COLB 10-Q Quarterly Report Sept. 30, 2016 | Alphaminr
COLUMBIA BANKING SYSTEM, INC.
ALPHAMINR

COLB 10-Q Quarter ended Sept. 30, 2016

Balance Sheet
Cash Flow
Income Statement
COLUMBIA BANKING SYSTEM, INC.
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10-Q 1 colb3q2016form10-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016 .
☐

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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒ No ☐
Indicate by check mark 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
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of common stock outstanding at October 31, 2016 was 58,042,207 .


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,
2016
December 31,
2015
ASSETS
(in thousands)
Cash and due from banks
$
180,839

$
166,929

Interest-earning deposits with banks
11,225

8,373

Total cash and cash equivalents
192,064

175,302

Securities available for sale at fair value (amortized cost of $2,324,721 and $2,157,610, respectively)
2,360,084

2,157,694

Federal Home Loan Bank stock at cost
12,640

12,722

Loans held for sale
3,361

4,509

Loans, net of unearned income of ($36,236) and ($42,373), respectively
6,259,757

5,815,027

Less: allowance for loan and lease losses
70,264

68,172

Loans, net
6,189,493

5,746,855

FDIC loss-sharing asset
3,592

6,568

Interest receivable
31,606

27,877

Premises and equipment, net
152,908

164,239

Other real estate owned
8,994

13,738

Goodwill
382,762

382,762

Other intangible assets, net
19,051

23,577

Other assets
230,199

235,854

Total assets
$
9,586,754

$
8,951,697

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
$
3,942,434

$
3,507,358

Interest-bearing
4,115,382

3,931,471

Total deposits
8,057,816

7,438,829

Federal Home Loan Bank advances
66,502

68,531

Securities sold under agreements to repurchase
69,189

99,699

Other liabilities
116,512

102,510

Total liabilities
8,310,019

7,709,569

Commitments and contingent liabilities (Note 10)


Shareholders’ equity:
September 30,
2016
December 31,
2015
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

115,000

Issued and outstanding
58,043

57,724

994,098

990,281

Retained earnings
263,915

255,925

Accumulated other comprehensive income (loss)
16,505

(6,295
)
Total shareholders’ equity
1,276,735

1,242,128

Total liabilities and shareholders’ equity
$
9,586,754

$
8,951,697

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,
2016
2015 (1)
2016
2015 (1)
(in thousands except per share amounts)
Interest Income
Loans
$
74,956

$
72,242

$
216,923

$
214,808

Taxable securities
8,988

7,472

25,834

22,258

Tax-exempt securities
2,799

2,920

8,397

8,972

Deposits in banks
15

31

81

84

Total interest income
86,758

82,665

251,235

246,122

Interest Expense
Deposits
823

756

2,352

2,244

Federal Home Loan Bank advances
229

78

594

391

Other borrowings
134

137

407

419

Total interest expense
1,186

971

3,353

3,054

Net Interest Income
85,572

81,694

247,882

243,068

Provision for loan and lease losses
1,866

2,831

10,760

6,242

Net interest income after provision for loan and lease losses
83,706

78,863

237,122

236,826

Noninterest Income
Deposit account and treasury management fees (1)
7,222

7,230

21,304

21,441

Card revenue (1)
6,114

5,849

17,817

16,914

Financial services and trust revenue (1)
2,746

3,316

8,347

9,657

Loan revenue (1)
2,949

3,200

8,013

8,125

Merchant processing revenue
2,352

2,422

6,726

6,802

Bank owned life insurance
1,073

1,086

3,459

3,370

Investment securities gains, net
572

236

1,174

1,300

Change in FDIC loss-sharing asset
(104
)
(1,635
)
(2,197
)
(2,979
)
Other (1)
242

795

1,109

2,098

Total noninterest income
23,166

22,499

65,752

66,728

Noninterest Expense
Compensation and employee benefits
38,476

35,175

112,086

112,721

Occupancy
8,219

8,101

26,044

24,781

Merchant processing expense
1,161

1,090

3,312

3,146

Advertising and promotion
1,993

1,354

3,878

3,480

Data processing
4,275

3,796

12,350

13,022

Legal and professional fees
2,264

2,173

5,366

7,527

Taxes, licenses and fees
1,491

1,344

4,079

4,003

Regulatory premiums
776

1,084

2,985

3,626

Net cost (benefit) of operation of other real estate owned
(249
)
240

(61
)
(1,569
)
Amortization of intangibles
1,460

1,695

4,526

5,230

Other
7,398

8,015

21,563

23,305

Total noninterest expense
67,264

64,067

196,128

199,272

Income before income taxes
39,608

37,295

106,746

104,282

Income tax provision
12,124

11,515

32,598

32,195

Net Income
$
27,484

$
25,780

$
74,148

$
72,087

Earnings per common share
Basic
$
0.47

$
0.45

$
1.28

$
1.25

Diluted
$
0.47

$
0.45

$
1.28

$
1.25

Dividends paid per common share
$
0.39

$
0.34

$
1.14

$
0.98

Weighted average number of common shares outstanding
57,215

57,051

57,173

57,007

Weighted average number of diluted common shares outstanding
57,225

57,064

57,183

57,021

__________
(1) Reclassified to conform to the current period’s presentation. Reclassifications consisted of disaggregating fee revenue previously presented in ‘Service charges and other fees’ and certain revenue previously presented in ‘Other’ into the presentation above. The Company made these reclassifications to provide additional information about its sources of noninterest income. There was no change to total noninterest income as previously reported as a result of these reclassifications.

See accompanying Notes to unaudited Consolidated Financial Statements.

2

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Columbia Banking System, Inc.
(Unaudited)
Three Months Ended
September 30,
2016
2015
(in thousands)
Net income
$
27,484

$
25,780

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 $2,305 and ($5,765)
(4,049
)
10,126

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $208 and $85
(364
)
(151
)
Net unrealized gain (loss) from securities, net of reclassification adjustment
(4,413
)
9,975

Pension plan liability adjustment:
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($60) and ($35)
107

62

Pension plan liability adjustment, net
107

62

Other comprehensive income (loss)
(4,306
)
10,037

Total comprehensive income
$
23,178

$
35,817

Nine Months Ended
September 30,
2016
2015
(in thousands)
Net income
$
74,148

$
72,087

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) from securities:
Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($13,225) and ($4,647)
23,229

8,161

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $426 and $471
(748
)
(829
)
Net unrealized gain from securities, net of reclassification adjustment
22,481

7,332

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

(280
)
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($182) and ($87)
319

153

Pension plan liability adjustment, net
319

(127
)
Other comprehensive income
22,800

7,205

Total comprehensive income
$
96,948

$
79,292

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, 2016
9

$
2,217

57,724

$
990,281

$
255,925

$
(6,295
)
$
1,242,128

Net income
—

—

—

—

74,148

—

74,148

Other comprehensive income
—

—

—

—

—

22,800

22,800

Issuance of common stock - stock option and other plans
—

—

47

1,304

—

—

1,304

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

—

310

3,626

—

—

3,626

Purchase and retirement of common stock
—

—

(38
)
(1,113
)
—

—

(1,113
)
Preferred dividends
—

—

—

—

(117
)
—

(117
)
Cash dividends paid on common stock
—

—

—

—

(66,041
)
—

(66,041
)
Balance at September 30, 2016
9

$
2,217

58,043

$
994,098

$
263,915

$
16,505

$
1,276,735

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


See accompanying Notes to unaudited Consolidated Financial Statements.

4

CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
Nine Months Ended September 30,
2016
2015 (1)
(in thousands)
Cash Flows From Operating Activities
Net income
$
74,148

$
72,087

Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan and lease losses
10,760

6,242

Stock-based compensation expense
3,626

2,934

Depreciation, amortization and accretion
27,796

21,892

Investment securities gain, net
(1,174
)
(1,300
)
Net realized (gain) loss on sale of other assets
186

(241
)
Net realized (gain) loss on sale and valuation adjustments of other real estate owned (1)
101

(1,798
)
Originations of loans held for sale
(76,645
)
(57,249
)
Proceeds from sales of loans held for sale (1)
77,793

51,728

Net change in:
Interest receivable
(3,729
)
(2,684
)
Interest payable
(84
)
(136
)
Other assets
(7,714
)
(1,618
)
Other liabilities
13,416

11,012

Net cash provided by operating activities
118,480

100,869

Cash Flows From Investing Activities
Loans originated and acquired, net of principal collected
(450,914
)
(314,768
)
Purchases of:
Securities available for sale
(502,602
)
(218,734
)
Premises and equipment
(2,705
)
(7,351
)
Federal Home Loan Bank stock
(57,799
)
(7,360
)
Proceeds from:
FDIC reimbursement on loss-sharing asset
878

4,195

Sales of securities available for sale
120,800

82,776

Principal repayments and maturities of securities available for sale
199,677

204,322

Sales of premises and equipment and loans held for investment (1)
7,391

14,132

Redemption of Federal Home Loan Bank stock (1)
57,881

30,483

Sales of other real estate and other personal property owned
5,845

13,254

Payments to FDIC related to loss-sharing asset
(855
)
(1,472
)
Net cash used in investing activities
(622,403
)
(200,523
)
Cash Flows From Financing Activities
Net increase in deposits
619,162

390,083

Net decrease in sweep repurchase agreements
(30,510
)
(31,898
)
Proceeds from:
Federal Home Loan Bank advances
1,347,000

1,467,000

Federal Reserve Bank borrowings
10

1,010

Exercise of stock options
1,304

1,194

Payments for:
Repayment of Federal Home Loan Bank advances
(1,349,000
)
(1,677,000
)
Repayment of Federal Reserve Bank borrowings
(10
)
(1,010
)
Common stock dividends
(66,041
)
(56,480
)
Preferred stock dividends
(117
)
(100
)
Repayment of other borrowings
—

(8,248
)
Purchase and retirement of common stock
(1,113
)
(879
)
Net cash provided by financing activities
520,685

83,672

Increase (decrease) in cash and cash equivalents
16,762

(15,982
)
Cash and cash equivalents at beginning of period
175,302

188,170

Cash and cash equivalents at end of period
$
192,064

$
172,188


5

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Columbia Banking System, Inc.
(Unaudited)
Nine Months Ended September 30,
2016
2015 (1)
(in thousands)
Supplemental Information:
Cash paid during the period for:
Cash paid for interest
$
3,437

$
3,190

Cash paid for income tax
$
20,825

$
19,054

Non-cash investing and financing activities
Loans transferred to other real estate owned
$
1,202

$
8,751


(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 Columbia Trust Company (“Columbia 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, 2016 are not necessarily indicative of results to be anticipated for the year ending December 31, 2016 . The accompanying interim unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2015 Annual Report on Form 10-K.
Because of reclassifications, changes occurred in the manner in which certain comparative period noninterest income items were presented in the unaudited consolidated statements of income. Specifically, fee revenue previously presented as ‘Service charges and other fees’ and certain fee revenue previously presented as ‘Other’ were reclassified to conform to the current period presentation. The Company made these presentation changes to provide additional information about its sources of noninterest income. There was no change to total noninterest income as previously reported as a result of these reclassifications.
Significant Accounting Policies
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2015 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2015 Form 10-K disclosure for the year ended December 31, 2015 .
2.
Accounting Pronouncements Recently Issued
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Classification of Certain Cash Receipts and Cash Payments . The amendments in this ASU provide specific guidance on several statement of cash flow classification issues to reduce diversity in practice. The amendments in ASU 2016-15 are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. The Company is assessing the impact that this guidance will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments . The amendments included in this ASU require an entity to reflect its current estimate of all expected credit losses for assets held at an amortized cost basis. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however, this ASU will require that credit losses be presented as an allowance rather than as a write-down. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and are required to be adopted through a modified retrospective approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is effective. The Company is assessing the impact that this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting . The amendments included in this ASU simplify several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The amendments in ASU 2016-09 are effective for the first interim or annual period beginning after December 15, 2016. Early adoption is permitted. The Company is assessing the impact that this guidance will have on its consolidated financial statements but does not expect the impact to be material.
In February 2016, the FASB issued ASU 2016-02, Leases . The amendments included in this ASU create a new accounting model for both lessees and lessors. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The amendments in ASU 2016-02 must be adopted using the modified retrospective approach and will be effective for the first interim or annual period beginning after December 15, 2018.

7

Early adoption is permitted. The Company is assessing the impact that this guidance will have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in ASU 2016-01 require all equity investments to be measured at fair value with changes in the fair value recognized through net income. The amendments in ASU 2016-01 also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendments in ASU 2016-01 are effective for the first interim or annual period beginning after December 15, 2017. The Company is assessing the impact that this guidance will have on its consolidated financial statements but does not expect the impact to be material.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . The guidance in this update will replace most existing revenue recognition guidance in GAAP when it becomes effective. 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. In March, April and May 2016, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively, to provide implementation guidance and practical expedients related to ASU 2014-09. The Company is assessing the impact that this guidance will have on its consolidated financial statements but does not expect the impact to be material.
3. Securities
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities available for sale:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(in thousands)
September 30, 2016
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
1,498,158

$
17,148

$
(2,382
)
$
1,512,924

State and municipal securities
487,308

16,192

(382
)
503,118

U.S. government agency and government-sponsored enterprise securities
333,423

5,009

(140
)
338,292

U.S. government securities
548

—

—

548

Other securities
5,284

64

(146
)
5,202

Total
$
2,324,721

$
38,413

$
(3,050
)
$
2,360,084

December 31, 2015
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
1,296,955

$
4,525

$
(14,991
)
$
1,286,489

State and municipal securities
480,417

12,690

(938
)
492,169

U.S. government agency and government-sponsored enterprise securities
354,515

1,113

(1,846
)
353,782

U.S. government securities
20,439

—

(302
)
20,137

Other securities
5,284

24

(191
)
5,117

Total
$
2,157,610

$
18,352

$
(18,268
)
$
2,157,694


8

Proceeds from sales of securities available for sale were $37.4 million and $10.6 million for the three months ended September 30, 2016 and 2015 , respectively, and were $120.8 million and $82.8 million for the nine months ended September 30, 2016 and September 30, 2015 , 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,
2016
2015
2016
2015
(in thousands)
Gross realized gains
$
572

$
236

$
1,174

$
1,310

Gross realized losses
—

—

—

(10
)
Net realized gains
$
572

$
236

$
1,174

$
1,300

The scheduled contractual maturities of investment securities available for sale at September 30, 2016 are presented as follows:
September 30, 2016
Amortized Cost
Fair Value
(in thousands)
Due within one year
$
28,765

$
28,874

Due after one year through five years
484,206

493,479

Due after five years through ten years
688,715

703,388

Due after ten years
1,117,751

1,129,141

Other securities with no stated maturity
5,284

5,202

Total investment securities available-for-sale
$
2,324,721

$
2,360,084

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, 2016
(in thousands)
Washington and Oregon State to secure public deposits
$
235,931

Federal Reserve Bank to secure borrowings
40,877

Other securities pledged
147,336

Total securities pledged as collateral
$
424,144


9

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, 2016 and December 31, 2015 :
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, 2016
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
176,508

$
(548
)
$
163,859

$
(1,834
)
$
340,367

$
(2,382
)
State and municipal securities
35,915

(337
)
3,489

(45
)
39,404

(382
)
U.S. government agency and government-sponsored enterprise securities
22,115

(140
)
—

—

22,115

(140
)
Other securities
—

—

2,810

(146
)
2,810

(146
)
Total
$
234,538

$
(1,025
)
$
170,158

$
(2,025
)
$
404,696

$
(3,050
)
December 31, 2015
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
664,509

$
(7,610
)
$
214,325

$
(7,381
)
$
878,834

$
(14,991
)
State and municipal securities
48,261

(358
)
31,383

(580
)
79,644

(938
)
U.S. government agency and government-sponsored enterprise securities
193,400

(1,128
)
40,034

(718
)
233,434

(1,846
)
U.S. government securities
10,343

(136
)
9,794

(166
)
20,137

(302
)
Other securities
2,300

(15
)
2,780

(176
)
5,080

(191
)
Total
$
918,813

$
(9,247
)
$
298,316

$
(9,021
)
$
1,217,129

$
(18,268
)
At September 30, 2016 , there were 83 U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations securities in an unrealized loss position, of which 46 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, 2016 .
At September 30, 2016 , there were 35 state and municipal government securities in an unrealized loss position, of which five 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, 2016 , 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, 2016 .
At September 30, 2016 , there were five U.S. government agency and government-sponsored enterprise securities in an unrealized loss position, of which none was in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not currently intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2016 .
At September 30, 2016 , 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, 2016 as it has the intent and ability to hold the investment for sufficient time to allow for recovery in the market value.

10

4. Loans
The Company’s loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments are referred to collectively as loans, excluding purchased credit impaired loans. Purchased loans for which there was, at acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or “PCI loans.”
The following is an analysis of the loan portfolio by segment (net of unearned income):
September 30, 2016
December 31, 2015
Loans, excluding PCI loans
PCI Loans
Total
Loans, excluding PCI loans
PCI Loans
Total
(in thousands)
Commercial business
$
2,630,017

$
22,558

$
2,652,575

$
2,362,575

$
34,848

$
2,397,423

Real estate:
One-to-four family residential
168,511

19,378

187,889

176,295

23,938

200,233

Commercial and multifamily residential
2,686,783

92,617

2,779,400

2,491,736

99,389

2,591,125

Total real estate
2,855,294

111,995

2,967,289

2,668,031

123,327

2,791,358

Real estate construction:
One-to-four family residential
130,163

867

131,030

135,874

2,278

138,152

Commercial and multifamily residential
202,014

1,583

203,597

167,413

1,630

169,043

Total real estate construction
332,177

2,450

334,627

303,287

3,908

307,195

Consumer
325,741

15,761

341,502

342,601

18,823

361,424

Less: Net unearned income
(36,236
)
—

(36,236
)
(42,373
)
—

(42,373
)
Total loans, net of unearned income
6,106,993

152,764

6,259,757

5,634,121

180,906

5,815,027

Less: Allowance for loan and lease losses
(58,762
)
(11,502
)
(70,264
)
(54,446
)
(13,726
)
(68,172
)
Total loans, net
$
6,048,231

$
141,262

$
6,189,493

$
5,579,675

$
167,180

$
5,746,855

Loans held for sale
$
3,361

$
—

$
3,361

$
4,509

$
—

$
4,509

At September 30, 2016 and December 31, 2015 , 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, 2016 and $10.0 million at December 31, 2015 . During the first nine months of 2016 , there were $759 thousand in advances and $652 thousand in repayments.
At September 30, 2016 and December 31, 2015 , $2.30 billion and $2.22 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 $50.0 million and $50.1 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at September 30, 2016 and December 31, 2015 , respectively.

11

The following is an analysis of nonaccrual loans as of September 30, 2016 and December 31, 2015 :
September 30, 2016
December 31, 2015
Recorded
Investment
Nonaccrual
Loans
Unpaid Principal
Balance
Nonaccrual
Loans
Recorded
Investment
Nonaccrual
Loans
Unpaid Principal
Balance
Nonaccrual
Loans
(in thousands)
Commercial business:
Secured
$
9,466

$
19,689

$
9,395

$
15,688

Unsecured
36

216

42

256

Real estate:
One-to-four family residential
579

1,303

820

1,866

Commercial & multifamily residential:
Commercial land
934

922

349

332

Income property
1,957

2,177

2,843

3,124

Owner occupied
4,161

6,842

6,321

8,943

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

—

362

385

Residential construction
461

461

566

679

Consumer
3,772

4,042

766

990

Total
$
21,366

$
35,652

$
21,464

$
32,263


12

Loans, excluding purchased credit impaired loans
The following is an aging of the recorded investment of the loan portfolio as of September 30, 2016 and December 31, 2015 :
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, 2016
(in thousands)
Commercial business:
Secured
$
2,515,042

$
2,542

$
609

$
—

$
3,151

$
9,466

$
2,527,659

Unsecured
97,496

5

—

—

5

36

97,537

Real estate:
One-to-four family residential
164,927

400

34

—

434

579

165,940

Commercial & multifamily residential:
Commercial land
238,887

—

200

—

200

934

240,021

Income property
1,376,735

90

—

—

90

1,957

1,378,782

Owner occupied
1,043,376

58

—

—

58

4,161

1,047,595

Real estate construction:
One-to-four family residential:
Land and acquisition
11,933

119

—

—

119

—

12,052

Residential construction
116,327

213

305

—

518

461

117,306

Commercial & multifamily residential:
Income property
89,373

—

—

—

—

—

89,373

Owner occupied
110,853

—

—

—

—

—

110,853

Consumer
314,581

649

873

—

1,522

3,772

319,875

Total
$
6,079,530

$
4,076

$
2,021

$
—

$
6,097

$
21,366

$
6,106,993

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, 2015
(in thousands)
Commercial business:
Secured
$
2,241,069

$
11,611

$
617

$
—

$
12,228

$
9,395

$
2,262,692

Unsecured
94,867

39

—

—

39

42

94,948

Real estate:
One-to-four family residential
170,913

1,637

66

—

1,703

820

173,436

Commercial & multifamily residential:
Commercial land
212,740

69

—

—

69

349

213,158

Income property
1,305,502

1,750

684

—

2,434

2,843

1,310,779

Owner occupied
939,396

599

—

—

599

6,321

946,316

Real estate construction:
One-to-four family residential:
Land and acquisition
14,388

—

—

—

—

362

14,750

Residential construction
119,809

—

—

—

—

566

120,375

Commercial & multifamily residential:
Income property
83,634

—

—

—

—

—

83,634

Owner occupied
81,671

—

—

—

—

—

81,671

Consumer
328,219

2,597

780

—

3,377

766

332,362

Total
$
5,592,208

$
18,302

$
2,147

$
—

$
20,449

$
21,464

$
5,634,121




13

The following is an analysis of impaired loans as of September 30, 2016 and December 31, 2015 :
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, 2016
(in thousands)
Commercial business:
Secured
$
2,520,876

$
6,783

$
1,208

$
1,277

$
873

$
5,575

$
11,840

Unsecured
97,537

—

—

—

—

—

—

Real estate:
One-to-four family residential
165,394

546

358

591

353

188

402

Commercial & multifamily residential:
Commercial land
239,313

708

—

—

—

708

687

Income property
1,376,349

2,433

546

551

28

1,887

2,124

Owner occupied
1,043,849

3,746

—

—

—

3,746

6,340

Real estate construction:
One-to-four family residential:
Land and acquisition
11,950

102

—

—

—

102

102

Residential construction
116,970

336

—

—

—

336

336

Commercial & multifamily residential:
Income property
89,373

—

—

—

—

—

—

Owner occupied
110,853

—

—

—

—

—

—

Consumer
316,281

3,594

2,976

3,010

46

618

700

Total
$
6,088,745

$
18,248

$
5,088

$
5,429

$
1,300

$
13,160

$
22,531

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, 2015
(in thousands)
Commercial business:
Secured
$
2,257,168

$
5,524

$
690

$
718

$
321

$
4,834

$
6,455

Unsecured
94,948

—

—

—

—

—

—

Real estate:
One-to-four family residential
172,150

1,286

314

339

314

972

1,397

Commercial & multifamily residential:
Commercial land
213,158

—

—

—

—

—

—

Income property
1,308,673

2,106

—

—

—

2,106

2,311

Owner occupied
940,261

6,055

—

—

—

6,055

8,528

Real estate construction:
One-to-four family residential:
Land and acquisition
14,283

467

—

—

—

467

490

Residential construction
119,813

562

335

335

3

227

227

Commercial & multifamily residential:
Income property
83,634

—

—

—

—

—

—

Owner occupied
81,671

—

—

—

—

—

—

Consumer
332,282

80

15

15

15

65

139

Total
$
5,618,041

$
16,080

$
1,354

$
1,407

$
653

$
14,726

$
19,547


14

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,
2016
2015
2016
2015
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
$
6,909

$
15

$
6,507

$
3

$
9,506

$
48

$
8,602

$
10

Unsecured
—

—

—

—

—

—

1

—

Real estate:
One-to-four family residential
617

5

3,315

11

796

8

3,238

35

Commercial & multifamily residential:
Commercial land
708

—

—

—

354

—

118

—

Income property
1,939

8

2,061

10

2,010

19

3,114

27

Owner occupied
4,486

—

6,665

65

5,001

—

7,302

533

Real estate construction:
One-to-four family residential:
Land and acquisition
103

1

825

1

245

4

685

4

Residential construction
449

—

893

—

506

—

670

—

Consumer
3,345

25

27

1

2,084

46

216

3

Total
$
18,556

$
54

$
20,293

$
91

$
20,502

$
125

$
23,946

$
612


15

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) during the three and nine months ended September 30, 2016 and 2015 :
Three months ended September 30, 2016
Three months ended September 30, 2015
Number of TDR Modifications
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of TDR Modifications
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
(dollars in thousands)
Commercial business:
Secured
2

$
90

$
90

4

$
2,903

$
2,903

Real estate:
One-to-four family residential
1

85

85

—

—

—

Consumer
10

731

731

—

—

—

Total
13

$
906

$
906

4

$
2,903

$
2,903

Nine months ended September 30, 2016
Nine months ended September 30, 2015
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
7

$
1,753

$
1,753

4

$
2,903

$
2,903

Real estate:
One-to-four family residential
2

115

115

1

30

30

Commercial and multifamily residential:
Owner occupied
1

250

250

—

—

—

Consumer
28

3,442

3,442

—

—

—

Total
38

$
5,560

$
5,560

5

$
2,933

$
2,933

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 summarized in the table above 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 commitments to lend $51 thousand of additional funds on loans classified as TDR as of September 30, 2016 . The Company had no such commitments at December 31, 2015 . 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, 2016 and 2015 .
Purchased Credit Impaired Loans
Purchased credit impaired (“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, which utilizes

16

probability values of a loan pool transitioning into a particular delinquency state (e.g. 0-30 days past due, 31 to 60 days, etc.) given its delinquency state at the remeasurement date. Loss severity factors are based upon either actual charge-off data within the loan pools or industry averages, and recovery lags are based upon the collateral within the loan pools.
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, 2016 and December 31, 2015 :
September 30, 2016
December 31, 2015
(in thousands)
Commercial business
$
24,436

$
38,784

Real estate:
One-to-four family residential
22,227

27,195

Commercial and multifamily residential
98,178

106,308

Total real estate
120,405

133,503

Real estate construction:
One-to-four family residential
867

2,326

Commercial and multifamily residential
1,754

1,834

Total real estate construction
2,621

4,160

Consumer
17,632

20,903

Subtotal of PCI loans
165,094

197,350

Less:
Valuation discount resulting from acquisition accounting
12,330

16,444

Allowance for loan losses
11,502

13,726

PCI loans, net of allowance for loan losses
$
141,262

$
167,180

The following table shows the changes in accretable yield for PCI loans for the three and nine months ended September 30, 2016 and 2015 :
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
2016
2015
(in thousands)
Balance at beginning of period
$
52,909

$
67,283

$
58,981

$
73,849

Accretion
(4,902
)
(5,049
)
(12,905
)
(17,105
)
Disposals
(178
)
256

(157
)
(1,796
)
Reclassifications from nonaccretable difference
1,034

350

2,944

7,892

Balance at end of period
$
48,863

$
62,840

$
48,863

$
62,840

5. Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit
We record an allowance for loan and lease losses (the “allowance”) to recognize management’s estimate of credit losses incurred in the loan portfolio at each balance sheet date. Management’s allowance estimate is measured quarterly and the primary components include allowances related to:
1.
Loans collectively evaluated for impairment under the Contingencies topic of the FASB ASC.
2.
Loans individually determined to be impaired in accordance with the Receivables topic of the FASB ASC.
3.
Purchased credit impaired loans accounted for under the Receivables topic of the FASB ASC.
The allowance for loans collectively evaluated for impairment is measured using quantitative information adjusted by qualitative factors. Quantitative information includes credit loss experience over a historical base period and a loss emergence period estimated by loan product category such as commercial business, commercial real estate, etc. Historical loss experience by loan class incorporates the loan’s risk rating migration from origination to the point of loss. Loan risk ratings are assigned

17

based upon an assessment of the borrower’s ability to service the debt. In the event a borrower experiences financial deterioration such that the primary source of loan repayment is at risk, secondary sources of loan repayment, such as guarantors, are considered.
As conditions likely differ between the historical base period and the balance sheet date, management qualitatively adjusts the historical loss rate to assist in ensuring our allowance estimate reflects current conditions. Such qualitative adjustments include general economic and business conditions affecting our marketplace, seasoning of the loan portfolio, duration of the business cycle, trends with respect to delinquencies and problem loans, etc. In addition, the allowance may include an unallocated amount to recognize factors inherent in our loan portfolio but not otherwise contemplated. Any unallocated amount generally comprises less than 5% of the allowance.
For loans individually determined to be impaired, the Company measures impairment on a loan-by-loan basis using either 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. A specific reserve for such loans is recognized to the extent the measured value is less than the loan’s recorded investment.
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 allowance 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 allowance, if any. See Note 4, 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 the Contingencies topic of the FASB ASC as described above.
We have used the same methodology for allowance calculations during the nine months ended September 30, 2016 and 2015 . The Company carefully monitors the loan portfolio and continues to emphasize the importance of credit quality. We recognize loan charge-offs when management determines that all or a portion of a loan balance is uncollectable and the uncollectable amount can be reasonably estimated.

18

The following tables show a detailed analysis of the allowance for the three and nine months ended September 30, 2016 and 2015 :
Beginning
Balance
Charge-offs
Recoveries
Provision (Recovery)
Ending
Balance
Specific
Reserve
General
Allocation
Three months ended September 30, 2016
(in thousands)
Commercial business:
Secured
$
31,808

$
(2,128
)
$
787

$
2,008

$
32,475

$
873

$
31,602

Unsecured
1,265

(31
)
67

(128
)
1,173

—

1,173

Real estate:
One-to-four family residential
675

—

81

221

977

353

624

Commercial & multifamily residential:
Commercial land
1,422

—

—

92

1,514

—

1,514

Income property
8,046

—

10

149

8,205

28

8,177

Owner occupied
6,336

—

10

487

6,833

—

6,833

Real estate construction:
One-to-four family residential:
Land and acquisition
587

—

2

(134
)
455

—

455

Residential construction
1,376

—

19

(393
)
1,002

—

1,002

Commercial & multifamily residential:
Income property
904

—

107

(480
)
531

—

531

Owner occupied
1,384

—

—

57

1,441

—

1,441

Consumer
3,559

(383
)
399

168

3,743

46

3,697

Purchased credit impaired
11,781

(2,062
)
2,216

(433
)
11,502

—

11,502

Unallocated
161

—

—

252

413

—

413

Total
$
69,304

$
(4,604
)
$
3,698

$
1,866

$
70,264

$
1,300

$
68,964

Beginning
Balance
Charge-offs
Recoveries
Provision (Recovery)
Ending
Balance
Specific
Reserve
General
Allocation
Nine months ended September 30, 2016
(in thousands)
Commercial business:
Secured
$
32,321

$
(8,798
)
$
2,126

$
6,826

$
32,475

$
873

$
31,602

Unsecured
1,299

(75
)
143

(194
)
1,173

—

1,173

Real estate:
One-to-four family residential
916

(35
)
142

(46
)
977

353

624

Commercial & multifamily residential:
Commercial land
1,178

(26
)
2

360

1,514

—

1,514

Income property
6,616

—

191

1,398

8,205

28

8,177

Owner occupied
5,550

—

26

1,257

6,833

—

6,833

Real estate construction:
One-to-four family residential:
Land and acquisition
339

—

55

61

455

—

455

Residential construction
733

—

225

44

1,002

—

1,002

Commercial & multifamily residential:
Income property
388

—

109

34

531

—

531

Owner occupied
1,006

—

—

435

1,441

—

1,441

Consumer
3,531

(983
)
765

430

3,743

46

3,697

Purchased credit impaired
13,726

(7,826
)
5,291

311

11,502

—

11,502

Unallocated
569

—

—

(156
)
413

—

413

Total
$
68,172

$
(17,743
)
$
9,075

$
10,760

$
70,264

$
1,300

$
68,964


19

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


20

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,
2016
2015
2016
2015
(in thousands)
Balance at beginning of period
$
2,780

$
2,930

$
2,930

$
2,655

Net changes in the allowance for unfunded commitments and letters of credit
125

—

(25
)
275

Balance at end of period
$
2,905

$
2,930

$
2,905

$
2,930

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 rated 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 rated 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 allowance 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. Loans risk rated as Substandard reflect loans where a loss is possible if loan weaknesses are not corrected. Doubtful rated loans have a high probability of loss, however, the amount of loss has not yet been determined. Loss rated loans are considered uncollectable and when identified, are charged off.

21

The following is an analysis of the credit quality of our loan portfolio, excluding PCI loans, as of September 30, 2016 and December 31, 2015 :
Pass
Special Mention
Substandard
Doubtful
Loss
Total
September 30, 2016
(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured
$
2,417,653

$
48,462

$
61,544

$
—

$
—

$
2,527,659

Unsecured
96,402

800

335

—

—

97,537

Real estate:
One-to-four family residential
164,102

458

1,380

—

—

165,940

Commercial and multifamily residential:
Commercial land
233,795

5,276

950

—

—

240,021

Income property
1,354,651

17,048

7,083

—

—

1,378,782

Owner occupied
1,027,356

5,745

14,494

—

—

1,047,595

Real estate construction:
One-to-four family residential:
Land and acquisition
12,052

—

—

—

—

12,052

Residential construction
116,187

—

1,119

—

—

117,306

Commercial and multifamily residential:
Income property
89,373

—

—

—

—

89,373

Owner occupied
106,310

—

4,543

—

—

110,853

Consumer
312,602

—

7,273

—

—

319,875

Total
$
5,930,483

$
77,789

$
98,721

$
—

$
—

6,106,993

Less:
Allowance for loan and lease losses
58,762

Loans, excluding PCI loans, net
$
6,048,231

Pass
Special Mention
Substandard
Doubtful
Loss
Total
December 31, 2015
(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured
$
2,146,729

$
59,746

$
56,217

$
—

$
—

$
2,262,692

Unsecured
93,347

278

1,323

—

—

94,948

Real estate:
One-to-four family residential
171,945

52

1,439

—

—

173,436

Commercial and multifamily residential:
Commercial land
207,768

4,966

424

—

—

213,158

Income property
1,296,043

5,889

8,847

—

—

1,310,779

Owner occupied
918,986

9,668

17,662

—

—

946,316

Real estate construction:
One-to-four family residential:
Land and acquisition
14,388

—

362

—

—

14,750

Residential construction
119,243

—

1,132

—

—

120,375

Commercial and multifamily residential:
Income property
83,634

—

—

—

—

83,634

Owner occupied
81,270

—

401

—

—

81,671

Consumer
328,286

—

4,076

—

—

332,362

Total
$
5,461,639

$
80,599

$
91,883

$
—

$
—

5,634,121

Less:
Allowance for loan and lease losses
54,446

Loans, excluding PCI loans, net
$
5,579,675


22

The following is an analysis of the credit quality of our PCI loan portfolio as of September 30, 2016 and December 31, 2015 :
Pass
Special Mention
Substandard
Doubtful
Loss
Total
September 30, 2016
(in thousands)
PCI loans:
Commercial business:
Secured
$
21,420

$
94

$
2,191

$
—

$
—

$
23,705

Unsecured
731

—

—

—

—

731

Real estate:
One-to-four family residential
20,996

—

1,231

—

—

22,227

Commercial and multifamily residential:
Commercial land
7,745

—

392

—

—

8,137

Income property
31,481

—

2,445

—

—

33,926

Owner occupied
54,471

—

1,644

—

—

56,115

Real estate construction:
One-to-four family residential:
Land and acquisition
767

—

100

—

—

867

Residential construction
—

—

—

—

—

—

Commercial and multifamily residential:
Income property
1,239

—

—

—

—

1,239

Owner occupied
515

—

—

—

—

515

Consumer
17,168

—

464

—

—

17,632

Total
$
156,533

$
94

$
8,467

$
—

$
—

165,094

Less:
Valuation discount resulting from acquisition accounting
12,330

Allowance for loan losses
11,502

PCI loans, net
$
141,262

Pass
Special Mention
Substandard
Doubtful
Loss
Total
December 31, 2015
(in thousands)
PCI loans:
Commercial business:
Secured
$
31,468

$
101

$
5,995

$
—

$
—

$
37,564

Unsecured
1,218

—

2

—

—

1,220

Real estate:
One-to-four family residential
25,018

—

2,177

—

—

27,195

Commercial and multifamily residential:
Commercial land
8,234

—

664

—

—

8,898

Income property
36,426

—

5,916

—

—

42,342

Owner occupied
53,071

261

1,736

—

—

55,068

Real estate construction:
One-to-four family residential:
Land and acquisition
1,086

—

479

—

—

1,565

Residential construction
427

—

334

—

—

761

Commercial and multifamily residential:
Income property
1,303

—

—

—

—

1,303

Owner occupied
531

—

—

—

—

531

Consumer
20,122

—

781

—

—

20,903

Total
$
178,904

$
362

$
18,084

$
—

$
—

197,350

Less:
Valuation discount resulting from acquisition accounting
16,444

Allowance for loan losses
13,726

PCI loans, net
$
167,180


23

6. Other Real Estate Owned (“OREO”)
The following tables set forth activity in OREO for the three and nine months ended September 30, 2016 and 2015 :
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
2016
2015
(in thousands)
Balance, beginning of period
$
10,613

$
20,617

$
13,738

$
22,190

Transfers in
891

915

1,202

8,751

Valuation adjustments
(14
)
(664
)
(290
)
(1,457
)
Proceeds from sale of OREO property
(2,569
)
(1,675
)
(5,845
)
(13,283
)
Gain on sale of OREO, net
73

263

189

3,255

Balance, end of period
$
8,994

$
19,456

$
8,994

$
19,456

At September 30, 2016 , the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession was $604 thousand and the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $876 thousand .
7. 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 the end of the first quarter of 2015. In addition, the loss-sharing provisions for the Summit Bank and First Heritage Bank non-single family covered assets expired at the end of the second quarter of 2016. Accordingly, further activity will be limited to recoveries through the first quarter of 2018 and second quarter of 2019, respectively, 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, 2016 , the net present value of the Bank’s estimated clawback liability was $5.5 million , which was included in other liabilities on the consolidated balance sheets.
At September 30, 2016 , the FDIC loss-sharing asset was comprised of a $3.2 million FDIC indemnification asset and a $438 thousand FDIC receivable. The indemnification asset represents the net present value of cash flows the Company expects to collect from the FDIC under the loss-sharing agreements and the FDIC receivable represents amounts from the FDIC for which the Company has requested reimbursement but has not yet received reimbursement.
For PCI loans, the Company remeasures contractual and expected cash flows on a quarterly basis. When the quarterly remeasurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded. As a result of this impairment, for loans covered by loss-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.

24

The following table shows a detailed analysis of the FDIC loss-sharing asset for the three and nine months ended September 30, 2016 and 2015 :
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
2016
2015
(in thousands)
Balance at beginning of period
$
4,266

$
9,344

$
6,568

$
15,174

Adjustments not reflected in income:
Cash (received from) paid to the FDIC, net
20

799

(23
)
(2,723
)
FDIC reimbursable recoveries, net
(590
)
(362
)
(756
)
(1,326
)
Adjustments reflected in income:
Amortization, net
(315
)
(1,416
)
(2,530
)
(5,086
)
Loan impairment (recapture)
266

(119
)
393

1,413

Sale of other real estate
(49
)
(126
)
71

(753
)
Valuation adjustments of other real estate owned
—

25

(22
)
1,148

Other
(6
)
1

(109
)
299

Balance at end of period
$
3,592

$
8,146

$
3,592

$
8,146

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, 2016
Columbia River Bank
American Marine Bank
Summit Bank
First Heritage Bank
Total
(in thousands)
FDIC loss-sharing asset (liability)
$
349

$
1,959

$
1,577

$
(293
)
$
3,592

Clawback liability
$
3,474

$
1,280

$
—

$
708

$
5,462

Non-single family covered assets
$
61,040

$
9,366

$
6,700

$
12,145

$
89,251

Single family covered assets
$
6,110

$
18,563

$
5,077

$
1,645

$
31,395

Loss-sharing expiration dates:
Non-single family
Expired
Expired
Expired
Expired
Single family
First Quarter 2020
First Quarter 2020
Second Quarter 2021
Second Quarter 2021
Recovery-sharing 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
8. 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, 2016 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 .


25

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,
2016
2015
2016
2015
(in thousands)
Goodwill
Goodwill at beginning of period
$
382,762

$
382,537

$
382,762

$
382,537

Provisional period adjustments
—

225

—

225

Total goodwill
$
382,762

$
382,762

$
382,762

$
382,762

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

58,598

58,598

58,598

Accumulated amortization at beginning of period
(39,006
)
(32,593
)
(35,940
)
(29,058
)
Core deposit intangible, net at beginning of period
19,592

26,005

22,658

29,540

CDI current period amortization
(1,460
)
(1,695
)
(4,526
)
(5,230
)
Total core deposit intangible, net at end of period
18,132

24,310

18,132

24,310

Intangible assets not subject to amortization
919

919

919

919

Other intangible assets, net at end of period
19,051

25,229

19,051

25,229

Total goodwill and other intangible assets at end of period
$
401,813

$
407,991

$
401,813

$
407,991

The following table provides the estimated future amortization expense of core deposit intangibles for the remaining three months ending December 31, 2016 and the succeeding four years:
Amount
(in thousands)
Year ending December 31,
2016
$
1,419

2017
4,913

2018
3,855

2019
2,951

2020
2,048

9. 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, 2016 and December 31, 2015 was $286.5 million and $264.4 million , respectively. During the three and nine months ended September 30, 2016 , a mark-to-market gain of $9 thousand and $2 thousand , respectively, were recorded to other noninterest expense. During the three and nine months ended September 30, 2015 , mark-to-market losses of $6 thousand and $2 thousand , respectively, were recorded to other noninterest expense.

26

The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2016 and December 31, 2015 :
Asset Derivatives
Liability Derivatives
September 30, 2016
December 31, 2015
September 30, 2016
December 31, 2015
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
$
19,803

Other assets
$
12,438

Other liabilities
$
19,841

Other liabilities
$
12,478

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, 2016
(in thousands)
Assets
Interest rate contracts
$
19,803

$
—

$
19,803

$
—

$
19,803

Liabilities
Interest rate contracts
$
19,841

$
—

$
19,841

$
(19,841
)
$
—

Repurchase agreements
$
69,189

$
—

$
69,189

$
(69,189
)
$
—

December 31, 2015
Assets
Interest rate contracts
$
12,438

$
—

$
12,438

$
—

$
12,438

Liabilities
Interest rate contracts
$
12,478

$
—

$
12,478

$
(12,478
)
$
—

Repurchase agreements
$
99,699

$
—

$
99,699

$
(99,699
)
$
—

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, 2016
(in thousands)
Class of collateral pledged for repurchase agreements
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
44,189

$
—

$
—

$
25,000

$
69,189

Gross amount of recognized liabilities for repurchase agreements
69,189

Amounts related to agreements not included in offsetting disclosure
$
—


27

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 an overnight basis, is monitored on a daily basis as the underlying sweep accounts can have frequent transaction activity and the amount of pledged collateral is adjusted as necessary.
10. Commitments and Contingent Liabilities
Lease Commitments: The Company’s lease commitments consist primarily of leased locations under various non-cancellable operating leases that expire between 2016 and 2043. The majority of the leases contain renewal options and provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule.
Sale-leaseback transaction: On August 24, 2016, the Company sold one of its Washington facilities and leased back the portion of the facility utilized for branch operations. The resulting gain on sale of $742 thousand was deferred in accordance with the Leases topic of the FASB ASC and is being amortized over the life of the respective lease. At September 30, 2016 , the deferred gain was $730 thousand and is a component of "Other liabilities" in the consolidated balance sheet.
Exit or disposal activities: As part of ongoing evaluations of facilities owned or leased by the Company for ongoing economic benefit, a decision was made to cease using one of our Idaho branch locations during the current quarter. As a result, in addition to recording a cease-use liability of $849 thousand in the current quarter, the Company also made a change in estimate for the useful lives of the fixed assets associated with this facility. The total expense related to the exit activity for the three and nine months ended September 30, 2016 was $857 thousand and $883 thousand , respectively, and was recorded in the noninterest expense line item "Occupancy" in the consolidated statements of income.
Financial Instruments with Off-Balance Sheet Risk: In the normal course of business, the Company makes loan commitments (typically unfunded loans and unused lines of credit) and issues standby letters of credit to accommodate the financial needs of its customers. At September 30, 2016 and December 31, 2015 , the Company’s loan commitments amounted to $2.10 billion and $1.93 billion , respectively.
Standby letters of credit commit the Company to make payments on behalf of customers under specified conditions. Historically, no significant losses have been incurred by the Company under standby letters of credit. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies, including collateral requirements, where appropriate. Standby letters of credit were $48.4 million and $38.7 million at September 30, 2016 and December 31, 2015 , respectively. In addition, commitments under commercial letters of credit used to facilitate customers’ trade transactions and other off-balance sheet liabilities amounted to $6.6 million and $5.0 million at September 30, 2016 and December 31, 2015 , respectively.
Legal Proceedings: The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
11. Shareholders’ Equity
Preferred Stock: In conjunction with the 2013 acquisition of West Coast Bancorp, 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 28, 2016 , the Company declared a quarterly cash dividend of $0.18 per common share and common share equivalent for holders of preferred stock, and a special cash dividend of $0.20 per common share and common share equivalent for holders of preferred stock, both payable on February 24, 2016 to shareholders of record at the close of business on February 10, 2016 .

28

On April 27, 2016 , the Company declared a regular quarterly cash dividend of $0.19 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 May 25, 2016 to shareholders of record at the close of business on May 11, 2016 .
On July 28, 2016 , the Company declared a regular quarterly cash dividend of $0.20 per common share and common share equivalent for holders of preferred stock, and a special cash dividend of $0.19 per common share and common share equivalent for holders of preferred stock, both payable on August 24, 2016 to shareholders of record at the close of business on August 10, 2016 .
Subsequent to quarter end, on October 27, 2016 , the Company declared a regular quarterly cash dividend of $0.20 per common share and common share equivalent for holders of preferred stock, and a special cash dividend of $0.19 per common share and common share equivalent for holders of preferred stock, both payable on November 23, 2016 to shareholders of record at the close of business on November 9, 2016 .
The payment of cash dividends is subject to federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both federal and state regulatory requirements.

29

12. Accumulated Other Comprehensive Income (Loss)
The following table shows changes in accumulated other comprehensive income (loss) by component for the three and nine month periods ended September 30, 2016 and 2015 :
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, 2016
(in thousands)
Beginning balance
$
27,280

$
(6,469
)
$
20,811

Other comprehensive loss before reclassifications
(4,049
)
—

(4,049
)
Amounts reclassified from accumulated other comprehensive income (loss)
(364
)
107

(257
)
Net current-period other comprehensive income (loss)
(4,413
)
107

(4,306
)
Ending balance
$
22,867

$
(6,362
)
$
16,505

Three months ended September 30, 2015
Beginning balance
$
4,819

$
(2,030
)
$
2,789

Other comprehensive income before reclassifications
10,126

—

10,126

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

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

62

10,037

Ending balance
$
14,794

$
(1,968
)
$
12,826

Nine months ended September 30, 2016
Beginning balance
$
386

$
(6,681
)
$
(6,295
)
Other comprehensive income before reclassifications
23,229

—

23,229

Amounts reclassified from accumulated other comprehensive income (loss)
(748
)
319

(429
)
Net current-period other comprehensive income
22,481

319

22,800

Ending balance
$
22,867

$
(6,362
)
$
16,505

Nine months ended September 30, 2015
Beginning balance
$
7,462

$
(1,841
)
$
5,621

Other comprehensive income (loss) before reclassifications
8,161

(280
)
7,881

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

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

(127
)
7,205

Ending balance
$
14,794

$
(1,968
)
$
12,826

__________
(1) All amounts are net of tax. Amounts in parenthesis indicate debits.

30


The following table shows details regarding the reclassifications from accumulated other comprehensive income (loss) for the three and nine month periods ended September 30, 2016 and 2015 :
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Three Months Ended September 30,
Nine Months Ended September 30,
Affected line Item in the Consolidated
2016
2015
2016
2015
Statement of Income
(in thousands)
Unrealized gains and losses on available-for-sale securities
Investment securities gains
$
572

$
236

$
1,174

$
1,300

Investment securities gains, net
572

236

1,174

1,300

Total before tax
(208
)
(85
)
(426
)
(471
)
Income tax provision
$
364

$
151

$
748

$
829

Net of tax
Amortization of pension plan liability
Actuarial losses
$
(167
)
$
(97
)
$
(501
)
$
(240
)
Compensation and employee benefits
(167
)
(97
)
(501
)
(240
)
Total before tax
60

35

182

87

Income tax benefit
$
(107
)
$
(62
)
$
(319
)
$
(153
)
Net of tax
13. Fair Value Accounting and Measurement
The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Fair values are determined as follows:
Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all securities other than U.S. Treasury Notes, which are considered a Level 1 input method.
Interest rate contract positions are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

31

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2016 and December 31, 2015 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, 2016
(in thousands)
Assets
Securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations
$
1,512,924

$
—

$
1,512,924

$
—

State and municipal debt securities
503,118

—

503,118

—

U.S. government agency and government-sponsored enterprise securities
338,292

—

338,292

—

U.S. government securities
548

548

—

—

Other securities
5,202

—

5,202

—

Total securities available for sale
$
2,360,084

$
548

$
2,359,536

$
—

Other assets (Interest rate contracts)
$
19,803

$
—

$
19,803

$
—

Liabilities
Other liabilities (Interest rate contracts)
$
19,841

$
—

$
19,841

$
—

Fair value
Fair Value Measurements at Reporting Date Using
Level 1
Level 2
Level 3
December 31, 2015
(in thousands)
Assets
Securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations
$
1,286,489

$
—

$
1,286,489

$
—

State and municipal debt securities
492,169

—

492,169

—

U.S. government agency and government-sponsored enterprise securities
353,782

—

353,782

—

U.S. government securities
20,137

20,137

—

—

Other securities
5,117

—

5,117

—

Total securities available for sale
$
2,157,694

$
20,137

$
2,137,557

$
—

Other assets (Interest rate contracts)
$
12,438

$
—

$
12,438

$
—

Liabilities
Other liabilities (Interest rate contracts)
$
12,478

$
—

$
12,478

$
—

There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the nine month periods ended September 30, 2016 and 2015 . The Company recognizes transfers between levels of the valuation hierarchy based on the valuation level at the end of the reporting period.

32

Nonrecurring Measurements
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:
Impaired loans —A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral less estimated costs to sell if the loan is a collateral-dependent loan. Generally, the Company utilizes the fair market value of the collateral to measure impairment. The impairment evaluations are performed in conjunction with the allowance 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 allowance, or in the event of a write-up without previous losses charged to the allowance, 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, 2016
Fair Value Measurements at Reporting Date Using
Losses During the Three Months Ended
September 30, 2016
Losses During the Nine Months Ended
September 30, 2016
Level 1
Level 2
Level 3
(in thousands)
Impaired loans
$
2,304

$
—

$
—

$
2,304

$
(647
)
$
(3,285
)
OREO
335

—

—

335

(14
)
(14
)
$
2,639

$
—

$
—

$
2,639

$
(661
)
$
(3,299
)
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
)
The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent changes in any valuation allowances from updated appraisals that were recorded to earnings.

33

Quantitative information about Level 3 fair value measurements
The range and weighted-average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:
Fair value at
September 30, 2016
Valuation Technique
Unobservable Input
Range (Weighted Average) (1)
(dollars in thousands)
Impaired loans - collateral-dependent (3)
$
943

Fair Market Value of Collateral
Adjustment to Stated Value
N/A (2)
Impaired loans - other
$
1,361

Discounted Cash Flow
Discount Rate
2.85% - 6.50% (3.85%)
OREO
$
335

Fair Market Value of Collateral
Adjustment to Appraisal Value
N/A (2)
(1) Discount rate used in discounted cash flow valuation.
(2) Quantitative disclosures are not provided for collateral-dependent impaired loans and OREO because there were no adjustments made to the appraisal values or stated values during the current period.
(3) Collateral consists of fixed assets and accounts receivable.
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.

34

Fair value of financial instruments
Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks and interest-earning deposits with banks —The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value that approximates carrying value (Level 1).
Securities available for sale —Securities at fair value, other than U.S. Treasury Notes, are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors (Level 2). U.S. Treasury Notes are priced using quotes in active markets (Level 1).
Federal Home Loan Bank stock —The fair value is based upon the par value of the stock which equates to its carrying value (Level 2).
Loans 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, 2016 or December 31, 2015 , 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, 2016 (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 discounted cash flow 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 Financial Instruments —The majority of our commitments to extend credit and standby letters of credit carry current market interest rates if converted to loans, as such, carrying value is assumed to equal fair value.

35

The following tables summarize carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value at September 30, 2016 and December 31, 2015 :
September 30, 2016
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
(in thousands)
Assets
Cash and due from banks
$
180,839

$
180,839

$
180,839

$
—

$
—

Interest-earning deposits with banks
11,225

11,225

11,225

—

—

Securities available for sale
2,360,084

2,360,084

548

2,359,536

—

FHLB stock
12,640

12,640

—

12,640

—

Loans held for sale
3,361

3,361

—

3,361

—

Loans
6,189,493

6,274,917

—

—

6,274,917

FDIC loss-sharing asset
3,592

594

—

—

594

Interest rate contracts
19,803

19,803

—

19,803

—

Liabilities
Deposits
$
8,057,816

$
8,054,970

$
7,645,310

$
409,660

$
—

FHLB advances
66,502

67,826

—

67,826

—

Repurchase agreements
69,189

69,543

—

69,543

—

Interest rate contracts
19,841

19,841

—

19,841

—

December 31, 2015
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
(in thousands)
Assets
Cash and due from banks
$
166,929

$
166,929

$
166,929

$
—

$
—

Interest-earning deposits with banks
8,373

8,373

8,373

—

—

Securities available for sale
2,157,694

2,157,694

20,137

2,137,557

—

FHLB stock
12,722

12,722

—

12,722

—

Loans held for sale
4,509

4,509

—

4,509

—

Loans
5,746,855

5,752,423

—

—

5,752,423

FDIC loss-sharing asset
6,568

921

—

—

921

Interest rate contracts
12,438

12,438

—

12,438

—

Liabilities
Deposits
$
7,438,829

$
7,434,787

$
6,979,924

$
454,863

$
—

FHLB advances
68,531

69,176

—

69,176

—

Repurchase agreements
99,699

100,346

—

100,346

—

Interest rate contracts
12,478

12,478

—

12,478

—

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

36

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2016
2015
2016
2015
(in thousands except per share)
Basic EPS:
Net income
$
27,484

$
25,780

$
74,148

$
72,087

Less: Earnings allocated to participating securities:
Preferred shares
48

45

131

127

Nonvested restricted shares
378

296

953

772

Earnings allocated to common shareholders
$
27,058

$
25,439

$
73,064

$
71,188

Weighted average common shares outstanding
57,215

57,051

57,173

57,007

Basic earnings per common share
$
0.47

$
0.45

$
1.28

$
1.25

Diluted EPS:
Earnings allocated to common shareholders (1)
$
27,058

$
25,439

$
73,064

$
71,188

Weighted average common shares outstanding
57,215

57,051

57,173

57,007

Dilutive effect of equity awards
10

13

10

14

Weighted average diluted common shares outstanding
57,225

57,064

57,183

57,021

Diluted earnings per common share
$
0.47

$
0.45

$
1.28

$
1.25

Potentially dilutive share options that were not included in the computation of diluted EPS because to do so would be anti-dilutive
15

29

20

40

__________
(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.

37

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited consolidated financial statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, “Columbia” and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2015 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 may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. 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, 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 forward-looking statements:
•
national and global 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 local housing/real estate markets where we operate and make loans could face challenges;
•
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;
•
changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverages;
•
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 and nontraditional providers of financial services 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;
•
natural disasters, including earthquakes, tsunamis, flooding, fires and other unexpected events; and
•
the effects of any damage to our reputation resulting from developments related to any of the items identified above.

38

You should take into account that forward-looking statements speak only as of the date of this report. Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on 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 allowance for loan and lease losses (the “allowance”), business combinations, purchased credit impaired (“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 Operations” 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 2015 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 2015 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 from our broad range of products and services including treasury management, wealth management, debit and credit cards and merchant card processing. Our operating expenses consist primarily of compensation and employee benefits, occupancy, 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.
Earnings Summary
Comparison of current quarter to prior year period
The Company reported net income for the third quarter of $27.5 million or $0.47 per diluted common share, compared to $25.8 million or $0.45 per diluted common share for the third quarter of 2015 . Net interest income for the three months ended September 30, 2016 was $85.6 million , an increase of $3.9 million from the prior year period. The increase was a result of higher interest income on loans and taxable securities primarily due to higher volume of such interest-earning assets. Noninterest income for the current quarter was $23.2 million , an increase of $667 thousand from the prior year period. The increase was primarily due to the change in FDIC loss-sharing asset.
The provision for loan and lease losses for the third quarter of 2016 was $1.9 million compared to a provision of $2.8 million during the third quarter of 2015 . The provision recorded in the third quarter of 2016 was due to the recording of a $2.3 million provision on loans, excluding PCI loans, and a $433 thousand provision recapture related to PCI loans.
Total noninterest expense for the quarter ended September 30, 2016 was $67.3 million , an increase from $64.1 million for the third quarter of 2015 . The increase from the prior year period was primarily due to higher compensation and employee benefits expense.
Comparison of current year-to-date to prior year period
Net interest income for the nine months ended September 30, 2016 was $247.9 million , an increase of $4.8 million from the prior year period. The increase was due to higher loan and securities volumes, partially offset by lower incremental accretion income on loans. Noninterest income for the current period was $65.8 million , a decrease of $1.0 million from the prior year period. The decrease was due to lower financial services revenue.
The provision for loan and lease losses for the nine months ended September 30, 2016 was $10.8 million compared to a provision of $6.2 million for the first nine months of 2015 . The $10.8 million provision was due to recording a provision of $10.4 million for loans, excluding PCI loans, and a provision of $311 thousand related to PCI loans.
Total noninterest expense for the nine months ended September 30, 2016 was $196.1 million , a 2% decrease from the prior year period. The decrease from the prior-year period was primarily due to lower acquisition-related expenses, partially offset by higher compensation and employee benefits expense and lower net OREO benefit.

39

Net Interest Income
The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average cost of 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,
2016
2015
Average
Balances
Interest
Earned / Paid
Average
Rate
Average
Balances
Interest
Earned / Paid
Average
Rate
(dollars in thousands)
ASSETS
Loans, net (1)(2)
$
6,179,163

$
76,195

4.93
%
$
5,712,614

$
73,231

5.13
%
Taxable securities
1,870,466

8,988

1.92
%
1,498,211

7,472

1.99
%
Tax exempt securities (2)
480,627

4,306

3.58
%
446,963

4,491

4.02
%
Interest-earning deposits with banks
14,620

15

0.41
%
53,743

31

0.23
%
Total interest-earning assets
8,544,876

$
89,504

4.19
%
7,711,531

$
85,225

4.42
%
Other earning assets
155,663

149,895

Noninterest-earning assets
792,912

811,266

Total assets
$
9,493,451

$
8,672,692

LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit
$
417,887

$
124

0.12
%
$
480,132

$
213

0.18
%
Savings accounts
705,923

18

0.01
%
643,672

17

0.01
%
Interest-bearing demand
961,527

189

0.08
%
916,388

158

0.07
%
Money market accounts
2,033,450

492

0.10
%
1,870,503

368

0.08
%
Total interest-bearing deposits
4,118,787

823

0.08
%
3,910,695

756

0.08
%
Federal Home Loan Bank advances
96,931

229

0.95
%
13,968

78

2.23
%
Other borrowings
79,767

134

0.67
%
82,535

137

0.66
%
Total interest-bearing liabilities
4,295,485

$
1,186

0.11
%
4,007,198

$
971

0.10
%
Noninterest-bearing deposits
3,799,745

3,323,168

Other noninterest-bearing liabilities
119,633

102,496

Shareholders’ equity
1,278,588

1,239,830

Total liabilities & shareholders’ equity
$
9,493,451

$
8,672,692

Net interest income (tax equivalent)
$
88,318

$
84,254

Net interest margin (tax equivalent)
4.13
%
4.37
%
__________
(1)
Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $1.4 million and $1.2 million for the three month periods ended September 30, 2016 and 2015 , respectively. The incremental accretion income on acquired loans was $4.6 million and $6.4 million for the three months ended September 30, 2016 and 2015 , respectively.

(2)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $1.2 million and $989 thousand for the three months ended September 30, 2016 and 2015 , respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.5 million and $1.6 million for the three months ended September 30, 2016 and 2015 , respectively.

40

The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average cost of 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,
2016
2015
Average
Balances
Interest
Earned / Paid
Average
Rate
Average
Balances
Interest
Earned / Paid
Average
Rate
(dollars in thousands)
ASSETS
Loans, net (1)(2)
$
6,002,656

$
220,445

4.90
%
$
5,557,771

$
217,128

5.21
%
Taxable securities
1,787,288

25,834

1.93
%
1,541,018

22,258

1.93
%
Tax exempt securities (2)
466,589

12,918

3.69
%
455,509

13,802

4.04
%
Interest-earning deposits with banks
23,106

81

0.47
%
46,656

84

0.24
%
Total interest-earning assets
8,279,639

$
259,278

4.18
%
7,600,954

$
253,272

4.44
%
Other earning assets
154,950

148,189

Noninterest-earning assets
790,877

821,682

Total assets
$
9,225,466

$
8,570,825

LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit
$
431,643

$
408

0.13
%
$
490,720

$
689

0.19
%
Savings accounts
691,379

53

0.01
%
631,979

53

0.01
%
Interest-bearing demand
946,437

541

0.08
%
1,003,544

451

0.06
%
Money market accounts
1,973,646

1,350

0.09
%
1,813,282

1,051

0.08
%
Total interest-bearing deposits
4,043,105

2,352

0.08
%
3,939,525

2,244

0.08
%
Federal Home Loan Bank advances
103,023

594

0.77
%
88,121

391

0.59
%
Other borrowings
82,403

407

0.66
%
92,169

419

0.61
%
Total interest-bearing liabilities
4,228,531

$
3,353

0.11
%
4,119,815

$
3,054

0.10
%
Noninterest-bearing deposits
3,619,994

3,108,293

Other noninterest-bearing liabilities
108,680

99,864

Shareholders’ equity
1,268,261

1,242,853

Total liabilities & shareholders’ equity
$
9,225,466

$
8,570,825

Net interest income (tax equivalent)
$
255,925

$
250,218

Net interest margin (tax equivalent)
4.12
%
4.39
%
__________
(1)
Nonaccrual loans have been included in the table as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $3.6 million and $3.8 million for the nine months ended September 30, 2016 and 2015 , respectively. The incremental accretion income on acquired loans was $13.7 million and $21.2 million for the nine months ended September 30, 2016 and 2015 , respectively.

(2)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $3.5 million and $2.3 million for the nine months ended September 30, 2016 and 2015 , respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.5 million and $4.8 million for the nine months ended September 30, 2016 and 2015 , respectively.

41

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,
2016 Compared to 2015
Increase (Decrease) Due to
Volume
Rate
Total
(in thousands)
Interest Income
Loans, net
$
5,825

$
(2,861
)
$
2,964

Taxable securities
1,798

(282
)
1,516

Tax exempt securities
323

(508
)
(185
)
Interest earning deposits with banks
(32
)
16

(16
)
Interest income
$
7,914

$
(3,635
)
$
4,279

Interest Expense
Deposits:
Certificates of deposit
$
(25
)
$
(64
)
$
(89
)
Savings accounts
1

—

1

Interest-bearing demand
8

23

31

Money market accounts
34

90

124

Total interest on deposits
18

49

67

Federal Home Loan Bank advances
219

(68
)
151

Other borrowings
(6
)
3

(3
)
Interest expense
$
231

$
(16
)
$
215

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,
2016 Compared to 2015
Increase (Decrease) Due to
Volume
Rate
Total
(in thousands)
Interest Income
Loans, net
$
16,785

$
(13,468
)
$
3,317

Taxable securities
3,560

16

3,576

Tax exempt securities
329

(1,213
)
(884
)
Interest earning deposits with banks
(56
)
53

(3
)
Interest income
$
20,618

$
(14,612
)
$
6,006

Interest Expense
Deposits:
Certificates of deposit
$
(76
)
$
(205
)
$
(281
)
Savings accounts
5

(5
)
—

Interest-bearing demand
(27
)
117

90

Money market accounts
98

201

299

Total interest on deposits
—

108

108

Federal Home Loan Bank advances
73

130

203

Other borrowings
(67
)
55

(12
)
Interest expense
$
6

$
293

$
299


42

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,
2016
2015
2016
2015
(dollars in thousands)
Incremental accretion income due to:
FDIC purchased credit impaired loans
$
1,816

$
2,082

$
4,773

$
6,896

Other FDIC acquired loans (2)
—

34

—

166

Other acquired loans
2,749

4,293

8,896

14,116

Incremental accretion income
$
4,565

$
6,409

$
13,669

$
21,178

Net interest margin (tax equivalent)
4.13
%
4.37
%
4.12
%
4.39
%
Operating net interest margin (tax equivalent) (1)
4.03
%
4.18
%
4.02
%
4.18
%
__________
(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.
(2) For 2016, incremental accretion income on other FDIC acquired loans is no longer considered significant.
Comparison of current quarter to prior year period
Net interest income for the third quarter of 2016 was $85.6 million , up from $81.7 million for the same quarter in 2015 . The increase was due to higher loan and securities volumes, partially offset by lower incremental accretion income on loans. As shown in the table above, incremental accretion income continued to decline which was reflective of the decrease in volume of acquired loans. Average interest-earning assets were up $833.3 million from the prior year period due to loan growth and purchases of investment securities. The Company’s net interest margin (tax equivalent) decreased to 4.13% in the third quarter of 2016 , from 4.37% for the prior year period. This decrease was due to a combination of lower incremental accretion income on acquired loans and lower yielding originated loans. The Company’s operating net interest margin (tax equivalent) decreased to 4.03% from 4.18% due to lower yielding originated loans (see footnote 1 in prior table).
Comparison of current year-to-date to prior year period
Net interest income for the nine months ended September 30, 2016 was $247.9 million , an increase of 2% from $243.1 million for the prior year period. The increase in net interest income was due to higher loan and securities volumes, partially offset by lower incremental accretion income on loans. The Company’s net interest margin (tax equivalent) decreased to 4.12% for the first nine months of 2016 , from 4.39% for the prior year period. The decrease in the Company’s net interest margin (tax equivalent) was due to a combination of lower accretion income on the acquired loans and lower yielding originated loans. As shown in the table above, the Company recorded $13.7 million in total incremental accretion during the nine months ended September 30, 2016 , a decrease of $ 7.5 million from the prior year period. The Company’s operating net interest margin (tax equivalent) for the nine months ended September 30, 2016 decreased to 4.02% from 4.18% due to lower yielding originated loans (see footnote 1 in prior table).
Provision for Loan and Lease Losses
Comparison of current quarter to prior year period
During the third quarter of 2016 , the Company recorded a $1.9 million provision expense compared with a provision expense of $2.8 million during the third quarter of 2015 . The $1.9 million net provision for loan and lease losses recorded during the current quarter was driven by loans, excluding PCI loans, which was $2.3 million . Net provision recapture for PCI loans was $433 thousand . The $2.3 million provision for loans, excluding PCI loans, was due to growth in the loan portfolio and net charge-off activity. 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 2016. The amount of provision was calculated in accordance with the Company’s methodology for determining the allowance, discussed in Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.

43

Comparison of current year-to-date to prior year period
The provision for loan and lease losses for the nine months ended September 30, 2016 was $10.8 million compared with provision expense of $6.2 million during the same period in 2015 . The $10.8 million provision expense for loans recorded for the current year-to-date period included a provision of $10.4 million for loans, excluding PCI loans and a provision of $311 thousand related to PCI loans. The provision of $10.4 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 $311 thousand 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 2015 , net of activity during the period. The amount of provision was calculated in accordance with the Company’s methodology for determining the allowance, discussed in Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
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,
2016
2015 (1)
$ Change
% Change
2016
2015 (1)
$ Change
% Change
(dollars in thousands)
Deposit account and treasury management fees (1)
$
7,222

$
7,230

$
(8
)
—
%
$
21,304

$
21,441

$
(137
)
(1
)%
Card revenue (1)
6,114

5,849

265

5
%
17,817

16,914

903

5
%
Financial services and trust revenue (1)
2,746

3,316

(570
)
(17
)%
8,347

9,657

(1,310
)
(14
)%
Loan revenue (1)
2,949

3,200

(251
)
(8
)%
8,013

8,125

(112
)
(1
)%
Merchant processing revenue
2,352

2,422

(70
)
(3
)%
6,726

6,802

(76
)
(1
)%
Bank owned life insurance
1,073

1,086

(13
)
(1
)%
3,459

3,370

89

3
%
Investment securities gains, net
572

236

336

142
%
1,174

1,300

(126
)
(10
)%
Change in FDIC loss-sharing asset
(104
)
(1,635
)
1,531

(94
)%
(2,197
)
(2,979
)
782

(26
)%
Other (1)
242

795

(553
)
(70
)%
1,109

2,098

(989
)
(47
)%
Total noninterest income
$
23,166

$
22,499

$
667

3
%
$
65,752

$
66,728

$
(976
)
(1
)%
__________
(1) Reclassified to conform to the current period’s presentation. Reclassifications consisted of disaggregating fee revenue previously presented in ‘Service charges and other fees’ and certain revenue previously presented in ‘Other’ into the presentation above. The Company made these reclassifications to provide additional information about its sources of noninterest income. There was no change to total noninterest income as previously reported as a result of these reclassifications.
Comparison of current quarter to prior year period
Noninterest income was $23.2 million for the third quarter of 2016 , compared to $22.5 million for the same period in 2015 . The increase was due to lower expenses from the FDIC loss-sharing asset, partially offset by lower financial services revenue which is sensitive to stock market volatility and lower other noninterest income.
The change in the 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 2016 , the change in the asset was primarily driven by $315 thousand of amortization of the asset. 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 7 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.

44

Comparison of current year-to-date to prior year period
For the nine months ended September 30, 2016 , noninterest income was $65.8 million compared to $66.7 million for the same period in 2015 . The decrease was due to lower financial services revenue which is sensitive to stock market volatility as well as lower other noninterest income, partially offset by higher card revenue. Card revenue, which consists principally of debit card interchange and ATM fees, was up $903 thousand , principally from higher interchange fees driven by higher transaction volumes.
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,
2016
2015
$ Change
% Change
2016
2015
$ Change
% Change
(dollars in thousands)
Compensation and employee benefits
$
38,476

$
35,175

$
3,301

9
%
$
112,086

$
112,721

$
(635
)
(1
)%
All other noninterest expense:
Occupancy
8,219

8,101

118

1
%
26,044

24,781

1,263

5
%
Merchant processing expense
1,161

1,090

71

7
%
3,312

3,146

166

5
%
Advertising and promotion
1,993

1,354

639

47
%
3,878

3,480

398

11
%
Data processing
4,275

3,796

479

13
%
12,350

13,022

(672
)
(5
)%
Legal and professional services
2,264

2,173

91

4
%
5,366

7,527

(2,161
)
(29
)%
Taxes, license and fees
1,491

1,344

147

11
%
4,079

4,003

76

2
%
Regulatory premiums
776

1,084

(308
)
(28
)%
2,985

3,626

(641
)
(18
)%
Net cost (benefit) of operation of other real estate owned
(249
)
240

(489
)
(204
)%
(61
)
(1,569
)
1,508

(96
)%
Amortization of intangibles
1,460

1,695

(235
)
(14
)%
4,526

5,230

(704
)
(13
)%
Other
7,398

8,015

(617
)
(8
)%
21,563

23,305

(1,742
)
(7
)%
Total all other noninterest expense
28,788

28,892

(104
)
—
%
84,042

86,551

(2,509
)
(3
)%
Total noninterest expense
$
67,264

$
64,067

$
3,197

5
%
$
196,128

$
199,272

$
(3,144
)
(2
)%
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,
2016
2015
2016
2015
(in thousands)
Acquisition-related expenses:
Compensation and employee benefits
$
—

$
—

$
35

$
3,373

Occupancy
—

181

2,383

1,484

Advertising and promotion
—

40

—

383

Data processing
—

42

18

1,780

Legal and professional fees
—

71

—

1,095

Other
—

94

—

930

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

$
428

$
2,436

$
9,045

__________
(1) There were no acquisition-related expenses recorded during the three months ended September 30, 2016 and all of the acquisition-related expenses recorded during the nine months ended September 30, 2016 were related to the 2014 acquisition of Intermountain Community Bancorp (“Intermountain”). Substantially all of the $9.0 million in acquisition-related expenses recorded during the nine months ended September 30, 2015 were related to the Intermountain acquisition.

45

Comparison of current quarter to prior year period
Total noninterest expense for the third quarter of 2016 was $67.3 million , an increase of $3.2 million , or 5% from the prior year period. The increase was due to higher compensation and employee benefits, driven by $1.4 million higher health insurance costs as well as higher incentive compensation expense. Also contributing to the increased noninterest expense was higher advertising costs, which were the result of refreshed television commercials and the associated media costs during the current quarter.
Comparison of current year-to-date to prior year period
For the nine months ended September 30, 2016 , noninterest expense was $196.1 million , a decrease of $3.1 million , or 2% from $199.3 million a year earlier. The decrease from the prior year period was partially due to lower acquisition-related expenses. After removing the effect of the acquisition-related expenses, noninterest expense for the current year-to-date period was $3.5 million higher than the prior year period on the same basis. This increase was due to higher compensation and employee benefits expense as well as lower net OREO benefit, partially offset by lower legal and professional fees. The higher compensation and employee benefits were a result of higher health insurance costs in the current 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
2016
2015 (1)
2016
2015 (1)
(in thousands)
Postage
$
499

$
626

$
(127
)
$
1,630

$
2,042

$
(412
)
Software support and maintenance
1,231

699

532

3,500

2,570

930

Supplies
353

322

31

1,064

1,044

20

Loan expenses (1)
587

507

80

1,277

1,324

(47
)
Dues and subscriptions (1)
310

243

67

927

807

120

Insurance
484

474

10

1,441

1,500

(59
)
Card expenses (1)
683

735

(52
)
2,053

2,334

(281
)
Travel and entertainment (1)
874

1,004

(130
)
2,490

3,058

(568
)
Employee expenses
288

246

42

943

903

40

Sponsorships and charitable contributions
593

573

20

1,737

1,568

169

Directors fees
181

206

(25
)
562

661

(99
)
Correspondent bank processing fees
142

173

(31
)
417

501

(84
)
Investor relations
25

41

(16
)
189

311

(122
)
Other personal property owned
(5
)
(11
)
6

(7
)
(5
)
(2
)
FDIC clawback expense
29

174

(145
)
308

167

141

Fraud losses (1)
209

835

(626
)
376

1,273

(897
)
Miscellaneous (1)
915

1,168

(253
)
2,656

3,247

(591
)
Total other noninterest expense
$
7,398

$
8,015

$
(617
)
$
21,563

$
23,305

$
(1,742
)
__________
(1) Reclassified to conform to the current period’s presentation. The reclassification was limited to creating new lines within other noninterest expense. There were no changes to previously reported total other noninterest expense as a result of these reclassifications.
Comparison of current quarter to prior year period
Other noninterest expense decreased $617 thousand due to lower fraud losses as well as decreases in postage, travel and entertainment and FDIC clawback expense. These decreases were partially offset by increased software support and maintenance expense in the current quarter.
Comparison of current year-to-date to prior year period
Other noninterest expense decreased $1.7 million due to lower acquisition-related expenses and lower fraud losses, partially offset by higher software support and maintenance in the current period.

46

FDIC Acquired Loan Accounting
The loss-sharing provisions for four of our eight FDIC loss-sharing agreements have expired. In addition, the balance of our FDIC-acquired loan portfolios continues to diminish over time. As a result, the significance of FDIC acquired loan accounting to our results of operations has also diminished. 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,
2016
2015
2016
2015
(in thousands)
Incremental accretion income on FDIC purchased credit impaired loans
$
1,816

$
2,082

$
4,773

$
6,896

Incremental accretion income on other FDIC acquired loans (1)
—

34

—

166

Recapture (provision) for losses on FDIC purchased credit impaired loans
433

519

(311
)
(2,566
)
Change in FDIC loss-sharing asset (2)
(104
)
(1,635
)
(2,197
)
(2,979
)
FDIC clawback liability expense
(29
)
(174
)
(308
)
(167
)
Pre-tax earnings impact of FDIC acquired loan portfolios
$
2,116

$
826

$
1,957

$
1,350

__________
(1) For 2016, incremental accretion income on other FDIC acquired loans is no longer considered significant.
(2) 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 7 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Income Taxes
We recorded an income tax provision of $12.1 million for the third quarter of 2016 , compared to a provision of $11.5 million for the same period in 2015 , with an effective tax rate of 31% for both periods. For the nine months ended September 30, 2016 and 2015 , we recorded income tax provisions of $32.6 million and $32.2 million , respectively, with an effective tax rate of 31% for both periods. 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, tax-exempt earnings on bank owned life insurance and loans with favorable tax attributes. For additional information, please refer to the Company’s annual report on Form 10-K for the year ended December 31, 2015 .
FINANCIAL CONDITION
Total assets were $9.59 billion as of September 30, 2016 , an increase of $635.1 million from $8.95 billion at December 31, 2015 . Loan growth of $444.7 million during the current year was driven by strong loan originations. Loan production was diversified across the portfolio, but was centered in commercial business loans. Securities available for sale were $2.36 billion at September 30, 2016 , an increase of $202.4 million from December 31, 2015 . Total liabilities were $8.31 billion as of September 30, 2016 , an increase of $600.5 million from $7.71 billion at December 31, 2015 . The increase was primarily due to increased deposits.
Investment Securities Available for Sale
At September 30, 2016 , the Company held investment securities totaling $2.36 billion compared to $2.16 billion at December 31, 2015 . The increase in the investment securities portfolio from year-end is due to $502.6 million in purchases and a $35.3 million increase in the net unrealized gain of securities in the portfolio, partially offset by $319.3 million in principal payments, maturities and sales and $16.2 million in premium amortization. The average duration of our investment portfolio was approximately 3 years and 10 months at September 30, 2016 . 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-

47

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, 2016 , the market value of securities available for sale had a net unrealized gain of $35.4 million compared to a net unrealized gain of $84 thousand at December 31, 2015 . The change in valuation was the result of fluctuations in market interest rates subsequent to purchase. At September 30, 2016 , the Company had $404.7 million of investment securities with gross unrealized losses of $3.1 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, 2016
December 31, 2015
(in thousands)
Securities Available for Sale
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
$
1,512,924

$
1,286,489

State and municipal securities
503,118

492,169

U.S. government and government-sponsored enterprise securities
338,292

353,782

U.S. government securities
548

20,137

Other securities
5,202

5,117

Total
$
2,360,084

$
2,157,694

For further information on our investment portfolio, see Note 3 of the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Credit Risk Management
The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of our principal commerce activities. Our policies, applicable laws, and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. In contrast, the monitoring process for the commercial business, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan-by-loan basis.

48

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 “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 2015 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 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, 2016
% of Total
December 31, 2015
% of Total
(dollars in thousands)
Commercial business
$
2,630,017

42.0
%
$
2,362,575

40.6
%
Real estate:
One-to-four family residential
168,511

2.7
%
176,295

3.0
%
Commercial and multifamily residential
2,686,783

43.0
%
2,491,736

42.9
%
Total real estate
2,855,294

45.7
%
2,668,031

45.9
%
Real estate construction:
One-to-four family residential
130,163

2.1
%
135,874

2.3
%
Commercial and multifamily residential
202,014

3.2
%
167,413

2.9
%
Total real estate construction
332,177

5.3
%
303,287

5.2
%
Consumer
325,741

5.2
%
342,601

5.9
%
Purchased credit impaired
152,764

2.4
%
180,906

3.1
%
Subtotal
6,295,993

100.6
%
5,857,400

100.7
%
Less: Net unearned income
(36,236
)
(0.6
)%
(42,373
)
(0.7
)%
Loans, net of unearned income (before Allowance for Loan and Lease Losses)
$
6,259,757

100.0
%
$
5,815,027

100.0
%
Loans held for sale
$
3,361

$
4,509

Total loans increased $444.7 million from year-end 2015 . The loan growth was driven by substantial loan production during the first nine months of the year, partially offset by contractual payments and prepayments. The loan portfolio continues to be diversified, with the intent to mitigate risk by monitoring concentration in any one sector. The $36.2 million in unearned income recorded at September 30, 2016 was comprised of $23.3 million in discount on acquired loans and $12.9 million in deferred loan fees. The $42.4 million in unearned income recorded at December 31, 2015 consisted of $32.2 million in discount on acquired loans and $10.2 million in deferred loan fees.

49

The following table provides additional detail related to the net discount of acquired and purchased loans, excluding PCI loans, by acquisition:
September 30, 2016
December 31, 2015
Acquisition:
(in thousands)
Intermountain
$
7,037

$
8,237

West Coast
16,613

24,367

Other
(355
)
(432
)
Total net discount at period end
$
23,295

$
32,172

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 4 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.

50

The following table sets forth, at the dates indicated, information with respect to our nonaccrual loans and total nonperforming assets:
September 30,
2016
December 31,
2015
(in thousands)
Nonperforming assets
Nonaccrual loans:
Commercial business
$
9,502

$
9,437

Real estate:
One-to-four family residential
579

820

Commercial and multifamily residential
7,052

9,513

Total real estate
7,631

10,333

Real estate construction:
One-to-four family residential
461

928

Total real estate construction
461

928

Consumer
3,772

766

Total nonaccrual loans
21,366

21,464

Other real estate owned and other personal property owned
8,994

13,738

Total nonperforming assets
$
30,360

$
35,202

Loans, net of unearned income
$
6,259,757

$
5,815,027

Total assets
$
9,586,754

$
8,951,697

Nonperforming loans to period end loans
0.34
%
0.37
%
Nonperforming assets to period end assets
0.32
%
0.39
%
At September 30, 2016 , nonperforming assets were $30.4 million , compared to $35.2 million at December 31, 2015 . Nonperforming assets decreased $4.8 million during the nine months ended September 30, 2016 , primarily due to OREO sales during the period.
Other Real Estate Owned: The following table sets forth activity in OREO for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
2016
2015
(in thousands)
Balance, beginning of period
$
10,613

$
20,617

$
13,738

$
22,190

Transfers in
891

915

1,202

8,751

Valuation adjustments
(14
)
(664
)
(290
)
(1,457
)
Proceeds from sale of OREO property
(2,569
)
(1,675
)
(5,845
)
(13,283
)
Gain on sale of OREO, net
73

263

189

3,255

Balance, end of period
$
8,994

$
19,456

$
8,994

$
19,456

Allowance for Loan and Lease Losses
We record an allowance to recognize management’s estimate of credit losses incurred in the loan portfolio at each balance sheet date. Management’s allowance estimate is measured quarterly and the primary components include allowances related to:
1.
Loans collectively evaluated for impairment under the Contingencies topic of the FASB ASC.
2.
Loans individually determined to be impaired in accordance with the Receivables topic of the FASB ASC.
3.
Purchased credit impaired loans accounted for under the Receivables topic of the FASB ASC.

51

On a quarterly basis, our Chief Credit Officer reviews with executive management and the board of directors the various factors that management considers when determining the adequacy of the allowance. These factors include the following:
•
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 allowance 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 to determine the allowance, changes in conditions could result in adjustments to the allowance, affecting net income, if circumstances differ from management’s assumptions. In addition, the allowance may include an unallocated amount to recognize factors inherent in our loan portfolio not otherwise contemplated. Any unallocated amount generally comprises less than 5% of the allowance.
For loans individually determined to be impaired, the Company measures impairment on a loan-by-loan basis using either 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. A specific reserve for such loans is recognized to the extent the measured value is less than the loan’s recorded investment.
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 allowance 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, 2016 , our allowance was $70.3 million , or 1.12% of total loans (excluding loans held for sale). This compares with an allowance of $68.2 million , or 1.17% of total loans (excluding loans held for sale) at December 31, 2015 and an allowance of $69.0 million or 1.20% of total loans (excluding loans held for sale) at September 30, 2015 .
In addition to the allowance, we recognize a liability for unfunded commitments and letters of credit. We report this amount in other liabilities on our Consolidated Balance Sheet. We measure this amount based upon our estimates of the probability of funding and losses related to those credit exposures. This methodology is similar to how we measure our allowance. For additional information on the liability for unfunded commitments and letters of credit, see Note 5 to the Consolidated Financial Statements presented elsewhere in this report.


52

The following table provides an analysis of the Company’s allowance for loans at the dates and the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
2016
2015
(in thousands)
Beginning balance
$
69,304

$
69,257

$
68,172

$
69,569

Charge-offs:
Commercial business
(2,159
)
(2,570
)
(8,873
)
(6,082
)
One-to-four family residential
—

—

(35
)
(297
)
Commercial and multifamily residential
—

(198
)
(26
)
(241
)
Consumer
(383
)
(311
)
(983
)
(1,521
)
Purchased credit impaired
(2,062
)
(3,198
)
(7,826
)
(10,174
)
Total charge-offs
(4,604
)
(6,277
)
(17,743
)
(18,315
)
Recoveries:
Commercial business
854

623

2,269

1,450

One-to-four family residential
81

261

142

288

Commercial and multifamily residential
20

417

219

3,698

One-to-four family residential construction
21

105

280

141

Commercial and multifamily residential construction
107

2

109

7

Consumer
399

297

765

707

Purchased credit impaired
2,216

1,533

5,291

5,262

Total recoveries
3,698

3,238

9,075

11,553

Net charge-offs
(906
)
(3,039
)
(8,668
)
(6,762
)
Provision for loan and lease losses
1,866

2,831

10,760

6,242

Ending balance
$
70,264

$
69,049

$
70,264

$
69,049

Total loans, net at end of period, excluding loans held of sale
$
6,259,757

$
5,746,511

$
6,259,757

$
5,746,511

Allowance for loan and lease losses to period-end loans
1.12
%
1.20
%
1.12
%
1.20
%
Allowance for unfunded commitments and letters of credit
Beginning balance
$
2,780

$
2,930

$
2,930

$
2,655

Net changes in the allowance for unfunded commitments and letters of credit
125

—

(25
)
275

Ending balance
$
2,905

$
2,930

$
2,905

$
2,930



53

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, 2016 , the FDIC loss-sharing asset was $3.6 million , which was comprised of a $3.2 million FDIC indemnification asset and a $438 thousand FDIC receivable. The FDIC receivable represents the amounts due from the FDIC for claims related to covered losses the Company has incurred net of amounts due to the FDIC relating to shared recoveries.
The following table summarizes the activity related to the FDIC loss-sharing asset for the three and nine months ended September 30, 2016 and 2015 :
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
2016
2015
(in thousands)
Balance at beginning of period
$
4,266

$
9,344

$
6,568

$
15,174

Adjustments not reflected in income:
Cash (received from) paid to the FDIC, net
20

799

(23
)
(2,723
)
FDIC reimbursable recoveries, net
(590
)
(362
)
(756
)
(1,326
)
Adjustments reflected in income:
Amortization, net
(315
)
(1,416
)
(2,530
)
(5,086
)
Loan impairment (recapture)
266

(119
)
393

1,413

Sale of other real estate
(49
)
(126
)
71

(753
)
Valuation adjustments of other real estate owned
—

25

(22
)
1,148

Other
(6
)
1

(109
)
299

Balance at end of period
$
3,592

$
8,146

$
3,592

$
8,146

For additional information on the FDIC loss-sharing asset, please see Note 7 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 (“FHLB”), the Federal Reserve Bank of San Francisco (“FRB”), and term and sweep 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.


54

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 $250,000) increased $570.4 million since year-end 2015 .
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, 2016 , CDARS ® deposits and brokered money market deposits were $169.1 million , or 2% of total deposits, compared to $127.8 million at year-end 2015 . 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, 2016
December 31, 2015 (1)
Balance
% of
Total
Balance
% of
Total
(dollars in thousands)
Core deposits:
Demand and other noninterest-bearing
$
3,942,434

48.9
%
$
3,507,358

47.2
%
Interest-bearing demand
963,242

12.0
%
925,909

12.4
%
Money market
1,873,376

23.2
%
1,788,552

24.0
%
Savings
714,047

8.9
%
657,016

8.8
%
Certificates of deposit, less than $250,000 (1)
315,965

3.9
%
359,878

4.8
%
Total core deposits
7,809,064

96.9
%
7,238,713

97.2
%
Certificates of deposit, $250,000 or more (1)
79,590

1.0
%
72,126

1.0
%
Certificates of deposit insured by CDARS®
16,951

0.2
%
26,901

0.4
%
Brokered money market accounts
152,151

1.9
%
100,854

1.4
%
Subtotal
8,057,756

100.0
%
7,438,594

100.0
%
Premium resulting from acquisition date fair value adjustment
60

235

Total deposits
$
8,057,816

$
7,438,829

__________
(1) Reclassified to conform to the current period’s presentation. The reclassification was limited to changing the threshold for certificates of deposit presented to the current FDIC insurance limit.
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, 2016 , we had FHLB advances of $66.5 million compared to $68.5 million at December 31, 2015 .
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, 2016 and December 31, 2015 , we had term repurchase agreements of $25.0 million, which mature in 2018, and deposit customer sweep-related repurchase agreements of $44.2 million and $74.7 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.
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, 2016 , we had commitments to extend credit of $2.15 billion compared to $1.98 billion at December 31, 2015 .

55

Capital Resources
Shareholders’ equity at September 30, 2016 was $1.28 billion , an increase from $1.24 billion at December 31, 2015 . Shareholders’ equity was 13% and 14% of total period-end assets at September 30, 2016 and December 31, 2015 , respectively.
Capital Ratios : Basel III capital requirements and various provisions of the Dodd-Frank Act (the “New Capital Rules”) became effective on January 1, 2015. The New Capital Rules, 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.
The New Capital Rules also require a capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset ratios. In addition, the New Capital Rules provide for a countercyclical capital buffer applicable only to certain covered institutions. We do not expect the countercyclical capital buffer to be applicable to us or the Bank. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased-in over a three-year period (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). When fully phased-in, the New Capital Rules will require us, and the Bank, to maintain such additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets. At September 30, 2016 , the capital conservation buffer was 4.4132% and 4.2350% for the Company and Bank, respectively. Therefore, we met all capital adequacy requirements under the New Capital Rules on a fully phased-in basis as if all such requirements were in effect at September 30, 2016 .
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 qualified as “well-capitalized” at September 30, 2016 and December 31, 2015 . The following table presents the capital ratios and the capital conservation buffer, as applicable, for the Company and its banking subsidiary at September 30, 2016 and December 31, 2015 :
Company
Columbia Bank
September 30, 2016
December 31, 2015
September 30, 2016
December 31, 2015
Common equity tier 1 (CET1) risk-based capital ratio
11.4292
%
11.94
%
11.2641
%
11.76
%
Tier 1 risk-based capital ratio
11.4430
%
11.95
%
11.2641
%
11.76
%
Total risk-based capital ratio
12.4132
%
12.94
%
12.2350
%
12.75
%
Leverage ratio
9.5268
%
10.03
%
9.3782
%
9.89
%
Capital conservation buffer
4.4132
%
N/A

4.2350
%
N/A

Stock Repurchase Program
In June 2016, the Board of Directors approved a stock repurchase program which succeeds the prior program that was adopted in October 2011. The program authorizes the Company to repurchase up to 2.9 million shares of our outstanding common stock, representing approximately 5% of the common shares outstanding. The Company intends to purchase the shares from time to time in the open market or in private transactions, under conditions which allow such repurchases to be accretive to earnings per share while maintaining capital ratios that exceed the guidelines for a well-capitalized financial institution.

56

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,
2016
2015
2016
2015
Operating net interest margin non-GAAP reconciliation:
(dollars in thousands)
Net interest income (tax equivalent) (1)
$
88,318

$
84,254

$
255,925

$
250,218

Adjustments to arrive at operating net interest income (tax equivalent):
Incremental accretion income on FDIC purchased credit impaired loans
(1,816
)
(2,082
)
(4,773
)
(6,896
)
Incremental accretion income on other FDIC acquired loans (2)
—

(34
)
—

(166
)
Incremental accretion income on other acquired loans
(2,749
)
(4,293
)
(8,896
)
(14,116
)
Premium amortization on acquired securities
1,991

2,396

6,390

7,964

Interest reversals on nonaccrual loans
266

325

826

1,131

Operating net interest income (tax equivalent) (1)
$
86,010

$
80,566

$
249,472

$
238,135

Average interest earning assets
$
8,544,876

$
7,711,531

$
8,279,639

$
7,600,954

Net interest margin (tax equivalent) (1)
4.13
%
4.37
%
4.12
%
4.39
%
Operating net interest margin (tax equivalent) (1)
4.03
%
4.18
%
4.02
%
4.18
%
__________
(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 $2.7 million and $2.6 million for the three months ended September 30, 2016 and 2015 , respectively, and an addition to net interest income of $8.0 million and $7.2 million for the nine months ended September 30, 2016 and 2015 .
(2) For 2016, incremental accretion income on other FDIC acquired loans is no longer considered significant and will no longer be tracked for this non-GAAP financial measure.

57

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, 2016 , 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, 2015 . For additional information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2015 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.

58

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, 2015 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, 2016 :
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)
7/1/2016 - 7/31/2016
156

$
29.82

—

2,900,000

8/1/2016 - 8/31/2016
—

—

—

2,900,000

9/1/2016 - 9/30/2016
532

32.92

—

2,900,000

688

$
32.21

—

(1)
Common shares repurchased by the Company during the quarter consisted of cancellation of 688 shares of common stock to pay the shareholders’ withholding taxes.
(2)
The repurchase plan, which was approved in 2016, authorized the Company to repurchase up to 2.9 million shares of its outstanding common stock.
Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
Item 5.
OTHER INFORMATION
None.

59

Item 6.
EXHIBITS
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, 2016 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements.
+ Filed herewith

60

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 8, 2016
By
/s/ MELANIE J. DRESSEL
Melanie J. Dressel
President and Chief Executive Officer
(Principal Executive Officer)
Date:
November 8, 2016
By
/s/ CLINT E. STEIN
Clint E. Stein
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date:
November 8, 2016
By
/s/ BARRY S. RAY
Barry S. Ray
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)


61

INDEX TO EXHIBITS
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, 2016 is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements.
+ Filed herewith

62
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