Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011.

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number 0-20288

 

 

COLUMBIA BANKING SYSTEM, INC.

(Exact name of issuer as specified in its charter)

 

 

 

Washington   91-1422237

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1301 “A” Street

Tacoma, Washington

  98402-2156
(Address of principal executive offices)   (Zip Code)

(253) 305-1900

(Issuer’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    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  x    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   x    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  x

The number of shares of common stock outstanding at July 31, 2011 was 39,496,663.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  
PART I — FINANCIAL INFORMATION   

Item 1.

  Financial Statements (unaudited)   
  Consolidated Condensed Statements of Income - three and six months ended June 30, 2011 and 2010      1   
  Consolidated Condensed Balance Sheets – June 30, 2011 and December 31, 2010      2   
 

Consolidated Condensed Statements of Changes in Shareholders’ Equity - three and six months ended June 30, 2011 and 2010

     3   
  Consolidated Condensed Statements of Cash Flows - three and six months ended June 30, 2011 and 2010      4   
  Notes to Unaudited Consolidated Condensed Financial Statements      5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      47   

Item 4.

  Controls and Procedures      47   
PART II — OTHER INFORMATION   

Item 1.

  Legal Proceedings      48   

Item 1A.

  Risk Factors      48   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      54   

Item 3.

  Defaults Upon Senior Securities      54   

Item 4.

  [Removed and Reserved]      54   

Item 5.

  Other Information      54   

Item 6.

  Exhibits      55   
  Signatures      56   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Columbia Banking System, Inc.

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands except per share)

   2011     2010     2011     2010  

Interest Income

        

Loans

   $ 44,362      $ 38,940      $ 91,791      $ 75,887   

Taxable securities

     6,247        4,708        10,664        9,453   

Tax-exempt securities

     2,516        2,290        4,983        4,736   

Federal funds sold and deposits in banks

     184        210        482        359   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     53,309        46,148        107,920        90,435   

Interest Expense

        

Deposits

     2,848        4,334        5,927        9,275   

Federal Home Loan Bank advances

     714        710        1,408        1,415   

Long-term obligations

     253        254        504        503   

Other borrowings

     119        118        257        236   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,934        5,416        8,096        11,429   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     49,375        40,732        99,824        79,006   

Provision for loan and lease losses

     2,150        13,500        2,150        28,500   

Provision for losses on covered loans

     2,301        0        1,879        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     44,924        27,232        95,795        50,506   

Noninterest Income (Loss)

        

Service charges and other fees

     6,467        6,442        12,755        11,866   

Gain on bank acquisitions

     0        0        0        9,818   

Merchant services fees

     1,808        1,913        3,441        3,652   

Gain on sale of investment securities, net

     0        0        0        58   

Bank owned life insurance

     528        516        1,033        1,020   

Change in FDIC loss sharing asset

     (6,419     3,399        (21,193     3,399   

Other

     1,158        967        2,087        1,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income (loss)

     3,542        13,237        (1,877     31,710   

Noninterest Expense

        

Compensation and employee benefits

     19,459        17,497        38,380        34,483   

Occupancy

     4,388        4,307        8,785        8,276   

Merchant processing

     905        1,227        1,788        2,327   

Advertising and promotion

     1,012        785        1,913        1,623   

Data processing and communications

     1,913        2,567        3,837        4,446   

Legal and professional fees

     1,498        1,477        2,911        2,975   

Taxes, licenses and fees

     907        688        1,772        1,252   

Regulatory premiums

     1,279        1,462        2,979        2,918   

Net cost of operation of other real estate owned

     214        (672     (228     640   

Amortization of intangibles

     955        1,055        1,939        1,842   

FDIC clawback liability

     448        0        2,148        0   

Other

     4,186        4,352        8,286        7,860   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     37,164        34,745        74,510        68,642   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     11,302        5,724        19,408        13,574   

Income tax provision

     2,670        668        4,997        602   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 8,632      $ 5,056      $ 14,411      $ 12,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Applicable to Common Shareholders

   $ 8,632      $ 3,946      $ 14,411      $ 10,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share

        

Basic

   $ 0.22      $ 0.11      $ 0.37      $ 0.34   

Diluted

   $ 0.22      $ 0.11      $ 0.36      $ 0.34   

Dividends paid per common share

   $ 0.05      $ 0.01      $ 0.08      $ 0.02   

Weighted average number of common shares outstanding

     39,107        34,829        39,073        31,376   

Weighted average number of diluted common shares outstanding

     39,166        35,077        39,159        31,607   

See accompanying notes to unaudited consolidated condensed financial statements.

 

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CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)

 

(in thousands)

                 June 30,
2011
     December 31,
2010
 
ASSETS            

Cash and due from banks

         $ 89,926       $ 55,492   

Interest-earning deposits with banks

           179,573         458,638   
        

 

 

    

 

 

 

Total cash and cash equivalents

           269,499         514,130   

Securities available for sale at fair value (amortized cost of $956,125 and $743,928, respectively)

           989,768         763,866   

Federal Home Loan Bank stock at cost

           18,791         17,908   

Loans held for sale

           655         754   

Loans, excluding covered loans, net of deferred loan fees of ($3,454) and ($3,490), respectively

           1,987,474         1,915,754   

Less: allowance for loan and lease losses

           54,057         60,993   
        

 

 

    

 

 

 

Loans, excluding covered loans, net

           1,933,417         1,854,761   

Covered loans, net of allowance for loan losses of ($7,948) and ($6,055), respectively

           607,310         517,061   
        

 

 

    

 

 

 

Total loans, net

           2,540,727         2,371,822   

FDIC loss sharing asset

           206,238         205,991   

Interest receivable

           14,010         11,164   

Premises and equipment, net

           99,439         93,108   

Other real estate owned ($24,239 and $14,443 covered by FDIC loss share, respectively)

           46,979         45,434   

Goodwill

           119,343         109,639   

Core deposit intangible, net

           18,602         18,696   

Other assets

           105,092         103,851   
        

 

 

    

 

 

 

Total Assets

         $ 4,429,143       $ 4,256,363   
        

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY            

Deposits:

           

Noninterest-bearing

         $ 923,031       $ 895,671   

Interest-bearing

           2,552,136         2,431,598   
        

 

 

    

 

 

 

Total deposits

           3,475,167         3,327,269   

Federal Home Loan Bank advances

           120,681         119,405   

Securities sold under agreements to repurchase

           25,000         25,000   

Other borrowings

           0         642   

Long-term subordinated debt

           25,768         25,735   

Other liabilities

           54,847         51,434   
        

 

 

    

 

 

 

Total liabilities

           3,701,463         3,549,485   

Commitments and contingent liabilities

           

Shareholders’ equity:

           
     June 30,
2011
     December 31,
2010
               

Common Stock (no par value)

           

Authorized shares

     63,033         63,033         

Issued and outstanding

     39,475         39,338         578,046         576,905   

Retained earnings

           128,949         117,692   

Accumulated other comprehensive income

           20,685         12,281   
        

 

 

    

 

 

 

Total shareholders’ equity

           727,680         706,878   
        

 

 

    

 

 

 

Total Liabilities and Shareholders’ Equity

         $ 4,429,143       $ 4,256,363   
        

 

 

    

 

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

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CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)

 

      Preferred Stock      Common Stock    

Retained
Earnings

    Accumulated
Other
Comprehensive

Income
    Total
Shareholders’

Equity
 

(in thousands)

   Number of
Shares
     Amount      Number of
Shares
    Amount        

Balance at January 1, 2010

     77       $ 74,301         28,129      $ 348,706      $ 93,316      $ 11,816      $ 528,139   

Comprehensive income:

                

Net income

               12,972          12,972   

Other comprehensive income, net of tax:

                

Net unrealized gain from securities, net of reclassification adjustments

                 7,128        7,128   

Net change in cash flow hedging instruments

                 (727     (727

Net pension plan liability adjustment

                 37        37   
                

 

 

 

Other comprehensive income

                   6,438   
                

 

 

 

Comprehensive income

                   19,410   
                

 

 

 

Accretion of preferred stock discount

        294             (294       0   

Issuance of common stock, net of offering costs

           11,040        229,129            229,129   

Issuance of common stock - stock option and other plans

           42        521            521   

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

           93        705            705   

Tax benefit deficiency associated with share-based compensation

             (12         (12

Preferred dividends

               (1,922       (1,922

Cash dividends paid on common stock

               (675       (675
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2010

     77       $ 74,595         39,304      $ 579,049      $ 103,397      $ 18,254      $ 775,295   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2011

     0       $ 0         39,338      $ 576,905      $ 117,692      $ 12,281      $ 706,878   

Comprehensive income:

                

Net income

               14,411          14,411   

Other comprehensive income, net of tax:

                

Net unrealized gain from securities, net of reclassification adjustments

                 8,780        8,780   

Net change in cash flow hedging instruments

                 (143     (143

Net pension plan liability adjustment

                 (233     (233
                

 

 

 

Other comprehensive income

                   8,404   
                

 

 

 

Comprehensive income

                   22,815   
                

 

 

 

Issuance of common stock - stock option and other plans

           25        410            410   

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

           114        763            763   

Repurchase of shares

           (2     (32         (32

Cash dividends paid on common stock

               (3,154       (3,154
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

     0       $ 0         39,475      $ 578,046      $ 128,949      $ 20,685      $ 727,680   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

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Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)

 

     Six Months Ended June 30,  

(in thousands)

   2011     2010  

Cash Flows From Operating Activities

    

Net Income

   $ 14,411      $ 12,972   

Adjustments to reconcile net income to net cash provided by operating activities

    

Provision for loan and lease losses and losses on covered loans

     4,029        28,500   

Stock-based compensation expense

     763        705   

Depreciation, amortization and accretion

     6,900        6,084   

Net realized gain on FDIC assisted bank acquisitions

     0        (9,818

Net realized gain on sale of securities

     0        (58

Net realized gain on sale of other assets

     (3     (14

Net realized gain on sale of other real estate owned

     (5,455     (1,644

Gain on termination of cash flow hedging instruments

     (222     (1,128

Write-down on other real estate owned

     4,559        1,793   

Deferred income tax benefit

     0        142   

Net change in:

    

FDIC loss-sharing asset, net of cash received

     20,139        (16,340

Loans held for sale

     99        0   

Interest receivable

     (1,940     469   

Interest payable

     (1     (459

Other assets

     1,287        5,651   

Other liabilities

     (2,045     11,327   
  

 

 

   

 

 

 

Net cash provided by operating activities

     42,521        38,182   

Cash Flows From Investing Activities

    

Loans originated and acquired, net of principal collected

     (27,829     97,279   

Purchases of:

    

Securities available for sale

     (269,966     (64,054

Premises and equipment

     (2,388     (1,054

Proceeds from:

    

FDIC reimbursement on loss-sharing asset

     44,892        0   

Sales of securities available for sale

     0        69,328   

Principal repayments and maturities of securities available for sale

     60,247        42,790   

Disposal of premises and equipment

     20        60   

Sales of covered other real estate owned

     11,081        9,347   

Sales of other real estate and other personal property owned

     7,874        3,190   

Capital improvements on other real estate properties

     (468     (579

Decrease in Small Business Administration secured borrowings

     (642     0   

Net cash acquired in business combinations

     39,010        145,534   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (138,169     301,841   

Cash Flows From Financing Activities

    

Net decrease in deposits

     (134,906     (345,080

Proceeds from:

    

Issuance of common stock

     0        229,129   

Exercise of stock options

     410        509   

Federal Home Loan Bank advances

     100        0   

Federal Reserve Bank borrowings

     100        0   

Payment for:

    

Repayment of Federal Home Loan Bank advances

     (11,401     (30,197

Repayment of Federal Reserve Bank borrowings

     (100     0   

Preferred stock dividends

     0        (1,922

Common stock dividends

     (3,154     (675

Repurchase of common stock

     (32     0   

Net decrease in other borrowings

     0        87   
  

 

 

   

 

 

 

Net cash used in financing activities

     (148,983     (148,149

(Decrease) Increase in cash and cash equivalents

     (244,631     191,874   

Cash and cash equivalents at beginning of period

     514,130        305,074   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 269,499      $ 496,948   
  

 

 

   

 

 

 

Supplemental Information:

    

Cash paid during the year for:

    

Cash paid for interest

   $ 8,097      $ 11,888   

Non-cash investing activities

    

Assets acquired in FDIC assisted acquisitions (excluding cash and cash equivalents)

   $ 257,104      $ 1,075,166   

Liabilities assumed in FDIC assisted acquisitions

   $ 296,114      $ 1,210,882   

Loans transferred to other real estate owned

   $ 8,240      $ 15,019   

See accompanying notes to unaudited consolidated condensed financial statements.

 

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiary Columbia Bank (the “Bank”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the six months ended June 30, 2011 are not necessarily indicative of results to be anticipated for the year ending December 31, 2011. The accompanying interim unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2010 Annual Report on Form 10-K.

Significant Accounting Policies

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

2. Accounting Pronouncements Recently Issued

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

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements (Topic 860). ASU 2011-03 attempts to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before maturity. The effective date of ASU 2011-03 will be the first interim or annual period beginning after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is evaluating the impact this ASU will have on its financial condition and results of operations.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) (Topic 820). ASU 2011-04 developed common requirements between GAAP and IFRS for measuring fair value and for disclosing information about fair value measurements. The effective date of ASU 2011-04 will be during interim or annual period beginning after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is evaluating the impact this ASU will have on its financial condition and results of operations.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). ASU 2011-05 attempts to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The effective date of ASU 2011-05 will be the first interim or fiscal period beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted. The Company will apply the disclosure requirements of ASU 2011-05 for its first interim period beginning after December 15, 2011.

 

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3. Earnings per Common Share

Basic Earnings per Share (“EPS”) is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Common shares outstanding include common stock and vested restricted stock awards where recipients have satisfied the vesting terms. Diluted EPS reflects the assumed conversion of all dilutive securities, applying the treasury stock method. The Company calculates earnings per share using the two-class method as described in the Earnings per Share topic of the FASB Accounting Standards Codification (“ASC”). The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2011 and 2010:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands except per share)

   2011     2010     2011     2010  

Basic EPS:

        

Net income

   $ 8,632      $ 5,056      $ 14,411      $ 12,972   

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

     0        (1,110     0        (2,217
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shareholders

   $ 8,632      $ 3,946      $ 14,411      $ 10,755   

Less: Earnings allocated to participating securities

     (82     (38     (135     (109
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings allocated to common shareholders

   $ 8,550      $ 3,908      $ 14,276      $ 10,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     39,107        34,829        39,073        31,376   

Basic earnings per common share

   $ 0.22      $ 0.11      $ 0.37      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS:

        

Earnings allocated to common shareholders

   $ 8,550      $ 3,908      $ 14,276      $ 10,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     39,107        34,829        39,073        31,376   

Dilutive effect of equity awards and warrants

     59        248        86        231   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average diluted common shares outstanding

     39,166        35,077        39,159        31,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.22      $ 0.11      $ 0.36      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     62        54        54        54   

4. Business Combinations

Summit Bank

On May 20, 2011 the Bank acquired certain assets and assumed certain liabilities of Summit Bank from the Federal Deposit Insurance Corporation (“FDIC”) in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into loss-sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and certain accrued interest on loans for up to 90 days. We refer to the acquired loans and OREO subject to the loss-sharing agreements collectively as “covered assets.” Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The loss-sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five years and ten years, respectively, from the May 20, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

Summit Bank was a full service community bank headquartered in Burlington, Washington that operated three branch locations in Skagit County. We entered into this transaction to assist us with filling in our geographic footprint between Seattle and Bellingham, Washington and to support our recently expanded Bellingham banking team. We believe participating with the FDIC in this assisted transaction was, from an economical standpoint, advantageous to expansion through de novo branching.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the May 20, 2011 acquisition date. Initial accounting for acquired loans and the related indemnification asset for the Summit Bank acquisition was incomplete as of June 30, 2011. The amounts currently recognized in the financial statements have been determined provisionally as we are completing a fair value analysis of those assets utilizing an income approach. The application of the acquisition method of accounting resulted in the recognition of $3.8 million of goodwill and a core deposit intangible of $509 thousand. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process. All of the goodwill and core deposit intangible assets recognized are deductible for income tax purposes.

 

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Table of Contents

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period May 21, 2011 to June 30, 2011. Due primarily to the significant amount of fair value adjustments and the FDIC loss-sharing agreements put in place, historical results of Summit Bank are not meaningful to the Company’s results and thus no pro forma information is presented.

The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:

 

     May 20, 2011  
     (in thousands)  

Assets

  

Cash and due from banks

   $ 1,837   

Interest-earning deposits with banks and federal funds sold

     14,198   

Investment securities

     871   

Federal Home Loan Bank stock

     406   

Acquired loans

     71,452   

Accrued interest receivable

     429   

Premises and equipment

     42   

FDIC receivable

     6,984   

Other real estate owned covered by loss sharing

     2,671   

Goodwill

     3,770   

Core deposit intangible

     509   

FDIC indemnification asset

     27,174   

Other assets

     786   
  

 

 

 

Total assets acquired

   $ 131,129   
  

 

 

 

Liabilities

  

Deposits

   $ 123,279   

Federal Home Loan Bank advances

     7,772   

Accrued interest payable

     71   

Other liabilities

     7   
  

 

 

 

Total liabilities assumed

   $ 131,129   
  

 

 

 

First Heritage Bank

On May 27, 2011 the Bank acquired certain assets and assumed certain liabilities of First Heritage Bank from the FDIC in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into loss-sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and certain accrued interest on loans for up to 90 days. We refer to the acquired loans and OREO subject to the loss-sharing agreements collectively as “covered assets.” Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The loss-sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five years and ten years, respectively, from the May 27, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

First Heritage Bank was a full service community bank headquartered in Snohomish, Washington that operated five branch locations in King and Snohomish Counties. We entered into this transaction to assist us with filling in our geographic footprint between Seattle and Bellingham, Washington and to support our recently expanded Bellingham banking team. We believe participating with the FDIC in this assisted transaction was, from an economical standpoint, advantageous to expansion through de novo branching.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the May 27, 2011 acquisition date. The initial accounting for acquired loan’s and the related indemnification asset for the First Heritage Bank acquisition was incomplete as of June 30, 2011. The amounts currently recognized in the financial statements have been determined provisionally as we are completing a fair value analysis of those assets utilizing an income approach. The application of the acquisition method of accounting resulted in the recognition in $5.9 million of goodwill and a core deposit intangible of $1.3 million. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process. All of the goodwill and core deposit intangible assets recognized are deductible for income tax purposes.

 

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Table of Contents

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period May 28, 2011 to June 30, 2011. Due primarily to the significant amount of fair value adjustments and the FDIC loss-sharing agreements put in place, historical results of First Heritage Bank are not meaningful to the Company’s results and thus no pro forma information is presented.

The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:

 

     May 27, 2011  
     (in thousands)  

Assets

  

Cash and due from banks

   $ 4,688   

Interest-earning deposits with banks

     6,689   

Investment securities

     5,303   

Federal Home Loan Bank stock

     477   

Acquired loans

     81,857   

Accrued interest receivable

     476   

Premises and equipment

     5,339   

FDIC receivable

     4,751   

Other real estate owned covered by loss sharing

     8,286   

Goodwill

     5,934   

Core deposit intangible

     1,337   

FDIC indemnification asset

     38,104   

Other assets

     1,743   
  

 

 

 

Total assets acquired

   $ 164,984   
  

 

 

 

Liabilities

  

Deposits

   $ 159,525   

Federal Home Loan Bank advances

     5,003   

Accrued interest payable

     421   

Other liabilities

     35   
  

 

 

 

Total liabilities assumed

   $ 164,984   
  

 

 

 

 

8


Table of Contents

5. Securities

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

 

(in thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

June 30, 2011:

          

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

   $ 671,342       $ 22,154       ($ 84   $ 693,412   

State and municipal securities

     250,336         12,161         (858     261,639   

U.S. government agency securities

     30,054         224         0        30,278   

Other securities

     4,393         77         (31     4,439   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 956,125       $ 34,616       ($ 973   $ 989,768   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010:

          

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

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

State and municipal securities

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

Other securities

     3,281         0         (38     3,243   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

 

The scheduled contractual maturities of investment securities available for sale at June 30, 2011 are presented as follows:

 

     June 30, 2011  
     Amortized Cost      Fair Value  
     (in thousands)  

Due within one year

   $ 29,452       $ 29,790   

Due after one year through five years

     93,873         96,310   

Due after five years through ten years

     169,886         177,458   

Due after ten years

     659,633         682,942   
  

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 952,844       $ 986,500   
  

 

 

    

 

 

 

The following table summarizes the carrying value of securities pledged as collateral at June 30, 2011:

 

(in thousands)

   Carrying
Amount
 

Washington and Oregon State public deposits

   $ 220,540   

Federal Home Loan Bank advances

     92,418   

Federal Reserve Bank borrowings

     51,657   

Repurchase agreement

     27,556   

Interest rate contracts

     13,336   

Other

     1,429   
  

 

 

 

Total securities pledged as collateral

   $ 406,936   
  

 

 

 

 

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Table of Contents

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010:

 

June 30, 2011                                        
     Less than 12 Months     12 Months or More     Total  

(in thousands)

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

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

   $ 26,028       ($ 83   $ 347       ($ 1   $ 26,375       ($ 84

State and municipal securities

     27,944         (636     2,829         (222     30,773         (858

Other securities

     0         0        969         (31     969         (31
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 53,972       ($ 719   $ 4,145       ($ 254   $ 58,117       ($ 973
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
December 31, 2010                                        
     Less than 12 Months     12 Months or More     Total  

(in thousands)

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

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

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

State and municipal securities

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

Other securities

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

6. Noncovered Loans

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

 

(in thousands)

   June 30,
2011
    December 31,
2010
 

Noncovered loans:

    

Commercial business

   $ 836,745      $ 795,369   

Real Estate:

    

One-to-four family residential

     51,077        49,383   

Commercial and five or more family residential properties

     843,288        794,329   
  

 

 

   

 

 

 

Total real estate

     894,365        843,712   

Real estate construction:

    

One-to-four family residential

     52,368        67,961   

Commercial and five or more family residential properties

     29,886        30,185   
  

 

 

   

 

 

 

Total real estate construction

     82,254        98,146   

Consumer

     177,564        182,017   

Less: deferred loan fees

     (3,454     (3,490
  

 

 

   

 

 

 

Total noncovered loans, net of deferred fees

     1,987,474        1,915,754   

Less: Allowance for loan and lease losses

     (54,057     (60,993
  

 

 

   

 

 

 

Total loans, net

   $ 1,933,417      $ 1,854,761   
  

 

 

   

 

 

 

Loans held for sale

   $ 655      $ 754   
  

 

 

   

 

 

 

At June 30, 2011 and December 31, 2010, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington and Oregon.

The Company and its banking subsidiary have granted loans to officers and directors of the Company and related interests. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was $9.8 million and $12.9 million at June 30, 2011 and December 31, 2010, respectively. During the first six months of 2011, advances on related party loans were $3.1 million and repayments totaled $6.2 million.

At June 30, 2011 and December 31, 2010, $366.1 million and $426.6 million of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank borrowings.

 

11


Table of Contents

The following is an analysis of noncovered, nonaccrual loans as of June 30, 2011 and December 31, 2010:

 

     June 30, 2011      December 31, 2010  

(in thousands)

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

Commercial Business

           

Secured

   $ 11,506       $ 17,798       $ 32,368       $ 44,316   

Unsecured

     204         814         0         327   

Real Estate 1-4 Family

           

Residential RE Perm

     2,748         3,197         2,999         3,353   

Real Estate Commercial & Multifamily

           

Commercial RE Land

     3,962         7,382         4,093         6,279   

Income Property Multifamily Perm

     8,611         10,724         11,716         12,737   

Owner Occupied RE Perm

     10,256         11,134         7,407         8,990   

Construction 1-4 Family

           

Land & Acquisition

     7,823         18,168         11,608         21,344   

Residential Construction

     2,307         4,593         6,503         11,547   

Construction Commercial & Multifamily

           

Income Property Multifamily Construction

     5,977         12,873         7,585         12,916   

Owner Occupied RE Construction

     0         0         0         0   

Consumer

     6,076         6,620         5,022         5,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 59,470       $ 93,303       $ 89,301       $ 127,001   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

12


Table of Contents

The following is an analysis of the aged loan portfolio as of June 30, 2011 and December 31, 2010:

 

(in thousands)

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

June 30, 2011

                    

Commercial Business

                    

Secured

   $ 782,661       $ 446       $ 969       $ 0         1,415       $ 11,380       $ 795,456   

Unsecured

     40,921         0         59         0         59         310         41,290   

Real Estate 1-4 Family

                    

Residential RE Perm

     48,331         0         0         0         0         2,746         51,077   

Real Estate Commercial & Multifamily

                    

Commercial RE Land

     21,525         211         0         0         211         3,957         25,693   

Income Property Multifamily Perm

     472,606         45         0         0         45         8,601         481,252   

Owner Occupied RE Perm

     333,095         301         460         0         761         10,252         344,108   

Construction 1-4 Family

                    

Land & Acquisition

     22,233         0         0         0         0         7,819         30,052   

Residential Construction

     18,084         1,942         0         0         1,942         2,289         22,315   

Construction Commercial & Multifamily

                    

Income Property Multifamily

                    

Construction

     2,938         0         0         0         0         5,976         8,914   

Owner Occupied RE Construction

     13,208         0         0         0         0         0         13,208   

Consumer

     168,317         663         2,509         0         3,172         6,074         177,563   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,923,919       $ 3,608       $ 3,997       $ 0       $ 7,605       $ 59,404       $ 1,990,928   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(in thousands)

   Current
Loans
     30 - 59
Days
Past Due
     60 - 89
Days

Past Due
     Greater
than 90
Days Past
Due
     Total
Past Due
     Nonaccrual
Loans
     Total Loans  

December 31, 2010

                    

Commercial Business

                    

Secured

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

Unsecured

     40,455         9         0         0         9         448         40,912   

Real Estate 1-4 Family

                    

Residential RE Perm

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

Real Estate Commercial & Multifamily

                    

Commercial RE Land

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

Income Property Multifamily Perm

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

Owner Occupied RE Perm

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

Construction 1-4 Family

                    

Land & Acquisition

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

Residential Construction

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

Construction Commercial & Multifamily

                    

Income Property Multifamily

                    

Construction

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

Owner Occupied RE Construction

     11,935         0         0         0         0         0         11,935   

Consumer

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is an analysis of impaired loans as of June 30, 2011 and December 31, 2010:

 

     Balance of Loans
Collectively Measured
for Contingency
Provision
     Balance of
Loans
Individually

Measured for
Specific
Impairment
     Impaired Loans With
Recorded Allowance
     Impaired Loans Without
Recorded Allowance
     Average Recorded
Investment
Impaired

Loans (1)
     Interest
Recognized  on

Impaired
Loans
 

(in thousands)

         Recorded
Investment (1)
     Unpaid
Principal

Balance
     Related
Allowance
     Recorded
Investment (1)
     Unpaid
Principal

Balance
       

June 30, 2011

                          

Commercial Business

                          

Secured

   $ 786,252       $ 9,204       $ 1,593       $ 1,592       $ 331       $ 7,617       $ 7,612       $ 20,471       $ 52   

Unsecured

     41,189         100         71         71         71         29         29         102         1   

Real Estate 1-4 Family

                          

Residential RE Perm

     48,652         2,425         0         0         0         2,428         2,425         2,649         0   

Real Estate Commercial & Multifamily

                          

Commercial RE Land

     21,933         3,760         0         0         0         3,763         3,760         4,567         0   

Income Property Multifamily Perm

     473,138         8,113         2,340         2,339         301         5,782         5,774         10,330         442   

Owner Occupied RE Perm

     327,962         16,146         1,466         1,465         286         14,717         14,681         15,431         64   

Construction 1-4 Family

                          

Land & Acquisition

     22,078         7,974         1,190         1,190         148         6,787         6,784         9,681         138   

Residential Construction

     20,027         2,289         0         0         0         2,311         2,289         4,158         0   

Construction Commercial & Multifamily

                          

Income Property Multifamily Construction

     2,939         5,976         0         0         0         5,977         5,976         6,878         0   

Owner Occupied RE Construction

     13,207         0         0         0         0         0         0         0         0   

Consumer

     172,409         5,155         106         106         11         5,050         5,049         4,871         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,929,786       $ 61,142       $ 6,766       $ 6,763       $ 1,148       $ 54,461       $ 54,379       $ 79,138       $ 698   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
             Balance of
Loans
Individually

Measured for
Specific
Impairment
     Impaired Loans With
Recorded Allowance
     Impaired Loans Without
Recorded Allowance
               

(in thousands)

   Balance of Loans
Collectively Measured
for Contingency
Provision
        Recorded
Investment (1)
     Unpaid
Principal

Balance
     Related
Allowance
     Recorded
Investment (1)
     Unpaid
Principal

Balance
               

December 31, 2010

                          

Commercial Business

                          

Secured

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

Unsecured

     40,808         104         75         75         75         29         30         

Real Estate 1-4 Family

                          

Residential RE Perm

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

Real Estate Commercial & Multifamily

                          

Commercial RE Land

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

Income Property Multifamily Perm

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

Owner Occupied RE Perm

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

Construction 1-4 Family

                          

Land & Acquisition

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

Residential Construction

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

Construction Commercial & Multifamily

                          

Income Property Multifamily Construction

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

Owner Occupied RE Construction

     11,935         0         0         0         0         0         0         

Consumer

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

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

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

We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:

 

  1. General valuation allowance consistent with the Contingencies topic of the FASB ASC.

 

  2. Classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with the Receivables topic of the FASB ASC.

 

  3. The unallocated allowance provides for other factors inherent in our loan portfolio that may not have been contemplated in the general and specific components of the allowance. This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed quarterly based on trends in credit losses, the results of credit reviews and overall economic trends.

The general valuation allowance is systematically calculated quarterly using quantitative and qualitative information about specific loan classes. The minimum required level in which an entity develops a systematic methodology to determine its allowance for loan and lease losses is at the segment level. However, the Company’s systematic methodology in determining its allowance for loan and lease losses is prepared at the class level, which is more detailed than the segment level. The quantitative information uses historical losses from a specific loan class and incorporates the loan’s risk rating migration from origination to the point of loss. A loan’s risk rating is primarily determined based upon the borrower’s ability to fulfill its debt obligation from a cash flow perspective. In the event there is financial deterioration of the borrower, the borrower’s other sources of income or repayment are also considered, including recent appraisal values for collateral dependent loans. The qualitative information takes into account general economic and business conditions affecting our market place, seasoning of the loan portfolio, duration of the business cycle, etc. to ensure our methodologies reflect the current economic environment and other factors as using historical loss information exclusively may not give an accurate estimate of inherent losses within the Company’s loan portfolio.

 

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Table of Contents

The specific valuation allowance is a reserve for each loan determined to be impaired and the value of the impaired loan is less than its recorded investment. The Company measures the impairment based on the discounted expected future cash flows, observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependant or if foreclosure is probable. The specific reserve for each loan is equal to the difference between the recorded investment in the loan and its determined impairment value.

The ALLL is increased by provisions for loan and lease losses (“provision”) charged to expense, and is reduced by loans charged off, net of recoveries. While the Company’s management believes the best information available is used to determine the ALLL, changes in market conditions could result in adjustments to the ALLL, affecting net income, if circumstances differ from the assumptions used in determining the ALLL.

We have used the same methodology for ALLL calculations during the three and six months ended June 30, 2011 and 2010. Adjustments to the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. The Company reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments when appropriate. The Company continues to strive towards maintaining a conservative approach to credit quality and will continue to prudently add to our ALLL as necessary in order to maintain adequate reserves. The Company carefully monitors the loan portfolio and continues to emphasize the importance of credit quality while continuously strengthening loan monitoring systems and controls.

 

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Table of Contents

The following table shows a detailed analysis of the allowance for loan and lease losses for noncovered loans as of the three and six months ended June 30, 2011:

 

(in thousands)

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

Three months ended June 30, 2011

                  

Commercial Business

                  

Secured

   $ 22,307       ($ 834   $ 233       $ 614      $ 22,320       $ 330       $ 21,990   

Unsecured

     618         0        359         (404     573         72         501   

Real Estate 1-4 Family

                  

Residential RE Perm

     1,100         (216     0         (37     847         0         847   

Real Estate Commercial & Multifamily

                  

Commercial RE Land

     555         (656     0         995        894         0         894   

Income Property Multifamily Perm

     12,297         (275     13         2,674        14,709         301         14,408   

Owner Occupied RE Perm

     10,412         (623     0         (3,310     6,479         286         6,193   

Construction 1-4 Family

                  

Land & Acquisition

     3,295         (410     700         (733     2,852         148         2,704   

Residential Construction

     2,118         (395     0         (19     1,704         0         1,704   

Construction Commercial & Multifamily

                  

Income Property Multifamily Construction

     127         (1,078     0         994        43         0         43   

Owner Occupied RE Construction

     68         0        0         (34     34         0         34   

Consumer

     2,418         (271     45         556        2,748         161         2,587   

Unallocated

     0         0        0         854        854         0         854   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 55,315       ($ 4,758   $ 1,350       $ 2,150      $ 54,057       $ 1,298       $ 52,759   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

(in thousands)

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

Six months ended June 30, 2011

                  

Commercial Business

                  

Secured

   $ 21,811       ($ 4,121   $ 329       $ 4,301      $ 22,320       $ 330       $ 21,990   

Unsecured

     738         (84     368         (449     573         72         501   

Real Estate 1-4 Family

                  

Residential RE Perm

     1,100         (664     0         411        847         0         847   

Real Estate Commercial & Multifamily

                  

Commercial RE Land

     634         (656     0         916        894         0         894   

Income Property Multifamily Perm

     15,210         (640     55         84        14,709         301         14,408   

Owner Occupied RE Perm

     9,692         (623     31         (2,621     6,479         286         6,193   

Construction 1-4 Family

                  

Land & Acquisition

     3,769         (1,178     1,768         (1,507     2,852         148         2,704   

Residential Construction

     2,292         (1,054     36         430        1,704         0         1,704   

Construction Commercial & Multifamily

                  

Income Property Multifamily Construction

     274         (1,565     0         1,334        43         0         43   

Owner Occupied RE Construction

     70         0        0         (36     34         0         34   

Consumer

     2,120         (1,196     108         1,716        2,748         161         2,587   

Unallocated

     3,283         0        0         (2,429     854         0         854   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 60,993       ($ 11,781   $ 2,695       $ 2,150      $ 54,057       $ 1,298       $ 52,759   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The three and six months changes as of June 30, 2011 and 2010 are summarized as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands)

   2011     2011     2010     2010  

Beginning balance

   $ 55,315      $ 60,993      $ 56,981      $ 53,478   

Provision charged to expense

     2,150        2,150        13,500        28,500   

Loans charged off

     (4,758     (11,781     (11,073     (23,926

Recoveries

     1,350        2,695        340        1,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 54,057      $ 54,057      $ 59,748      $ 59,748   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the allowance for unfunded commitments and letters of credit are summarized as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(in thousands)

   2011     2010      2011      2010  

Beginning balance

   $ 1,660      $ 815       $ 1,165       $ 775   

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

     (200     0         295         40   
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,460      $ 815       $ 1,460       $ 815   
  

 

 

   

 

 

    

 

 

    

 

 

 

Risk Elements

The extension of credit in the form of loans to individuals and businesses is one of our principal commerce activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry, type of borrower and by limiting the aggregation of debt to a single borrower.

The monitoring process for the loan portfolio includes periodic reviews of individual loans with risk ratings assigned to each loan. Based on the analysis, loans are given a risk rating of 1-10 based on the following criteria:

 

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

 

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

 

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

 

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

 

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

 

  6) and a rating of 10 indicates the loan is uncollectable, and when identified is charged-off.

Loans with a risk rating of 1-6 are considered Pass loans and loans with risk ratings of 7, 8, 9 and 10 are considered Special Mention, Substandard, Doubtful and Loss, respectively. Loans with a risk rating of Substandard or worse are reported as classified loans in our allowance for loan and lease losses analysis. We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of loss on the loan increases. In the event full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on non-accrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan.

 

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Table of Contents

The following is an analysis of the credit quality of our noncovered loan portfolio as of June 30, 2011 and December 31, 2010:

 

     June 30, 2011      December 31, 2010  

(dollars in thousands)

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

Commercial Business

           

Secured

     4.94       $ 799,676         4.96       $ 757,372   

Unsecured

     4.27         41,568         4.23         41,175   

Real Estate 1-4 Family

           

Residential RE Perm

     4.94         51,259         4.96         49,436   

Real Estate Commercial & Multifamily

           

Commercial RE Land

     5.79         25,899         5.75         24,956   

Income Property Multifamily Perm

     5.05         483,465         5.07         406,711   

Owner Occupied RE Perm

     5.12         345,811         5.12         366,284   

Construction 1-4 Family

           

Land & Acquisition

     6.66         30,164         6.79         37,054   

Residential Construction

     6.49         22,529         6.63         31,293   

Construction Commercial & Multifamily

           

Income Property Multifamily Construction

     5.94         8,932         6.38         18,296   

Owner Occupied RE Construction

     4.81         13,266         4.93         11,990   

Consumer

     4.39         178,560         4.31         182,624   
     

 

 

       

 

 

 

Total recorded investment of noncovered loans

      $ 2,001,129          $ 1,927,191   
     

 

 

       

 

 

 

 

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

 

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Table of Contents

8. Covered Assets and FDIC Loss-sharing Asset

Covered Assets

Covered assets consist of loans and OREO acquired in FDIC assisted acquisitions during 2010 and 2011, for which the Bank entered into loss-sharing agreements, whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded loan commitments), OREO and certain accrued interest on loans. Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries up to specified amounts and, with respect to loss-sharing agreements for two acquisitions completed in 2010, will absorb 95% of losses and share in 95% of loss recoveries thereafter. The loss-sharing provisions of the agreements for commercial and single-family mortgage loans are in effect for five and ten years, respectively, from the acquisition dates and the loss recovery provisions are in effect for eight and ten years, respectively, from the acquisition dates.

Ten years and forty-five days after the acquisition dates, the Bank shall pay to the FDIC a clawback in the event the losses from the acquisitions fail to reach stated levels. This clawback shall be in the amount of 50% of the excess, if any, of 20% of the stated threshold amounts, less the sum of 25% of the asset premium (discount), 20% or 25% of the cumulative loss-sharing payments (depending on the particular agreement), and the cumulative servicing amount. As of June 30, 2011, the net present value of the Bank’s estimated clawback liability is $2.1 million, which is included in other liabilities on the consolidated condensed financial statements.

The following is an analysis of our covered loans, net of related allowance for losses on covered loans as of June 30, 2011 and December 31, 2010:

 

$241,391 $241,391 $241,391

(dollars in thousands)

   Covered Loans
June 30, 2011
     Weighted-
Average
Risk Rating
     Allowance
for Loan
Losses
 

Commercial Business

   $ 241,391         5.82       $ 3,156   

Real Estate 1-4 Family

     84,568         4.68         508   

Real Estate Commercial & Multifamily

     365,099         5.72         3,861   

Construction 1-4 Family

     57,638         7.44         0   

Construction Commercial & Multifamily

     32,203         6.65         382   

Consumer

     65,936         4.60         41   
  

 

 

       

 

 

 

Subtotal of covered loans

     846,835          $ 7,948   
        

 

 

 

Less:

        

Valuation discount resulting from acquisition accounting

     231,577         

Allowance for loan losses

     7,948         
  

 

 

       

Covered loans, net of allowance for loan losses

   $ 607,310         
  

 

 

       

(dollars in thousands)

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

Commercial Business

   $ 165,255         5.74       $ 2,903   

Real Estate 1-4 Family

     68,700         4.77         1,013   

Real Estate Commercial & Multifamily

     341,063         5.70         821   

Construction 1-4 Family

     39,754         7.29         98   

Construction Commercial & Multifamily

     41,624         6.79         469   

Consumer

     58,337         4.49         751   
  

 

 

       

 

 

 

Subtotal of covered loans

     714,733          $ 6,055   
        

 

 

 

Less:

        

Valuation discount resulting from acquisition accounting

     191,617         

Allowance for loan losses

     6,055         
  

 

 

       

Covered loans, net of allowance for loan losses

   $ 517,061         
  

 

 

       

Acquired loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans or market-based information for comparable loans. Management monitors and estimates expected future cash flows of acquired loans on a quarterly basis. Acquired loans are also subject to the Company’s internal and external credit review and are risk rated using the same criteria as loans originated by the Company. However, risk ratings are not a clear indicator of losses on acquired loans as a majority of the losses are recoverable from the FDIC under the loss-sharing agreements.

 

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Table of Contents

Draws on acquired loans, advanced subsequent to the loan acquisition date, are accounted for under ASC 450-20 and those amounts are also subject to the Company’s internal and external credit review. An allowance for loan losses is estimated in a similar manner as the originated loan portfolio, and a provision for loan losses is charged to earnings as necessary.

During the six months ended June 30, 2011, the Company recorded a provision expense for losses on covered loans of $1.9 million. Of this amount, $2.3 million was impairment expense calculated in accordance with ASC 310-30 and $462 thousand was a negative provision to adjust the allowance for loss calculated under ASC 450-20 for draws on acquired loans. The impact to earnings of the $1.9 million of provision expense for covered loans was partially offset through noninterest income by a $1.5 million increase in the FDIC loss-sharing asset.

The following table shows the changes in accretable yield for acquired loans for three and six months ended June 30, 2011. Due to the provisional measurement of loans acquired from Summit Bank and First Heritage Bank acquisitions, the table below does not include accretable yield arising from those two acquisitions:

 

(in thousands)

   Three months
ended
June 30, 2011
    Six months
ended
June 30, 2011
 

Balance at beginning of period

   $ 217,351      $ 256,572   

Accretion

     (15,458     (36,761

Cash receipts, disposals and change in cash flows

     52,629        34,711   
  

 

 

   

 

 

 

Balance at end of period

   $ 254,522      $ 254,522   
  

 

 

   

 

 

 

The excess of cash flows expected to be collected over the initial fair value of acquired loans is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes of indices for acquired loans with variable interest rates.

The following table sets forth activity in covered OREO at carrying value for the three and six months ended June 30, 2011:

 

(in thousands)

   Three Months Ended
June 30, 2011
    Six Months
Ended
June 30, 2011
 

Covered OREO:

    

Balance, beginning of period

   $ 13,527      $ 14,443   

Established through acquisitions

     10,896        10,896   

Transfers in, net of write-downs ($23 and $441, respectively)

     1,668        5,092   

OREO improvements

     0        0   

Additional OREO write-downs

     (99     (113

Proceeds from sale of OREO property

     (4,122     (11,081

Gain on sale of OREO

     2,369        5,002   
  

 

 

   

 

 

 

Total covered OREO, end of period

   $ 24,239      $ 24,239   
  

 

 

   

 

 

 

The covered OREO is covered by loss-sharing agreements with the FDIC in which the FDIC will assume 80% of additional write-downs and losses on covered OREO sales, or 95%, if applicable, of additional write-downs and losses on covered OREO sales if the minimum loss share thresholds are met.

 

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Table of Contents

FDIC Loss-sharing Asset

The FDIC loss-sharing asset as of June 30, 2011 is comprised of a $199.3 million FDIC indemnification asset and a $6.9 million FDIC receivable. The indemnification is the present value of the cash flows the Company expects to collect from the FDIC under the loss-sharing agreements and the FDIC receivable represents 80% of reimbursable amounts from the FDIC that have not yet been received.

 

     Three months ended
June 30,
    Six months ended
June 30,
 

(in thousands)

   2011     2010     2011     2010  

Balance at beginning of period

   $ 193,053      $ 210,405      $ 205,991      $ 0   

Adjustments not reflected in income

        

Established through acquistions

     65,278        0        65,278        210,405   

Cash received from the FDIC

     (44,892     0        (44,892     0   

FDIC share of additional estimated losses

     991        13,947        2,295        13,947   

Other

     (1,773     (1,006     (1,241     (1,006

Adjustments reflected in income

        

(Amortization) accretion

     (6,638     3,952        (15,641     3,952   

Loan loss provision

     1,841        0        1,503        0   

Other

     (1,622     (553     (7,055     (553
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 206,238      $ 226,745      $ 206,238      $ 226,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

9. Changes in Noncovered Other Real Estate Owned

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

 

(in thousands)

   Three Months Ended
June 30, 2011
    Six Months
Ended
June 30, 2011
 

Noncovered OREO:

    

Balance, beginning of period

   $ 26,081      $ 30,991   

Transfers in, net of write-downs ($18 and $108, respectively)

     1,106        3,148   

OREO improvements

     217        468   

Additional OREO write-downs

     (2,536     (4,446

Proceeds from sale of OREO property

     (2,502     (7,874

Gain on sale of OREO

     373        452   
  

 

 

   

 

 

 

Total noncovered OREO, end of period

   $ 22,739      $ 22,739   
  

 

 

   

 

 

 

10. Goodwill and Intangible Assets

In accordance with the Intangibles – Goodwill and Other topic of the FASB ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level during the third quarter on an annual basis and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company completed its annual goodwill impairment test during the third quarter of 2010 and determined the fair value of the Company’s single reporting unit exceeded its carrying value.

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

 

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Table of Contents

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands)

   2011     2010     2011     2010  

Total goodwill, beginning of period

   $ 109,639      $ 109,639      $ 109,639      $ 95,519   

Established through acquisitions

     9,704        0        9,704        14,120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total goodwill, end of period

     119,343        109,639        119,343        109,639   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross core deposit intangible balance, beginning of period

     26,651        26,651        26,651        8,896   

Accumulated amortization, beginning of period

     (8,939     (4,820     (7,955     (4,033
  

 

 

   

 

 

   

 

 

   

 

 

 

Core deposit intangible, net, beginning of period

     17,712        21,831        18,696        4,863   

Established through acquisitions

     1,846        0        1,846        17,755   

CDI current period amortization

     (956     (1,055     (1,940     (1,842
  

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposit intangible, end of period

     18,602        20,776        18,602        20,776   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total goodwill and intangible assets, end of period

   $ 137,945      $ 130,415      $ 137,945      $ 130,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(in thousands)

   Amount  

Year ending December 31,

  

2011

   $ 2,053   

2012

     3,760   

2013

     3,352   

2014

     2,856   

2015

     2,176   

11. Shareholders’ Equity

Common Stock. On February 3, 2011, the Company declared a quarterly cash dividend of $0.03 per share, payable on March 3, 2011 to shareholders of record as of the close of business on February 17, 2011. On April 27, 2011 the Company declared a quarterly cash dividend of $0.05 per share, payable on May 25, 2011 to shareholders of record at the close of business May 11, 2011. The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both Federal and State regulatory requirements. Subsequent to quarter end, on July 28, 2011 the Company declared a quarterly cash dividend of $0.06 per share, payable on August 24, 2011 to shareholders of record at the close of business August 10, 2011.

 

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12. Comprehensive Income

The components of comprehensive income are as follows:

 

     Three Months Ended
June 30,
 

(in thousands)

   2011     2010  

Net income as reported

   $ 8,632      $ 5,056   

Unrealized gain from securities:

    

Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($3,641) and ($1,907)

     6,467        3,610   

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

     0        0   
  

 

 

   

 

 

 

Net unrealized gain from securities, net of reclassification adjustment

     6,467        3,610   

Cash flow hedging instruments:

    

Reclassification adjustment of net gain included in income, net of tax of $0 and $137

     0        (248
  

 

 

   

 

 

 

Net change in cash flow hedging instruments

     0        (248

Pension plan liability adjustment:

    

Net unrealized gain from unfunded defined benefit plan liability arising during the period, net of tax of $0 and $0

     0        0   

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

     14        7   
  

 

 

   

 

 

 

Pension plan liability adjustment, net

     14        7   
  

 

 

   

 

 

 

Total comprehensive income

   $ 15,113      $ 8,425   
  

 

 

   

 

 

 
     Six Months Ended
June 30,
 

(in thousands)

   2011     2010  

Net income as reported

   $ 14,411      $ 12,972   

Unrealized gain from securities:

    

Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($4,925) and ($3,943)

     8,780        7,166   

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

     0        (38
  

 

 

   

 

 

 

Net unrealized gain from securities, net of reclassification adjustment

     8,780        7,128   

Cash flow hedging instruments:

    

Reclassification adjustment of net gain included in income, net of tax of $79 and $401

     (143     (727
  

 

 

   

 

 

 

Net change in cash flow hedging instruments

     (143     (727

Pension plan liability adjustment:

    

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

     (261     23   

Less: amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of $(16) and $(8)

     28        14   
  

 

 

   

 

 

 

Pension plan liability adjustment, net

     (233     37   
  

 

 

   

 

 

 

Total comprehensive income

   $ 22,815      $ 19,410   
  

 

 

   

 

 

 

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.

 

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The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

Fair values are determined as follows:

Securities at fair value are priced using matrix pricing based on the securities’ relationship to other benchmark quoted prices, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC are considered a Level 2 input method.

Interest rate contract positions are valued in models, which use as their basis, readily observable market parameters and are classified within level 2 of the valuation hierarchy.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2011 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

     Fair value  at
June 30, 2011
     Fair Value Measurements at Reporting Date Using  

(in thousands)

      Level 1      Level 2      Level 3  

Assets

           

Securities available for sale

           

U.S. government agency

   $ 30,278       $ 0       $ 30,278       $ 0   

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

     693,412         0         693,412         0   

State and municipal debt securities

     261,639         0         261,639         0   

Other securities

     4,439         0         4,439         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 989,768       $ 0       $ 989,768       $ 0   

Other assets (Interest rate contracts)

   $ 10,476       $ 0       $ 10,476       $ 0   

Liabilities

           

Other liabilities (Interest rate contracts)

   $ 10,476       $ 0       $ 10,476       $ 0   

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:

Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral if the loan is collateral-dependent loan. Generally, the Company utilizes the fair market value of the collateral to measure impairment.

Other real estate owned—OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is recorded at the lower of the carrying amount of the loan or fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write-downs based on the property fair value less estimated cost to sell at the date of acquisition are charged to the allowance for loan and lease losses. Management periodically reviews OREO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any write-downs subsequent to acquisition are charged to earnings.

The following table presents information about the Company’s assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made and not necessarily the fair value at the reporting date.

 

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Table of Contents
     Fair value at
June 30, 2011
     Fair Value Measurements at Reporting Date Using      Losses During  the
Three Months Ended
June 30, 2011
     Losses During  the
Six Months Ended
June 30, 2010
 

(in thousands)

      Level 1      Level 2      Level 3        

Impaired loans

   $ 13,924       $ 0       $ 0       $ 13,924       $ 411       $ 5,320   

Non-covered OREO

     6,846         0         0         6,846         1,313         3,314   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,770       $ 0       $ 0       $ 20,770       $ 1,724       $ 8,634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on non-covered OREO disclosed above represent the writedowns taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent writedowns from updated appraisals that were charged to earnings.

14. Fair Value of Financial Instruments

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and due from banks and interest-earning deposits with banks—The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value that approximates carrying value.

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

Federal Home Loan Bank stock—The fair value is based upon the par value of the stock which equates to its carrying value.

Loans—Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. For most performing loans, fair value is estimated using expected duration and lending rates that would have been offered on June 30, 2011 for loans which mirror the attributes of the loans with similar rate structures and average maturities. Commercial loans and construction loans, which are variable rate and short-term are reflected with fair values equal to carrying value. The fair values resulting from these calculations are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers’ credit quality since the loans were originated. For nonperforming loans, fair value is estimated by applying a valuation discount based upon loan sales data from the FDIC.

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

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

Deposits—For deposits with no contractual maturity, the fair value is equal to the carrying value. The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and current market rates for deposits of similar remaining maturities.

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

 

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Table of Contents

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

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

Other Financial Instruments—The majority of our commitments to extend credit and standby letters of credit carry current market interest rates if converted to loans, as such, carrying value is assumed to equal fair value.

The following table summarizes carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value:

 

     June 30,
2011
     December 31,
2010
 
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
            (in thousands)         

Assets

           

Cash and due from banks

   $ 89,926       $ 89,926       $ 55,492       $ 55,492   

Interest-earning deposits with banks

     179,573         179,573         458,638         458,638   

Securities available for sale

     989,768         989,768         763,866         763,866   

FHLB stock

     18,791         18,791         17,908         17,908   

Loans held for sale

     655         655         754         754   

Loans

     2,540,727         2,806,335         2,371,822         2,525,113   

FDIC loss-sharing asset

     206,238         206,238