Bank advances
(13
)
11

(2
)
Other borrowings
24

(7
)
17

Interest expense
$
36

$
22

$
58


45

The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
Nine Months Ended September 30,
2015 Compared to 2014
Increase (Decrease) Due to
Volume
Rate
Total
(in thousands)
Interest Income
Loans, net
$
36,489

$
(19,108
)
$
17,381

Taxable securities
4,072

(3,493
)
579

Tax exempt securities
3,038

(1,655
)
1,383

Interest earning deposits with banks
(17
)
(4
)
(21
)
Interest income
$
43,582

$
(24,260
)
$
19,322

Interest Expense
Deposits:
Certificates of deposit
$
19

$
(305
)
$
(286
)
Savings accounts
9

2

11

Interest-bearing demand
(59
)
170

111

Money market accounts
108

106

214

Total interest on deposits
77

(27
)
50

Federal Home Loan Bank advances
178

(96
)
82

Other borrowings
82

(21
)
61

Interest expense
$
337

$
(144
)
$
193

Provision for Loan and Lease Losses
Comparison of current quarter to prior year period
During the third quarter of 2015 , the Company recorded a $2.8 million provision expense compared with a provision expense of $1.0 million during the third quarter of 2014 . The $2.8 million net provision for loan and lease losses recorded during the current quarter was driven by loans, excluding PCI loans, for which Columbia recorded a provision of $3.3 million, partially offset by provision recapture of $519 thousand related to PCI loans. The $2.3 million provision related to loans, excluding PCI loans, was due to organic loan growth, charge-off activity during the current quarter and higher loss rates in the substandard category. The provision recapture recorded relating to PCI loans was due to the increase in the present value of expected future cash flows as remeasured during the current quarter, compared to the present value of expected future cash flows measured during the second quarter of 2015. The amount of provision was calculated in accordance with the Company’s methodology for determining the ALLL, discussed in Note 6 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
The provision for loan and lease losses for the nine months ended September 30, 2015 was $6.2 million compared with provision expense of $5.0 million during the same period in 2014 . The $6.2 million provision expense for loans recorded for the current year-to-date period included a provision of $3.6 million for loans, excluding PCI loans and a provision of $2.6 million related to PCI loans. The provision of $3.6 million related to loans, excluding PCI loans, was due to the combination of loan growth and net loan charge-offs experienced in the period. The $2.6 million in provision expense for PCI loans was primarily due to the decrease in the present value of expected future cash flows as remeasured during the current period, compared to the present value of expected future cash flows at the end of 2014 , net of activity during the period. The amount of provision was calculated in accordance with the Company’s methodology for determining the ALLL, discussed in Note 6 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.

46

Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
$ Change
% Change
2015
2014
$ Change
% Change
(dollars in thousands)
Service charges and other fees
$
15,893

$
14,254

$
1,639

11
%
$
46,636

$
40,980

$
5,656

14
%
Merchant services fees
2,422

2,104

318

15
%
6,802

6,014

788

13
%
Bank owned life insurance
1,086

956

130

14
%
3,370

2,897

473

16
%
Other
4,497

3,399

1,098

32
%
11,599

8,807

2,792

32
%
Subtotal
23,898

20,713

3,185

15
%
68,407

58,698

9,709

17
%
Investment securities gains, net
236

33

203

615
%
1,300

552

748

136
%
Change in FDIC loss-sharing asset
(1,635
)
(4,816
)
3,181

(66
)%
(2,979
)
(14,685
)
11,706

(80
)%
Total noninterest income
$
22,499

$
15,930

$
6,569

41
%
$
66,728

$
44,565

$
22,163

50
%
Comparison of current quarter to prior year period
Noninterest income was $22.5 million for the third quarter of 2015 , compared to $15.9 million for the same period in 2014 . The increase was primarily due to lower expense recorded for the change in FDIC loss-sharing asset, which was $3.2 million less in the current quarter. Also contributing to the increase was an additional $1.6 million in revenue earned from service charges and other fees which reflected the larger customer base established in the Intermountain acquisition. Finally, other noninterest income was up $1.1 million from a combination of revenue from a larger customer base and $550 thousand in additional loan sale gains.
The change in FDIC loss-sharing asset has been a significant component of noninterest income. Changes in the asset are primarily driven by amortization of the asset, the provision recorded for reimbursable losses on covered loans and write-downs of covered other real estate owned (“OREO”). For the third quarter of 2015 , the change in the asset was primarily driven by $1.4 million of amortization of the asset. The decline in amortization recorded in the current quarter was due to the recent expiration of our two most significant FDIC loss-sharing agreements. For the same period in 2014 , there was $4.0 million of amortization of the asset, $416 thousand related to the provision recapture recorded on covered loans and sales of OREO of $383 thousand. For additional information on the FDIC loss-sharing asset, please see the “FDIC Loss-sharing Asset” section of this Management’s Discussion and Analysis and Note 8 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
For the nine months ended September 30, 2015 , noninterest income was $66.7 million compared to $44.6 million for the same period in 2014 . The increase was primarily due to lower expense recorded for the change in FDIC loss-sharing asset, which was $11.7 million less in the current period compared to the prior year period. The increase was also driven by an increase of $5.7 million in service charges and other fees due to the increased customer base from the Intermountain acquisition and an increase of $2.8 million in other noninterest income due to both higher gains on sales of loans and increased loan prepayment fees in the current year.

47

Noninterest Expense
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014 (1)
$ Change
% Change
2015
2014 (1)
$ Change
% Change
(dollars in thousands)
Compensation and employee benefits
$
35,175

$
32,559

$
2,616

8
%
$
112,721

$
94,961

$
17,760

19
%
All other noninterest expense:
Occupancy
8,101

7,445

656

9
%
24,781

24,276

505

2
%
Merchant processing
1,090

1,080

10

1
%
3,146

3,058

88

3
%
Advertising and promotion
1,354

1,027

327

32
%
3,480

2,746

734

27
%
Data processing and communications
3,796

4,269

(473
)
(11
)%
13,022

11,469

1,553

14
%
Legal and professional services
2,173

2,905

(732
)
(25
)%
7,527

7,377

150

2
%
Taxes, license and fees
1,344

1,156

188

16
%
4,003

3,387

616

18
%
Regulatory premiums
1,084

1,195

(111
)
(9
)%
3,626

3,444

182

5
%
Net cost (benefit) of operation of other real estate owned (1)
240

(1,256
)
1,496

(119
)%
(1,569
)
(1,207
)
(362
)
30
%
Amortization of intangibles
1,695

1,456

239

16
%
5,230

4,516

714

16
%
Other
8,015

8,146

(131
)
(2
)%
23,305

21,105

2,200

10
%
Total all other noninterest expense
28,892

27,423

1,469

5
%
86,551

80,171

6,380

8
%
Total noninterest expense
$
64,067

$
59,982

$
4,085

7
%
$
199,272

$
175,132

$
24,140

14
%
__________
(1) Reclassified to conform to the current period’s presentation. The reclassification was limited to removing the separate line item for “Net benefit of operation of covered other real estate owned” and including the prior period activity in the line item for net cost (benefit) of operation of other real estate owned.
The following table shows the impact of the acquisition-related expenses for the periods indicated to the various components of noninterest expense:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2015
2014
2015
2014
(in thousands)
Acquisition-related expenses:
Compensation and employee benefits
$
—

$
73

$
3,373

$
727

Occupancy
181

10

1,484

696

Advertising and promotion
40

27

383

27

Data processing and communications
42

684

1,780

684

Legal and professional fees
71

510

1,095

723

Other
94

1,934

930

2,019

Total impact of acquisition-related costs to noninterest expense (1)
$
428

$
3,238

$
9,045

$
4,876

__________
(1) Of the $9.0 million in acquisition-related expenses recorded during the nine months ended September 30, 2015 , $9.0 million related to the recent acquisition of Intermountain and $72 thousand related to the acquisition of West Coast Bancorp (“West Coast”). Of the $4.9 million acquisition-related expenses recorded during the nine months ended September 30, 2014 , $459 thousand related to the acquisition of Intermountain and $4.4 million related to the acquisition of West Coast.

48

Comparison of current quarter to prior year period
Total noninterest expense for the third quarter of 2015 was $64.1 million , an increase of $4.1 million , or 7% from a year earlier. The increase from the prior year period was due to additional noninterest expense stemming from the growth resulting from the Intermountain acquisition. Also contributing to the increase was an increase in net cost of other real estate owned. These increases were partially offset by lower acquisition-related expenses, which were $428 thousand during the current quarter compared to $3.2 million for the prior year period.
Comparison of current year-to-date to prior year period
For the nine months ended September 30, 2015 , noninterest expense was $199.3 million , an increase of $24.1 million , or 14% from $175.1 million a year earlier. The increase from the prior-year period was due to additional ongoing noninterest expense stemming from the growth resulting from the Intermountain acquisition. Also contributing to the increase from the prior year period were acquisition-related expenses, which were $9.0 million during the nine months ended September 30, 2015 compared to $4.9 million for the prior year period.
The following table presents selected items included in Other noninterest expense and the associated change from period to period:
Three Months Ended September 30,
Increase
(Decrease)
Amount
Nine Months Ended September 30,
Increase
(Decrease)
Amount
2015
2014
2015
2014
(in thousands)
Postage
$
626

$
533

$
93

$
2,042

$
2,355

$
(313
)
Software support & maintenance
699

550

149

2,570

1,556

1,014

Supplies
322

289

33

1,044

1,045

(1
)
Insurance
474

403

71

1,500

1,203

297

ATM Network
338

207

131

1,144

675

469

Travel
668

534

134

2,166

1,483

683

Employee expenses
246

242

4

903

790

113

Sponsorships and charitable contributions
573

434

139

1,568

1,555

13

Directors fees
206

183

23

661

514

147

Federal Reserve Bank processing fees
173

169

4

501

305

196

Investments in affordable housing projects expense
—

271

(271
)
—

800

(800
)
Investor relations
41

38

3

311

216

95

Other personal property owned
(11
)
9

(20
)
(5
)
(135
)
130

FDIC clawback expense
174

201

(27
)
167

302

(135
)
Miscellaneous
3,486

4,083

(597
)
8,733

8,441

292

Total other noninterest expense
$
8,015

$
8,146

$
(131
)
$
23,305

$
21,105

$
2,200

Comparison of current quarter to prior year period
Other noninterest expense decreased $131 thousand due to lower acquisition-related expenses during the current quarter and lower expense related to investments in affordable housing projects, partially offset by general increases stemming from the acquisition of Intermountain. Acquisition-related expenses recorded to other noninterest expense during the third quarter of 2015 were $94 thousand compared to $1.9 million for the prior year period. This decrease was partially offset by higher fraud losses in the current quarter of $834 thousand compared to $266 thousand for the prior year period, included in miscellaneous other noninterest expense. The decrease in expense related to investments in affordable housing projects was due to the adoption of ASU 2014-01 Accounting for Investments in Qualified Affordable Housing Projects. The expense related to investments in affordable housing projects is now recorded to provision for income taxes in the consolidated statements of income. For additional information, see Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in our 2014 Annual Report on Form 10-K.

49

Comparison of current year-to-date to prior year period
Other noninterest expense increased $2.2 million due to additional ongoing noninterest expense stemming from the growth resulting from the Intermountain acquisition, partially offset by lower acquisition-related expenses and expense related to investments in affordable housing projects related to the adoption of ASU 2014-01 discussed above. Acquisition-related expenses recorded to other noninterest expense during the nine months ended September 30, 2015 were $930 thousand compared to $2.0 million for the prior year period.
FDIC Acquired Loan Accounting
Net income was positively affected by the pre-tax earnings impact of the FDIC acquired loan portfolios for the current quarter and year-to-date periods, but was negatively affected by the pre-tax earnings impact of the FDIC acquired loan portfolios during the prior year periods. The negative effect of the FDIC acquired loan portfolios in the prior year period was primarily due to greater amortization of the FDIC loss-sharing asset recorded in the prior year period. With the recent expiration of our two largest FDIC loss-sharing agreements, the amortization of the FDIC loss-sharing asset has declined.
While the significance of the FDIC acquired loan accounting has diminished over time, the following table illustrates the impact to earnings associated with the Company’s FDIC acquired loan portfolios for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Incremental accretion income on FDIC purchased credit impaired loans
$
2,082

$
4,205

$
6,896

$
16,428

Incremental accretion income on other FDIC acquired loans
34

175

166

474

Recapture (provision) for losses on purchased credit impaired loans
519

520

(2,566
)
(3,419
)
Change in FDIC loss-sharing asset (1)
(1,635
)
(4,816
)
(2,979
)
(14,685
)
FDIC clawback liability recovery (expense)
(174
)
(201
)
(167
)
(302
)
Pre-tax earnings impact of FDIC acquired loan portfolios
$
826

$
(117
)
$
1,350

$
(1,504
)
__________
(1) For additional information on the FDIC loss-sharing asset, please see the “FDIC Loss-sharing Asset” section of this Management’s Discussion and Analysis and Note 8 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Income Taxes
We recorded an income tax provision of $11.5 million for the third quarter of 2015 , compared to a provision of $9.6 million for the same period in 2014 . For the nine months ended September 30, 2015 and 2014 , we recorded an income tax provision of $32.2 million and $27.0 million , respectively, with an effective tax rate of 31% and 30% , respectively. Our effective tax rate remains lower than the statutory tax rate due to the amount of tax-exempt municipal securities held in the investment portfolio and tax-exempt earnings on bank owned life insurance. For additional information, please refer to the Company’s annual report on Form 10-K for the year ended December 31, 2014 .
FINANCIAL CONDITION
Total assets were $8.76 billion as of September 30, 2015 , an increase of $177.1 million from $8.58 billion at December 31, 2014 . The increase was due to increases in loans and securities available for sale. The increase in loans was due to significant originations during the year. Total liabilities were $7.50 billion as of September 30, 2015 , an increase of $151.2 million from $7.35 billion at December 31, 2014 . The increase was primarily due to an increase in deposits, partially offset by decreases in Federal Home Loan Bank advances and securities sold under agreements to repurchase.
Investment Securities
At September 30, 2015 , the Company held investment securities totaling $2.03 billion compared to $2.10 billion at December 31, 2014 . All of our securities are classified as available for sale and carried at fair value. The decrease in the investment securities portfolio from year-end is due to $285.8 million in principal payments, maturities and sales and $15.3 million in premium amortization, partially offset by $218.7 million in purchases and a $11.5 million increase in the net

50

unrealized gain of securities in the portfolio. The average duration of our investment portfolio was approximately 3 years and 9 months at September 30, 2015 . This duration takes into account calls, where appropriate, and consensus prepayment speeds.
The investment securities are used by the Company as a component of its balance sheet management strategies. From time-to-time, securities may be sold to reposition the portfolio in response to strategies developed by the Company’s asset liability committee. In accordance with our investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent.
The Company performs a quarterly assessment of the debt and equity securities in its investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their amortized cost basis is other-than-temporary. Impairment is considered other-than-temporary when it becomes probable that the Company will be unable to recover the entire amortized cost basis of its investment. The Company’s impairment assessment takes into consideration factors such as the length of time and the extent to which the market value has been less than cost, defaults or deferrals of scheduled interest or principal, external credit ratings and recent downgrades, internal assessment of credit quality, and whether the Company intends to sell the security and whether it is more likely than not it will be required to sell the security prior to recovery of its amortized cost basis. If a decline in fair value is judged to be other-than-temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis. The new cost basis is not adjusted for subsequent recoveries in fair value.
When there are credit losses associated with an impaired debt security and the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company will separate the amount of the impairment into the amount that is credit-related and the amount related to non-credit factors. The credit-related impairment is recognized in earnings and the non-credit-related impairment is recognized in accumulated other comprehensive income.
At September 30, 2015 , the market value of securities available for sale had a net unrealized gain of $22.7 million compared to a net unrealized gain of $11.2 million at December 31, 2014 . The change in valuation was the result of fluctuations in market interest rates subsequent to purchase. At September 30, 2015 , the Company had $464.1 million of investment securities with gross unrealized losses of $6.4 million ; however, we did not consider these investment securities to be other-than-temporarily impaired.
The following table sets forth our securities portfolio by type for the dates indicated:
September 30, 2015
December 31, 2014
(in thousands)
Securities Available for Sale
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
1,164,532

$
1,162,387

State and municipal securities
489,469

496,484

U.S. government and government-sponsored enterprise securities
347,856

413,706

U.S. government securities
20,400

20,499

Other securities
5,167

5,181

Total
$
2,027,424

$
2,098,257

For further information on our investment portfolio, see Note 4 of the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Credit Risk Management
The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of our principal commerce activities. Our policies, applicable laws, and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. In contrast, the

51

monitoring process for the commercial business, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan-by-loan basis.
We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan. For additional discussion on our methodology in managing credit risk within our loan portfolio, see the following: “Allowance for Loan and Lease Losses” section in this Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2014 Annual Report on Form 10-K.
Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of our Chief Credit Officer and approved, as appropriate, by the board of directors. Credit Administration, together with the management loan committee, has the responsibility for administering the credit approval process. As another part of its control process, we use an internal credit review and examination function to provide reasonable assurance that loans and commitments are made and maintained as prescribed by our credit policies. This includes a review of documentation when the loan is initially extended and subsequent examination to ensure continued performance and proper risk assessment.
Loan Portfolio Analysis
Our wholly owned banking subsidiary Columbia State Bank (“Columbia Bank” or the “Bank”) is a full service commercial bank, which originates a wide variety of loans, and focuses its lending efforts on originating commercial business and commercial real estate loans.
The following table sets forth the Company’s loan portfolio by type of loan for the dates indicated:
September 30, 2015
% of Total
December 31, 2014
% of Total
(dollars in thousands)
Commercial business
$
2,354,731

41.0
%
$
2,119,565

38.9
%
Real estate:
One-to-four family residential
177,108

3.1
%
175,571

3.2
%
Commercial and multifamily residential
2,449,847

42.6
%
2,363,541

43.5
%
Total real estate
2,626,955

45.7
%
2,539,112

46.7
%
Real estate construction:
One-to-four family residential
136,783

2.4
%
116,866

2.1
%
Commercial and multifamily residential
134,097

2.3
%
134,443

2.5
%
Total real estate construction
270,880

4.7
%
251,309

4.6
%
Consumer
348,315

6.1
%
364,182

6.7
%
Purchased credit impaired
191,066

3.3
%
230,584

4.2
%
Subtotal
5,791,947

100.8
%
5,504,752

101.1
%
Less: Net unearned income
(45,436
)
(0.8
)%
(59,374
)
(1.1
)%
Loans, net of unearned income (before Allowance for Loan and Lease Losses)
$
5,746,511

100.0
%
$
5,445,378

100.0
%
Loans held for sale
$
6,637

$
1,116

Total loans increased $301.1 million from year-end 2014 due to significant originations during the year. The loan portfolio continues to be diversified, with the intent to mitigate risk by minimizing concentration in any one segment. The $45.4 million in unearned income recorded at September 30, 2015 was comprised of $36.0 million in discount on acquired loans and $9.4 million in deferred loan fees. The $59.4 million in unearned income recorded at December 31, 2014 consisted of $50.8 million in discount on acquired loans and $8.6 million in deferred loan fees.

52

The following table provides additional detail related to the net discount of acquired and purchased loans, excluding PCI loans, by acquisition:
September 30, 2015
December 31, 2014
Acquisition:
(dollars in thousands)
Intermountain
$
8,572

$
10,453

West Coast
27,785

40,623

Other
(386
)
(303
)
Total net discount at period end
$
35,971

$
50,773

Commercial Loans: We are committed to providing competitive commercial lending in our primary market areas. Management expects a continued focus within its commercial lending products and to emphasize, in particular, relationship banking with businesses and business owners.
Real Estate Loans: One-to-four family residential loans are secured by properties located within our primary market areas and, typically, have loan-to-value ratios of 80% or lower at origination. Our underwriting standards for commercial and multifamily residential loans generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
Real Estate Construction Loans: We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits and loan advance limits, as applicable. Our underwriting guidelines for commercial and multifamily residential real estate construction loans generally require that the loan-to-value ratio not exceed 75% and stabilized debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. As noted above, underwriting standards can be influenced by competition and other factors. However, we endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
Consumer Loans: Consumer loans include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.
Foreign Loans: The Company has no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon and Idaho.
Purchased Credit Impaired Loans: PCI loans are comprised of loans and loan commitments acquired in connection with the 2011 FDIC-assisted acquisitions of First Heritage Bank and Summit Bank, as well as the 2010 FDIC-assisted acquisitions of Columbia River Bank and American Marine Bank. PCI loans are generally accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).
For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Nonperforming Assets
Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan, (ii) OREO; and (iii) other personal property owned, if applicable.
Nonaccrual loans : The Consolidated Financial Statements are prepared according to the accrual basis of accounting. This includes the recognition of interest income on the loan portfolio, unless a loan is placed on nonaccrual status, which occurs when there are serious doubts about the collectability of principal or interest. Our policy is generally to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status. Loans accounted for under ASC 310-30 are generally considered accruing and performing as the loans accrete interest income over the estimated lives of the loans when cash flows are reasonably estimable. Accordingly, PCI loans accounted for under ASC 310-30 that are contractually past due are still considered to be accruing and performing loans.

53

The following table set forth, at the dates indicated, information with respect to our nonaccrual loans and total nonperforming assets:
September 30,
2015
December 31,
2014
(in thousands)
Nonperforming assets
Nonaccrual loans:
Commercial business
$
10,150

$
16,799

Real estate:
One-to-four family residential
2,012

2,822

Commercial and multifamily residential
4,317

7,847

Total real estate
6,329

10,669

Real estate construction:
One-to-four family residential
1,472

465

Commercial and multifamily residential
470

480

Total real estate construction
1,942

945

Consumer
659

2,939

Total nonaccrual loans
19,080

31,352

Other real estate owned and other personal property owned
19,475

22,225

Total nonperforming assets
$
38,555

$
53,577

Loans, net of unearned income
$
5,746,511

$
5,445,378

Total assets
$
8,755,984

$
8,578,846

Nonperforming loans to period end loans
0.33
%
0.58
%
Nonperforming assets to period end assets
0.44
%
0.62
%
At September 30, 2015 , nonperforming assets were $38.6 million , compared to $53.6 million at December 31, 2014 . Nonperforming assets decreased $15.0 million during the nine months ended September 30, 2015 as a result of a $12.3 decline in nonaccrual loans and a $2.7 million decline in OREO, primarily due to OREO sales.
Other Real Estate Owned: During the nine months ended September 30, 2015 , OREO decreased $2.7 million . The following table sets forth activity in OREO for the periods indicated:
Nine Months Ended September 30,
2015
2014
(in thousands)
Balance, beginning of period
$
22,190

$
35,927

Transfers in
8,751

8,930

Valuation adjustments
(1,457
)
(3,220
)
Proceeds from sale of OREO property
(13,283
)
(24,688
)
Gain on sale of OREO, net
3,255

4,955

Balance, end of period
$
19,456

$
21,904


54

Allowance for Loan and Lease Losses
Loans, excluding Purchased Credit Impaired Loans
We maintain an ALLL to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:
1.
General valuation allowance consistent with the Contingencies topic of the FASB ASC.
2.
Classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with the Receivables topic of the FASB ASC.
3.
The unallocated allowance provides for other factors inherent in our loan portfolio that may not have been contemplated in the general and specific components of the allowance. This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed quarterly based on trends in credit losses, the results of credit reviews and overall economic trends.
On a quarterly basis, our Chief Credit Officer reviews with executive management and the board of directors the various additional factors that management considers when determining the adequacy of the ALLL, including economic and business condition reviews. Factors which influenced management’s judgment in determining the amount of the additions to the ALLL charged to operating expense include the following as of the applicable balance sheet dates:
•
Existing general economic and business conditions affecting our market place
•
Credit quality trends
•
Historical loss experience
•
Seasoning of the loan portfolio
•
Bank regulatory examination results
•
Findings of internal credit examiners
•
Duration of current business cycle
•
Specific loss estimates for problem loans
The ALLL is increased by provisions for loan and lease losses (“provision”) charged to expense, and is reduced by loans charged off, net of recoveries or recapture of previous provision. While we believe the best information available is used by us to determine the ALLL, changes in market conditions could result in adjustments to the ALLL, affecting net income, if circumstances differ from the assumptions used in determining the ALLL.
In addition to the ALLL, we maintain an allowance for unfunded commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. This methodology is similar to the methodology we use for determining the adequacy of our ALLL. For additional information on our allowance for unfunded commitments and letters of credit, see Note 6 to the Consolidated Financial Statements presented elsewhere in this report.
Purchased Credit Impaired Loans
PCI loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. PCI loans that have common risk characteristics are aggregated into pools. The Company re-measures contractual and expected loan cash flows, at the pool-level, on a quarterly basis. If, due to credit deterioration, the present value of expected cash flows, as periodically re-measured, is less than the carrying value of the loan pool, the Company adjusts the carrying value of the loan pool to the lower amount by adjusting the ALLL with a charge to earnings through the provision for loan losses. If the present value of expected cash flows is greater than the carrying value of the loan pool, the Company adjusts the carrying value of the loan pool to a higher amount by recapturing previously recorded allowance for loan losses, if any.
At September 30, 2015 , our ALLL was $69.0 million , or 1.20% of total loans (excluding loans held for sale). This compares with an ALLL of $69.6 million , or 1.28% of total loans (excluding loans held for sale) at December 31, 2014 and an ALLL of $67.9 million or 1.41% of total loans (excluding loans held for sale) at September 30, 2014 .

55

The following table provides an analysis of the Company’s ALLL for loans at the dates and the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Beginning balance
$
69,257

$
69,295

$
69,569

$
72,454

Charge-offs:
Commercial business
(2,570
)
(1,348
)
(6,082
)
(3,298
)
One-to-four family residential
—

—

(297
)
(207
)
Commercial and multifamily residential
(198
)
(7
)
(241
)
(2,993
)
Consumer
(311
)
(620
)
(1,521
)
(2,256
)
Purchased credit impaired
(3,198
)
(3,236
)
(10,174
)
(11,350
)
Total charge-offs
(6,277
)
(5,211
)
(18,315
)
(20,104
)
Recoveries:
Commercial business
623

356

1,450

2,558

One-to-four family residential
261

63

288

103

Commercial and multifamily residential
417

140

3,698

716

One-to-four family residential construction
105

20

141

504

Commercial and multifamily residential construction
2

—

7

—

Consumer
297

340

707

931

Purchased credit impaired
1,533

1,888

5,262

5,690

Total recoveries
3,238

2,807

11,553

10,502

Net charge-offs
(3,039
)
(2,404
)
(6,762
)
(9,602
)
Provision for loan and lease losses
2,831

980

6,242

5,019

Ending balance
$
69,049

$
67,871

$
69,049

$
67,871

Total loans, net at end of period, excluding loans held of sale
$
5,746,511

$
4,823,022

$
5,746,511

$
4,823,022

Allowance for loan and lease losses to period-end loans
1.20
%
1.41
%
1.20
%
1.41
%
Allowance for unfunded commitments and letters of credit
Beginning balance
$
2,930

$
2,355

$
2,655

$
2,505

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

150

275

—

Ending balance
$
2,930

$
2,505

$
2,930

$
2,505



56

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 September 30, 2015 , the FDIC loss-sharing asset was $8.1 million , which was comprised of a $6.7 million FDIC indemnification asset and a $1.4 million FDIC receivable. The FDIC receivable represents the amounts due from the FDIC for claims related to covered losses the Company has incurred net of amounts due to the FDIC relating to shared recoveries.
The following table summarizes the activity related to the FDIC loss-sharing asset for the three and nine months ended September 30, 2015 and 2014 :
Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
(in thousands)
Balance at beginning of period
$
9,344

$
27,981

$
15,174

$
39,846

Adjustments not reflected in income:
Cash (received from) paid to the FDIC, net
799

541

(2,723
)
(1,223
)
FDIC reimbursable recoveries, net
(362
)
(214
)
(1,326
)
(446
)
Adjustments reflected in income:
Amortization, net
(1,416
)
(3,992
)
(5,086
)
(16,208
)
Loan impairment
(119
)
(416
)
1,413

2,735

Sale of other real estate
(126
)
(383
)
(753
)
(2,104
)
Write-downs of other real estate
25

67

1,148

860

Other
1

(92
)
299

32

Balance at end of period
$
8,146

$
23,492

$
8,146

$
23,492

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

57

$33.4 million at December 31, 2014 to $10.2 million at September 30, 2015 , reflecting, in part, the redemption of excess Seattle Bank shares. The balance of Columbia’s FHLB stock will continue to fluctuate based upon Columbia’s borrowing activity with the Des Moines Bank.
Deposit Activities
Our deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Core deposits (demand deposit, savings, money market accounts and certificates of deposit less than $100,000) increased $366.3 million since year-end 2014 . During the current year, as part of a product migration to our new deposit account product line, a substantial portion of our interest-bearing deposits which were typically bearing a nominal interest rate were migrated to noninterest-bearing deposit products. This migration resulted in a decrease in interest-bearing demand deposit balances and an increase in noninterest-bearing deposit balances during the current year.
We have established a branch system to serve our consumer and business depositors. In addition, management’s strategy for funding asset growth is to make use of brokered and other wholesale deposits on an as-needed basis. The Company participates in the Certificate of Deposit Account Registry Service (CDARS ® ) program. CDARS ® is a network that allows participating banks to offer extended FDIC deposit insurance coverage on time deposits. The Company also participates in a similar program to offer extended FDIC deposit insurance coverage on money market accounts. These extended deposit insurance programs are generally available only to existing customers and are not used as a means of generating additional liquidity. At September 30, 2015 , CDARS ® deposits and brokered money market deposits were $144.2 million , or 2% of total deposits, compared to $101.8 million at year-end 2014 . The brokered deposits have varied maturities.
The following table sets forth the Company’s deposit base by type of product for the dates indicated:
September 30, 2015
December 31, 2014
Balance
% of
Total
Balance
% of
Total
(dollars in thousands)
Core deposits:
Demand and other noninterest-bearing
$
3,386,968

46.3
%
$
2,651,373

38.3
%
Interest-bearing demand
911,686

12.5
%
1,304,258

18.8
%
Money market
1,776,087

24.3
%
1,760,331

25.4
%
Savings
651,695

8.9
%
615,721

8.9
%
Certificates of deposit less than $100,000
259,770

3.6
%
288,261

4.2
%
Total core deposits
6,986,206

95.6
%
6,619,944

95.6
%
Certificates of deposit greater than $100,000
184,047

2.4
%
202,014

2.9
%
Certificates of deposit insured by CDARS®
26,975

0.4
%
18,429

0.3
%
Brokered money market accounts
117,196

1.6
%
83,402

1.2
%
Subtotal
7,314,424

100.0
%
6,923,789

100.0
%
Premium resulting from acquisition date fair value adjustment
381

933

Total deposits
$
7,314,805

$
6,924,722

Borrowings
We rely on FHLB advances and FRB borrowings as another source of both short and long-term funding. FHLB advances and FRB borrowings are secured by bonds within our investment portfolio, and residential, commercial and commercial real estate loans. At September 30, 2015 , we had FHLB advances of $6.5 million compared to $216.6 million at December 31, 2014 .
We also utilize wholesale and retail repurchase agreements as a supplement to our funding sources. Our wholesale repurchase agreements are secured by mortgage-backed securities. At September 30, 2015 and December 31, 2014 , we had term repurchase agreements of $25.0 million, which mature in 2018, and deposit customer sweep-related repurchase agreements of $48.2 million and $80.1 million, respectively, which mature on a daily basis. Management anticipates we will continue to rely on FHLB advances, FRB borrowings, and wholesale and retail repurchase agreements in the future and we will use those funds primarily to make loans and purchase securities.

58

Contractual Obligations, Commitments & Off-Balance Sheet Arrangements
We are party to many contractual financial obligations, including repayment of borrowings, operating and equipment lease payments, off-balance sheet commitments to extend credit and investments in affordable housing partnerships. At September 30, 2015 , we had commitments to extend credit of $1.89 billion compared to $1.62 billion at December 31, 2014 .
Capital Resources
Shareholders’ equity at September 30, 2015 was $1.25 billion , an increase from $1.23 billion at December 31, 2014 . Shareholders’ equity was 14% of total period-end assets at September 30, 2015 and December 31, 2014 .
Capital Ratios : Basel III capital requirements became effective on January 1, 2015. The new capital requirements, among other things, (i) introduce a new capital measure called “Common Equity Tier 1,” or CET1, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations. Under the requirements that are now effective, the minimum capital ratios are now (i) 4.5% CET1 to risk-weighted assets, (ii) 6% Tier 1 capital to risk-weighted assets, (iii) 8% total capital to risk-weighted assets and (iv) 4% Tier 1 leverage. The Company and the Bank have made the one-time election to opt-out of including accumulated other comprehensive income items in regulatory capital calculations.
FDIC regulations set forth the qualifications necessary for a bank to be classified as “well capitalized,” primarily for assignment of FDIC insurance premium rates. To qualify as “well capitalized,” banks must have a CET1 risk-adjusted capital ratio of 6.5%, a Tier I risk-adjusted capital ratio of at least 8%, a total risk-adjusted capital ratio of at least 10% and a leverage ratio of at least 5%. Failure to qualify as “well capitalized” can negatively impact a bank’s ability to expand and to engage in certain activities.
The Company and its banking subsidiary qualify as “well-capitalized” at September 30, 2015 . The following table presents the regulatory standards for adequately capitalized and well-capitalized institutions and the capital ratios for the Company and its banking subsidiary at September 30, 2015 :
Company
Columbia Bank
Requirements
September 30, 2015
September 30, 2015
Adequately
capitalized
Well-
Capitalized
Common equity tier 1 (CET1) risk-based capital ratio
12.18
%
11.99
%
4.50
%
6.50
%
Tier 1 risk-based capital ratio
12.18
%
11.99
%
6.00
%
8.00
%
Total risk-based capital ratio
13.22
%
13.02
%
8.00
%
10.00
%
Leverage ratio
10.21
%
10.06
%
4.00
%
5.00
%
For additional information concerning the new Basel III capital requirements, including information regarding those requirements when fully phased in, see “Business-Regulatory Capital Requirements” in our 2014 Form 10-K. See Note 24, Regulatory Capital Requirements, in Item 8 of our 2014 Form 10-K for additional details related to our capital ratios as of December 31, 2014 based on capital requirements then in effect.

59

Non-GAAP Financial Measures

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

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

Three Months Ended September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
Operating net interest margin non-GAAP reconciliation:
(dollars in thousands)
Net interest income (tax equivalent) (1)
$
84,254

$
78,232

$
250,218

$
231,089

Adjustments to arrive at operating net interest income (tax equivalent):
Incremental accretion income on FDIC purchased credit impaired loans
(2,082
)
(4,205
)
(6,896
)
(16,428
)
Incremental accretion income on other FDIC acquired loans
(34
)
(175
)
(166
)
(474
)
Incremental accretion income on other acquired loans
(4,293
)
(5,040
)
(14,116
)
(16,136
)
Premium amortization on acquired securities
2,396

1,454

7,964

4,633

Correction of immaterial error - securities premium amortization and discount accretion
—

(2,622
)
—

(2,622
)
Interest reversals on nonaccrual loans
325

423

1,131

1,103

Operating net interest income (tax equivalent) (1)
$
80,566

$
68,067

$
238,135

$
201,165

Average interest earning assets
$
7,711,531

$
6,451,660

$
7,600,954

$
6,345,909

Net interest margin (tax equivalent) (1)
4.37
%
4.85
%
4.39
%
4.86
%
Operating net interest margin (tax equivalent) (1)
4.18
%
4.22
%
4.18
%
4.23
%
__________
(1) Tax-exempt interest income has been adjusted to a tax equivalent basis. The amount of such adjustment was an addition to net interest income of $2.6 million and $2.0 million for the three months ended September 30, 2015 and 2014 , respectively, and an addition to net interest income of $7.2 million and $5.8 million for the nine months ended September 30, 2015 and 2014 , respectively.


60

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analysis. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At September 30, 2015 , based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2014 . For additional information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2014 Annual Report on Form 10-K.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is (i) accumulated and communicated to our management (including the CEO and CFO) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

61

PART II - OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are party to routine litigation arising in the ordinary course of business. Management believes that, based on information currently known to it, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial conditions, results of operations or cash flows.
Item 1A. RISK FACTORS
Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of risk factors relating to the Company’s business. The Company believes that there has been no material change in its risk factors as previously disclosed in the Company’s Form 10-K.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Not applicable
(b)
Not applicable
(c)
The following table provides information about repurchases of common stock by the Company during the quarter ended September 30, 2015 :
Period
Total Number of Common Shares Purchased (1)
Average Price Paid per Common Share
Total Number of Shares Purchased as Part of Publicly Announced Plan (2)
Maximum Number of Remaining Shares That May Yet Be Purchased Under the Plan (2)
7/1/2015 - 7/31/2015
71

$
33.48

—

—

8/1/2015 - 8/31/2015
—

—

—

—

9/1/2015 - 9/30/2015
105

31.26

—

—

176

$
32.15

—

(1)
Common shares repurchased by the Company during the quarter consist of cancellation of 3,010 shares of common stock to pay the shareholders’ withholding taxes.
(2)
The Company does not have a current share repurchase plan.
Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
Item 5.
OTHER INFORMATION
On October 30, 2015, Columbia State Bank (the “Bank”) entered into split dollar life insurance agreements (the “Agreements”) with Melanie J. Dressel, President and Chief Executive Officer of the Company and the Bank. The Agreements provide Ms. Dressel’s beneficiaries with benefits comparable to those provided to the beneficiaries of the Bank’s other senior officers in the event of death while employed by the Bank or, for Ms. Dressel, while serving on the Bank’s board of directors.
The Bank is the owner of the life insurance policies and is responsible for paying the premiums due under such policies. Under the Agreements, the amount of the death benefit payable to Ms. Dressel’s beneficiaries is equal to three times her then-current base salary and approximately ten times the projected benefit at normal retirement age of her Supplemental Executive Retirement Plan, or SERP, minus the value of other life insurance policies owned by Ms. Dressel and the Bank. Ms. Dressel may request an acceleration of these benefits in the event of terminal or chronic illness.
The foregoing description of the Agreements is not complete and is qualified in its entirety by reference to the full text of the Agreements that are filed as Exhibits 10.1 and 10.2 hereto and incorporated by reference herein.


62

Item 6.
EXHIBITS
10.1*+
Columbia State Bank Endorsement Method Split Dollar Agreement (Base Salary Benefit), dated October 30, 2015, by and between Columbia State Bank and Melanie J. Dressel
10.2*+
Columbia State Bank Endorsement Method Split Dollar Agreement (SERP Benefit), dated October 30, 2015, by and between Columbia State Bank and Melanie J. Dressel
31.1+
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32+
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101+
The following financial information from Columbia Banking System, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements.
* Management contract or compensatory plan or arrangement
+ Filed herewith

63

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
Date:
November 5, 2015
By
/s/ MELANIE J. DRESSEL
Melanie J. Dressel
President and Chief Executive Officer
(Principal Executive Officer)
Date:
November 5, 2015
By
/s/ CLINT E. STEIN
Clint E. Stein
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date:
November 5, 2015
By
/s/ BARRY S. RAY
Barry S. Ray
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)


64

INDEX TO EXHIBITS
10.1*+
Columbia State Bank Endorsement Method Split Dollar Agreement (Base Salary Benefit), dated October 30, 2015, by and between Columbia State Bank and Melanie J. Dressel
10.2*+
Columbia State Bank Endorsement Method Split Dollar Agreement (SERP Benefit), dated October 30, 2015, by and between Columbia State Bank and Melanie J. Dressel
31.1+
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32+
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101+
The following financial information from Columbia Banking System, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements.
* Management contract or compensatory plan or arrangement
+ Filed herewith

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